Abu Dhabi’s real estate market witnessed a continued slowdown last year, triggered by the decline in oil prices and subsequent impact on government spending, and consolidation of businesses across various sectors. Against this backdrop of macroeconomic uncertainty, landlords have come under increasing pressure as tenants look for more affordable accommodation, with large units being the most affected segment.
“Villa sales remained quiet and office rental rates are currently at their lowest point since the market peak in late 2008, with rates on average 72 per cent lower,” says John Stevens, managing director of Asteco.
While all real estate sectors have been affected to some extent, David Dudley, international director of JLL Middle East and North Africa, notes that the extent of rental decline is limited within higher-quality residential schemes, grade A office buildings and high-quality malls, with the softening of demand mitigated by low supply completions.
Dudley points out that annual supply completions remain limited in each sector compared with historic averages due to government supply controls, tightened liquidity and greater caution among developers.
“This has helped mitigate negative impact on real estate performance in the current period of low demand,” explains Dudley.
Moving forward, there could be further decline in certain sub-sectors over the short term due to the current decline in demand growth and sentiment, and increased supply in some sectors.
According to JLL’s UAE Real Estate Market Review for 2016, prices in Abu Dhabi could further fall as the emirate’s real estate cycle historically lags behind Dubai by a year. “The greater diversification of the Dubai economy and the earlier downturn of real estate prices from mid-2014 means the Dubai residential market is now poised closer to its cyclical trough, while prices may fall further in Abu Dhabi,” says Craig Plumb, head of research at JLL Mena.
However, industry experts anticipate the level of decline to be relatively modest, with rental rates and sales price remaining above the levels in 2012, prior to the 2013-2014 upswing.
Among the hardest-hit sectors was residential, which according to JLL figures saw average rentals fall about 5 per cent year-on-year, with villa and apartment rentals declining by 4 per cent and 7 per cent respectively. But the largest decline was observed in villa and apartment sale prices at 11 per cent year-on-year as of the fourth quarter last year.
Industry observers agree that the government’s budget reductions and job cuts due to low oil prices have negatively affected overall market sentiment. “The ongoing redundancies across various industry sectors and the reduction of staff housing allowances continue to negatively affect demand, with a number of tenants opting to downsize or move to more affordable developments,” says Stevens.
Due to difficulties in the job market, Robin Teh, UAE country manager and director of valuations and advisory UAE at Chestertons Mena, notes that demand has weakened in the past few months, with major demand arising from the middle and low-income groups largely looking for affordable housing.
However, he says, Abu Dhabi still remains an attractive destination for investors, with gross rental yields reaching as high as 8.5 per cent in the apartment sector and 7 per cent for villas.
“The capital’s position as a safe haven for investors has been consistent in recent years, offering returns of 5.5 per cent and above,” says Teh. “This remained true throughout 2016, with overall gross rental yields at a constant level to date within the coverage areas of the Chestertons Mena Observer Q3 2016 Abu Dhabi Residential report.”
Although demand was low, Abu Dhabi managed to mitigate the impact by keeping new supply relatively low. The emirate had only 3,100 residential units completed last year, bringing the total stock to 248,000 units. This includes 700 units in Marina Bay One and Marina Bay Two towers on Reem Island that entered the market in the fourth quarter.
JLL expects around 5,000 new units to be completed along the Corniche, Al Raha Beach, Reem Island and Saadiyat Island this year. However, there is a likelihood that many of these will be delayed, reducing the actual completion number.
The Abu Dhabi office market had also been subdued last year as it witnessed limited demand from local and international occupiers. “Take-up by new occupiers is limited and, therefore, the market has been driven by existing occupiers looking for office consolidation opportunities or a flight to quality,” says Matthew Dadd, commercial leasing partner at Knight Frank.
Dadd says office occupiers have remained focused on location and quality as rents are softening. “Price has, of course, been a major consideration, however, occupiers are looking for buildings that provide good management, amenities and specifications. Fitted offices have leased more successfully in the last quarter as tenants look to reduce overhead capex on their fit-out,” says Dadd.
As demand for large office space reduced significantly over the past six months, industry experts say landlords continued to subdivide space into smaller office units.
There has been a growing rationale by landlords to be more creative and flexible to secure suitable occupiers. “This is beneficial as long as tenants remain realistic. There are no significant buildings under development that need to be reviewed at present by the developer or landlord,” says Dadd.
The reduced demand has also led to increased vacancy rates, which put further downward pressure on rental rates. According JLL, grade A office rents in Abu Dhabi fell by 5 per cent year-on-year from Dh1,850 per square metre to Dh1,760 per square metre as of the fourth quarter.
However, the impact of a softening demand on the rental rates was mitigated by relatively low new supply, with only 214,000 sq m of gross leasable area (GLA) being completed last year, bringing the total stock to 3.5 million sq m. Most of the new supply that was added in the first half of the year was on Abu Dhabi island, including Bloom Central and the Adnoc headquarters.
“While rents have been upheld, this is partly due to limited level of new supply, as demand and net absorption levels have declined in comparison to previous years, partly due to consolidations in the oil sector,” says Plumb.
JLL estimates around 210,000 sq m of GLA to enter the market this year, dominated by the delivery of ADIB on Airport Road, as well as Leaf and Omega towers on Reem Island.
Moving forward, Knight Frank expects market conditions similar to last year due to continued subdued occupier demand and limited economic upturn. “However, with limited new supply, we do not foresee the market to worsen significantly, allowing landlords to reflect on their building’s position,” says Dadd.
Among the least affected sectors was retail, which saw vacancies remaining stable at 2 per cent in the majority of malls in Abu Dhabi. The emirate didn’t have any major mall completion last year, with total stock remaining at about 2.6 million sq m, according to JLL. Although around 85,000 sq m of retail space is scheduled for completion this year, this would mostly be within residential communities or towers.
“Despite a number of retailers reporting a decline of sales last year, average retail rents remained unchanged in the primary malls of Dubai and Abu Dhabi,” says Plumb.
As no major malls are scheduled for completion in Abu Dhabi this year, Plumb says rental performance is unlikely to change significantly, although retail sales performance will remain under pressure.
Abu Dhabi’s hospitality market remains subdued as it is heavily reliant on corporate demand, which has weakened due to a decline in oil prices and government spending. The hotel room occupancy rates dropped to 71 per cent last year against 74 per cent in 2015. This also impacted the average daily rates, which declined by 10 per cent to $127 (Dh466.48).
“Hotel operators have looked to reduce room rates to lock in occupancy,” says Dudley, noting that market-wide occupancy rates remain at about 70 per cent. “While corporate demand has slowed, the near-term outlook for hospitality growth remains highly positive due to wide-ranging efforts to grow tourism demand.”
According to JLL, Abu Dhabi added about 1,000 hotel keys last year, bringing total supply to 21,400 keys. The emirate is expected to see 2,000 hotel keys this year.