Downturn predicted for Abu Dhabi property market

If oil prices remain low throughout this year, there is a risk that demand for office and residential space could soften. Published in MEED, 22 March 2015

When it comes to the long-term health of the Abu Dhabi economy, one factor is more important than anything else. Oil sales provide the vast majority of government revenues and they in turn keep the economy as a whole ticking.

All this has a direct link to the health of the real estate industry, so with the slump in crude prices since last summer, the question facing the sector is whether property demand in the UAE capital will also take a dive this year.

The evidence to date is rather inconclusive, but many are anticipating a downturn of some sort, particularly when it comes to demand for office space. According to UK real estate consultancy Knight Frank, oil and gas companies account for 16 per cent of all office space in the city, followed by the government sector with 15 per cent.

It says there was a slowdown in enquiries for office space in the second half of 2014, which might have been due to companies reviewing the impact of falling oil prices on their business.

Others are anticipating further signs to emerge this year. “Amid the current slump in oil prices, one of the capital’s major occupier groups, the oil and gas sector, could be set for a period of decline,” says Matthew Green, head of research and consultancy for the UAE at US real estate agency CBRE. “Given the current environment, it is likely many existing new office requirements could be placed on hold, with a possibility of some downsizing should the current pricing trend be maintained for a sustained period of time.”

If that does happen, it will mark a reversal for the office market, which has been in recovery mode of late. Prime office rents grew by 5 per cent in each of the final two quarters of last year, according to US real estate consultancy JLL.

Supply has been growing at a slow but steady rate over the past year, with about 100,000 square metres of gross leasable area being added in each of the past three years. The only major addition to the market in the final quarter of 2014 was the 11,000 sq m of space at the Arjaan Rotana Capital Centre. City-wide vacancy rates were running at about 25 per cent at the end of last year, down from about 39 per cent at the end of 2013.

According to JLL, the figure is expected to remain at that level throughout this year. However, some schemes are now close to being fully let, including Capital Gate and Nation Towers, according to the UK’s Cluttons, another real estate agency.

There has been some upward momentum in prices over the past year, particularly for higher-quality office space. Grade A space rose by 12 per cent over the past year, from AED1,540 ($420) a sq m at the end of 2013 to AED1,730 a sq m at the end of 2014. In contrast, the cost of Grade B space remained flat at AED1,180 throughout the year. JLL says that it expects prices to rise over the course of this year.

Among the more prominent schemes in the city the most expensive rents are being paid at Etihad Tower, the World Trade Centre and International Tower. The costs at all these sites are running at more than AED1,750 a sq m according to Cluttons. Others such as Addax Tower on Reem Island are cheaper, with prices closer to 1,200 a sq m.

The retail market in the city, meanwhile, appears to be heading for a period of relative stability. The main development over the past year was the opening of Yas Mall in November 2014. That brought an additional 235,000 sq m of gross leasable space to the market.

Along with the opening of Capital Mall and retail space at Al-Reef, it means some 326,000 sq m of space was added to the Abu Dhabi market in the final quarter of last year.

In all, that brings the total amount of retail space in the city to 2.5 million sq m, according to JLL. Things are expected to slow down somewhat this year and the next, however, with no major developments due to open until 2017/18, when the likes of Sowwah Central, Reem Mall and the Marina Mall extension are planned to be launched.

On current projections, JLL expects some 128,000 sq m of gross leasable area to be added to the market over the course of 2015, and a further 95,000 sq m the following year.

Based on the current vacancy rates, developers should find it relatively easy to fill this space. Just 2 per cent of retail space was left unused at the end of 2014, according to JLL. Developments on Abu Dhabi island are still commanding a premium in terms of price, with average retail rents of AED3,000 at the end of 2014, slightly up on the average price of AED2,900 a year earlier.

Prices off the island are lower and have been falling slightly in the past year. They ended 2014 at AED1,860 a sq m, a drop of about 2 per cent compared with AED1,900 a sq m at the end of December 2013.

“Over the past 18 months, we have seen an increasing number of new brands entering the Abu Dhabi market, some of which have also been new to the UAE,” says Green. “The recent growth has been driven in part by a significant increase in supply, with the opening of a number of new malls including The Galleria and Deerfields Town Square in 2013, and, more recently, Yas Mall. However, the lack of available units in Dubai’s malls has also played a part in this growth, with some retailers forced to look beyond the emirate to maintain store roll-out requirements.”

Dubai also tends to lead Abu Dhabi when it comes to residential property prices, with a typical time lag of between 12 and 18 months. That suggests the UAE capital should start to see a slowdown in its residential market this year, something that is backed up by data from real estate agencies in the city.

JLL says sales prices rose by 25 per cent a year in 2013 and 2014, but the rate of increase began to slow at the end of last year and the firm predicts that prices are likely to be more stable this year. Rents have also been growing at a fairly rapid rate, with the cost of prime properties climbing by 17 per cent in 2013 and a further 11 per cent last year. This year, JLL expects residential rental prices to grow by single digits, due in part to an expected slowdown in government spending.

Julia Knibbs, research and consultancy manager at local property consultancy Asteco, takes a similar view. “The residential market is expected to keep growing in 2015, with rental rates increasing by an average of 5 per cent,” she says.

“However, sales prices are expected to remain relatively stable as prices reached high rates in 2014. Sales and rental rates are expected to increase over the next few years by an average of 3-5 per cent across the mid-to-high-end projects if market conditions remain stable.”

The supply of new stock to the city is also in something of a lull compared with some recent years. While about 30,000 units were added in 2013, the figure dropped to 7,000 units last year. This year, JLL expects about 10,000 units to be added, followed by 11,000 units in 2016.

Units on Abu Dhabi island continue to attract a premium. According to the most recent figures from CBRE, average rents for better-quality two-bedroom apartments on the main island range between AED140,000 and AED195,000 a year.

In contrast, similar quality apartments elsewhere in the city cost between AED70,000 and AED95,000 a year. However, some high-end developments buck this trend, such as those at Saadiyat Island and Al-Raha Beach, where the cost of a two-bedroom apartment is between AED160,000 and AED200,000 a year.

The market for villas shows a similar pattern. The annual rent for a four-bedroom house on Abu Dhabi island ranges from AED190,000 to AED350,000 a year in prime locations. Similar units elsewhere in the city typically cost between AED140,000 and AED180,000 a year to rent. Sales prices in the third quarter of the year were typically between AED13,725 and AED17,760 a sq m, according to CBRE.

If oil prices do stay low throughout this year, the danger is that demand for residential property could also soften. Real estate agents in the city are liable to be keeping a close eye on Brent crude prices for the foreseeable future.