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Mixed outlook for Abu Dhabi real estate

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Abu Dhabi real estate was supposed to offer a no-brainer investment opportunity. For after a long building moratorium from the late 1990s, arguably the world’s wealthiest city was short of real estate.

Yet the global financial crisis of autumn 2008 that ditched the Dubai real estate boom also brought Abu Dhabi’s belated boom to a close. Prices fell. Sales have been difficult to achieve and impossible for off-plan. Work slowed on many sites and development of others froze.

For the UAE 2009 proved a tough year with a modest contraction in economic growth after many years of expansion. Only a sharp recovery in oil prices prevented something worse.

Forward view

Going forward investors are bound to look again at Abu Dhabi, the capital of the desert oasis of wealth and security in the region that is the modern UAE. A new and comprehensive report from Investment Boutique, a regional real estate advisory and research firm, is therefore welcome in this still under-researched market.

The report puts market weakness in 2009 largely down to the problems in Dubai and price competition from the neighboring emirate for long-distance commuter homes.

Some 10-15,000 commuters a day make the rather perilous high-speed journey from the south side of Dubai to Abu Dhabi. This year the report says Abu Dhabi will continue to be plagued by project delays, and housing rents and prices still fall.

Next year a recovery in housing demand is expected with rents and prices stabilizing. From 2012 rents and prices will rise slightly as a rising supply of property will fail to keep up with renewed demand.

Residential supply

Residential property supply is forecast to rise by 17 per cent by 2012 with the 2009 shortfall in supply of 45,000 units falling to a shortfall of 33,000 units by 2012, but still falling short of demand. New laws and regulations expected in 2010 are also expected to make an impact on the market.

For the office market a shortage of Grade A property is already being felt and here the market will be stable in 2010 and improve thereafter. Outside premium office space rents and prices will fall until 2012.

The new study notes: ‘New Grade A office spaces such as the Aldar HQ Building in Al Raha Beach continue to command annual rents in excess of AED 325 per sq ft as there is a genuine shortage of Grade A office space in the city’.

But then: ‘The majority of the new office supply under construction is in the Corniche and in new master-planned communities with around 70 per cent of it being Grade A space. The new supply is expected to increase office stock by around 50 percent between now and 2012’.

Retail oversupply

Retail space is a different story. Poor retail revenues this year will meet a rising supply of shop units in 2011 and rents continue to fall in 2012. Remarkably the additional retail supply from 2010 to 2012 is projected to double the gross leasing area in the city.

The Investment Boutique also considers hotels as a separate class of commercial property for investors. For both 2010 and 2011 a substantial rise in the supply of hotel rooms is going to result in lower occupancy and room rates in the sector. The forecast has hotel occupancy and revenues stabilizing by 2012.

What lessons can investors draw from this lengthy and careful piece of investment research? The simplest conclusion would appear to be that the Abu Dhabi commercial real estate market is becoming saturated with overbuilding in the office, retail and hotel sectors, but that the residential market shows no sign of shifting out of its chronic undersupply position.

Owning property in one of the world’s great energy capitals has to be a good investment in the long run and any short-term real estate price weakness is an opportunity.

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Written by Peter Cooper

March 18, 2010 at 10:41 am

One Response

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  1. rumour has it that AUH rents are no longer subject to rent cap and LL soon be able to issue notice of rise. Still loads of folk renting on 2003 rates adjusted by <5% per year. If this happens the dubai commuter numbers will likely increase a fair bit.

    Nigel

    March 18, 2010 at 6:57 pm


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