Jones Lang LaSalle, the world's leading real estate investment and advisory firm, today released its latest ‘Abu Dhabi Real Estate Market Overview – Q2 2011’ covering the Abu Dhabi office, residential, retail and hospitality sectors.
The report illustrates that new supply deliveries were limited in Q2, but this is temporary because a significant supply pipeline remains for each real estate sector in Abu Dhabi. Growing supply, combined with a cutback in government spending on economic diversification and infrastructure upgrade, will put additional downward pressure on rents and prices. Declining rents and increased vacancy will however have a positive impact on demand as Abu Dhabi becomes more cost competitive and higher quality real estate comes on stream.
The report, also outlines a range of welcomed government initiatives, which Jones Lang LaSalle concludes will have a positive impact on demand and are a further step towards the maturation of the real estate market. This includes initiatives like the announced three year residency visa for property owners; a new tenancy registration system, ‘Tawtheeq’; a new law limiting overcrowding in residential properties and the government consolidating various major projects to reduce the supply over-hang. In addition, the Government continues to invest in key infrastructure projects like the Union Railway.
David Dudley, Head of Abu Dhabi office, Jones Lang LaSalle MENA said, “The threat of increasing supply and liquidity constraints persist in Abu Dhabi’s real estate market. A number of residential, office, hotels and retail projects come online 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.”
Looking more specifically at each of the sectors, the report highlighted the following:
Office: The report states that Abu Dhabi office rents will continue to decline as vacancies rise. This should enhance demand because tenants will be able to upgrade the quality or location of premises while managing costs. With 2.3 million sq m of current office stock and 1.2 million sq m of upcoming supply in 2013, the total oversupply of office space in Abu Dhabi is expanding, but it is important to note that only 11% of the current stock qualifies as international grade A quality. The capital’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.
Residential: In H2 2011, up to 14,000 residential units –primarily high end – will be handed over in Abu Dubai. This will improve options for high income residents, a historically underserviced sector. Meanwhile, lower grade properties will face increasing vacancies and steeper rent declines. Lower, more affordable average rents will stimulate demand by enticing Dubai commuters to relocate and potentially encouraging job growth through 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.
Retail: Abu Dhabi’s retail rents are expected to soften as new supply enters the market during 2011-2012. Over the next two years, the completion of new super-regional malls will start to weaken the prevalence of shoppers commuting from the capital to Dubai. Furthermore, there remains a shortage of good quality community and neighbourhood retail. 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.
Hospitality: Occupancy levels have recovered in the first half of 2011, but, going forward, anticipated supply increases – particularly with a number of key project due to open in H2 2011 – will put downward pressure on average rates and RevPAR levels. In terms of future demand drivers, the most significant growth potential is in leisure sector.
Although supply deliveries were limited in Q2, the supply pipeline projected for Abu Dhabi will generate and expand over-supply for most asset classes. Thus, average rents and sales prices continued to decline during Q2 2011 from unsustainable highs, with very limited sales transactions in all sectors.
Market conditions in Dubai continue to negatively impact Abu Dhabi, due to relative market conditions and the proximity of the two Emirates. Dubai experienced a sharper price / rent decline than Abu Dhabi and is, therefore, currently more competitive for occupiers. However, declining rents in the capital will start to draw commuters back and increase office occupier requirements.
Few new projects were started in Q2 and many existing projects are now under review, delayed and scaled back. Liquidity remains tight with many developers continuing to experience cash-flow issues.
In Q2, two major towers entered the office market: Tower One Sowwah Square and Guardian Tower at Danet Abu Dhabi. Large amounts of new supply are still due for delivery in 2011, which will push down average rents, particularly for secondary quality assets.
In Q2, 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 to Q1. Abu Dhabi rents maintain a premium over Dubai, resulting in the ongoing prevalence of daily commuting.
In the retail market, no major handovers were reported in Q2 because the opening of several centres were delayed until H2 2011. 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 favor of tenants.
Although no new supply entered the hotel market in Q2, a number of major hotels are anticipated for delivery in H2 2011 (including the first completions on Saadiyat Island), which will put additional downward pressure on ADRs and hotel occupancy rates. In YTD April 2011, average room rates fell 20% compared to the same period in 2010.