Govt initiatives can create momentum in Abu Dhabi real estate

ABU DHABI: Recent initiatives taken by the United Arab Emirates government can create momentum in Abu Dhabi’s real estate industry, according to the Abu Dhabi Real Estate Overview 2Q11 report by Jones Lang LaSalle. The report covers Abu Dhabi’s office, residential, retail and hospitality sectors.

Although a cutback in government spending on economic diversification and infrastructure upgrades will put downward pressure on rents and prices, besides the growing supply pipeline for each real estate sector, a more positive impact on demand may occur in the long term as Abu Dhabi becomes more cost competitive and higher quality real estate comes onstream.

Among the government initiatives that Jones Lang LaSalle believes will have a positive impact on demand and are steps towards the maturation of the real estate market are initiatives such as the three-year residency visa for property owners; a new tenancy registration system, “Tawtheeq”; a new law limiting overcrowding in residential properties and the government’s action to consolidate various major projects to reduce supply overhang. The government has also said it will continue to invest in key infrastructure projects like the Union Railway.

“The threat of increasing supply and liquidity constraints persists in Abu Dhabi’s real estate market. A number of residential, office, hotels and retail projects came onstream this year, pushing rates down from unsustainable highs but there are also positive economic ramifications.

“Reducing the cost of living and doing business in the capital improves the value proposition and attractiveness for residents and companies, thereby facilitating growth. We think demand can receive an additional boost from the various recently announced government initiatives, but the actual impact on growth will depend on the successful implementation of these measures,” said Jones Lang LaSalle MENA head of the Abu Dhabi office David Dudley.

Office sector
According to the report, the office sector will see rents continue to decline as vacancies rise. This should enhance demand from tenants looking to upgrade to better quality premises while managing costs.

Large amounts of new supply are still due for delivery in 2011, which will push down average rents, particularly for secondary quality assets. The current office stock is 2.3 million sq m while 1.2 million sq m will be coming in 2013. The report noted that only 11% of the current stock qualifies as international grade A quality.

Abu Dhabi’s office rents also face downward pressure through competition from alternative markets like Dubai, which offers an abundant supply of good quality office space, relative rent discounts, and more developed urban infrastructure.

Lower grade properties will face increasing vacancies and steeper rent declines. The lower rents will have a positive impact through enticing commuters back from Dubai and stimulating business growth by lowering employment costs for companies. In spite of supply growth, opportunities still exist in the affordable housing segment, which is marked by strong demand and limited supply.

In 2Q, the residential market saw no significant additions to supply as buildings on Reem Island and Al Raha Beach await formal completion. Average rents for prime two-bedroom apartments remained unchanged, while those older and low quality units decreased by 10% to 15% compared with 1Q.

In the retail sector, rents are expected to soften as new supply enters the market during 2011/12.  No major handovers were reported in 2Q because the opening of several centres were delayed until 2H11. Supported by high occupancies, rents in major malls on Abu Dhabi Island remained constant, but rents in both existing and upcoming malls outside the Abu Dhabi Island decreased as the market moves in favour of tenants. The future performance of individual malls will depend on several factors like quality of tenant mix, parking provision, location, and management quality and mall design.  

In the hospitality sector, occupancy levels have recovered in 1H 11 reflecting increase in visitor flow. Over the short to medium term, supply will increase with a number of key projects due to open in 2H11 which will put downward pressure on average daily rates (ADRs) and revenue per available room (RevPAR) levels. In the year to April 2011, ADRs fell 20% against the same period in 2010.  RevPAR contracted by about 50 % during 2010 but the recovery in occupancy levels restricted RevPAR contraction to 5% in the first four months of 2011. Over the medium to long term, the strongest demand growth will come from the leisure sector.

This article appeared on the Property page, The Edge Financial Daily, July 22, 2011.

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