The Aldar-Sorouh merger is intended to consolidate Abu Dhabi’s struggling property market. But prices could fall further this year before bottoming out. Published in MEED, 21 February 2013
As MEED was going to press, shareholders in Aldar Properties and Sorouh Real Estate were meeting to decide whether to approve the merger of the two companies.
If, as expected, they support the deal it should all be wrapped up by 30 June, creating a titan of the Abu Dhabi property sector. Aldar Sorouh Properties, the name for the combined group, will be valued at AED10.9bn ($3bn) and will have $13bn in assets and a land bank of 77 square kilometres.
Most observers have welcomed the proposed merger, saying the combination of the larger Aldar with the more conservatively-run Sorouh should offer gains for both companies. But, more importantly, it could also provide a boost to the wider property market, according to Asjad Yahya, vice-president for research at Dubai-based Shuaa Capital.
Property firm merger benefits
“Both sides should benefit,” he says. “Aldar should benefit primarily through an improved balance sheet and Sorouh through the addition of a substantial development portfolio.
“The combined entity will have a better earnings profile with a greater portion of earnings from recurring rental income. As such, it should be able to manage its existing debt better, as well as tap debt markets in the future at improved terms.
“By combining the two largest developers in Abu Dhabi, the future planning and supply of real estate is also likely to be better managed. I think in principle, the deal does makes sense.”
If there is a dividend for the wider market it would be a welcome development for other local property firms, who may themselves now be tempted to look for merger partners. Real estate prices in Abu Dhabi have been steadily falling since the market peaked at the end of 2008. The annual rental price of grade A office space, for example, has fallen 59 per cent since then from AED3,800 a square metre to AED1,540 a sq m at the end of 2012. Similarly, the cost of renting a two-bed apartment has dropped 48 per cent, from AED231,000 a year to AED120,000 a year. In the commercial sector, landlords have been forced to offer reduced rents or rent-free periods to ensure properties are leased, particularly for older buildings.
However, no one is holding their breath for a quick turnaround. Instead, most analysts appear to be rather cautious in their predictions of a recovery.
“We’ve seen some initial signs of a potential recovery, but it’s still quite a bit further down the road,” says Matthew Green, head of research and consultancy for the UAE at CB Richard Ellis, a real estate services firm. “We have seen some fragmented rental growth for specific luxury developments in some locations such as Saadiyat Island and Al-Raha Beach. It’s very much isolated growth for specific product types, but it is an indication that further down the line we could see a return to growth. We’re as confident as we can be that we will see an improvement in conditions.”
Outside those few examples, prices could in fact fall further this year, particularly for older or lower quality properties or those in less desirable neighbourhoods. Although there are signs that demand is now returning, the growth in supply is also accelerating.
Residential space increased by 4,070 units in the final quarter of last year and 12,000 over the year as a whole, according to Jones Lang LaSalle, another real estate agency. New developments included the Residences in Eastern Mangroves, Al-Marasy in Bateen, Marina Bay on Reem Island, and Bawabat al-Sharq in Baniyas.
It is a similar situation for commercial property. New developments that have recently come onto the market include the Shining Towers in Khalidiya, the new headquarters of International Petroleum Investment Company and Centro in the Capital Centre. According to Jones Lang LaSalle, some 340,500 sq m of new office space was added to the Abu Dhabi market in 2012, taking the total stock to approximately 2.87 million sq m.
Retail property also increased by 54,000 sq m in the final quarter of 2012 and a further 200,000sq m is expected to be completed in the first half of this year. With the development of Yas Mall and Sowwah Square, the amount of available retail space in malls could double over the next three years, according to observers.
Real estate oversupply concerns
The problem is that property is a cyclical industry and many of these developments were approved before the market peaked in late 2008. Developers may hope that by the time construction is completed, the market will still be buoyant, but they know that it is not something they can control.
“We’re going to have about 45,000 new units delivered in Abu Dhabi over the next three years,” says Green. “Since the end of 2007, there’s probably only been about 50,000 units delivered, so an average of say 10,000 a year. And now it’s going to be 15,000 a year so the development pipeline has ramped up quite considerably. That’s a consequence of developments that were launched during the peak now being delivered. We’re at the peak of the development cycle in Abu Dhabi.”
Others suggest even higher levels of new supply. Jones Lang LaSalle estimates that there will be 16,000 new residential units delivered this year, while rival firm Asteco estimates as many as 17,000, including 12,000 apartments and 5,000 villas. Some 443,000 sq m of new office space is also expected.
Dubai real estate recovery
There are some positives to be had, however. One is that the Abu Dhabi market is now thought to be close to the bottom and likely to stabilise over the course of this year. In addition, the gradual recovery in the Dubai property market offers some hope.
“Dubai’s cycle is 18-24 months ahead of Abu Dhabi, and we’re definitely seeing signs of recovery in Dubai,” says David Dudley, head of the Abu Dhabi office of Jones Lang LaSalle. “That’s good for Abu Dhabi because it leads us to believe there will be recovery in Abu Dhabi within the next 18-24 months too.”
For now, Dubai continues to be cheaper than Abu Dhabi for comparable quality properties. According to CB Richard Ellis, the average annual rent for a studio apartment in Dubai is now slightly under AED40,000 a year, compared with AED45,000 for a similar property on the main island of Abu Dhabi. However, prices are now rising in Dubai.
The federal authorities have been taking action to prevent another property bubble emerging, with proposals to limit the amount that first and second time buyers can borrow, although it may not have the impact they hope. If prices continue to strengthen in Dubai, then more people could look for a place to live in the capital. In the meantime, the Abu Dhabi authorities have themselves been taking action to boost demand.
The government has said that from this year if its public sector workers want to keep on receiving housing allowances they must live in the emirate. It also started to insist that tenancy contracts are registered via the Tawtheeq system, which clamps down on people sharing properties illegally. Both moves should increase demand for property in the capital.
In addition, the Abu Dhabi Department of Finance has recently approved 245 loans worth AED3bn to provide real estate finance for citizens who own commercial and investment land. Of those loans, 133 were for demolishing and rebuilding residential properties, 103 were for constructing new buildings and the remaining nine for extensions to existing properties.
Over the past three years, some 6,416 housing loans worth a total of AED13bn have been distributed to Abu Dhabi citizens. The emirate’s Executive Council says that it is now planning to provide a further AED3bn for housing loans to 1,500 people, with 834 beneficiaries in Abu Dhabi, 618 in Al-Ain and 48 from the Western Region.
The loans are part of a wider AED330bn spending plan covering the period between now and 2017. It is such government activity that has sustained the real estate market in recent years, not least for Aldar and Sorouh, who have been kept busy building public housing. The support was highlighted by a deal announced at the same time as the Aldar-Sorouh merger, when the government agreed to pay AED3.2bn to Sorouh for assets at The Gate and Shams Abu Dhabi developments.
“The whole market in Abu Dhabi is dependent on the government spending revenue surpluses on economic development and infrastructure,” says Dudley. “There’s a big emphasis on prioritising the big government-backed masterplanned areas, such as Saadiyat Island and Yas Island. There is also a major effort to regenerate the central business district.”
Assuming the Aldar-Sorouh deal is completed, the emirate’s government will own 37 per cent of the combined group, cementing its influence over the local real estate market. Clearly, it is the public authorities that are in the driving seat when it comes to the hoped-for recovery.