The residential rents in Abu Dhabi  registered a 7 percent drop in the first quarter and were set to fall further amid significant jump in supply across all sectors at a time of weak demand and tight economic conditions, said a report.
The real estate sector in the UAE capital is becoming more competitive as a large number of high quality projects are being delivered across all sectors, according to leading property expert Jones Lang LaSalle (JLL)
Significant increases in supply across all sectors during a time of weak demand and tight economic conditions is causing rents to correct from the unsustainable highs of the boom years. Rents are expected to decrease further in line with future additions to supply, said JLL in its Q1 update on the Abu Dhabi property  scenario.
Due to a significant increase in supply, rents in the emirate dropped by 7 percent to Dh126,000 for prime two-bedroom apartments. This registers a year-on-year decline of 10 percent from Dh140,000 in Q1 of 2011, the report stated.
With this, the rent premium that Abu Dhabi had maintained over Dubai has decreased, which will ultimately reduce the number of commuters from Dubai, the expert said in its report.
According to JLL, the softening in rents has affected some districts more than others with Al Raha Beach and Reem Island experiencing the most significant declines due to the locations diverse ownership.
There is a widening gap between quoting rents for non investment areas and investment areas where foreigners have bought property, it stated.
The residential stock has increased further by 2,800 units over the quarter as additions to supply were provided by Al Muneera and Al Zeina on Raha Beach, four towers on Marina Square, St. Regis on Saadiyat and apartments on Rawdhat,
Rapid take up of residential developments such as the St. Regis apartments on Saadiyat Island demonstrate the latent demand in the market for high quality, well planned residential projects, it added.
According to JLL, a record 23,900 units are scheduled for completion in 2012 but it is expected that many of these projects will experience further delays at the final stage of approval.
According to JLL, the average residential asking prices remained stable in the first quarter at Dh10,900 per sq m. This represents a significant decline of 47 percent from its peak of Dh21,500 in the fourth quarter of 2008.
The asking prices for apartments were approximately Dh11,900 per sq m, whereas average asking prices for villas were Dh 10,100 per sq m, said the report. Despite the introduction of rent-to-own schemes the number of sales transactions happening in the market remained limited in Q1 and were predominantly from Emirati purchasers.
Approximately two thirds of the upcoming supply is apartments with the majority of the upcoming villa supply being within Emirati housing communities such as Al Falah and Watani, the report said.
The supply that is due to be delivered during 2012 mainly comprises additional units at master planned developments including Reem Island, Al Reef Villas, Danet, Saadiyat Island and Rawdhat.
Upcoming supply also includes units in Nation Towers on the Corniche, Al Bateen Park development, Marasy in Bateen, and Rihan Heights in the Grand Mosque District.
Although a large proportion of the residential pipeline announced prior to 2008 has since been delayed, the aggregate supply could still reach 236,700 units by the end of 2014.
The completion of new high-end apartment buildings will improve options for higher income residents and increase vacancies in lower grade assets as tenants upgrade.
In the light of increasing competition in the market incentives are being offered to tenants such as the option of paying with multiple cheques, the report said.
Due to the significant development pipeline, rents will continue to experience downward pressure as the residential sector becomes more competitive, providing tenants with better opportunities to upgrade their housing. On the office sector, JLL said the supply in this sector is scheduled to increase further this year.
As the office sector is entering a period of over supply, vacancy rates have increased to approximately 30 percent and are expected to increase further as new supply comes on stream.
International Tower at Capital Centre and three major towers on Sowwah Square entered the office market during first quarter thus bringing the total office supply to approximately 2.7 million sq m.
There are limited deals at present and demand continues to be from tenants looking to upgrade from their current space. However, decreasing rents and better quality space has a highly positive impact on increasing demand for office space.
Approximately 182,000 sq m of office gross leasable area (GLA) has been added to the Abu Dhabi Metropolitan area in Q1 thus bringing the total office stock to approximately 2.7 million sq m, said the report.
The major office deliveries include Al Maqam, Al Khatem, and Al Sarab (formerly Towers 2,3,4) on Sowwah Island and International Tower in Capital Centre, it stated.
An additional 432,000 sq m of further office supply could be delivered to the market by the end of this year, however there could be delays at the final stages of approval following recent trends, it said.
Several large-scale office projects are scheduled for delivery in 2012, including Nation Towers on the Corniche, Al Bustan Complex on 29th street, Trust Tower at Central Market, ADIC HQ (Al Bahr Towers), Al Noor office tower at Al Muneera on Raha Beach and Finance HQ and Capital Tower at Capital Centre.
The recent handover of Grade A office space and anticipated future supply in Abu Dhabi is providing tenants with an improving standard and range of options to consider, the report said.
According to JLL, the average rents for Grade A office space remained steady in Q1. Peaking at Dh3,800 per sq m in Q4 2008, average effective rents for Grade A space declined by 55 percent from the peak in Q4 2008 to around Dh1,700 per sq m per annum.
These average rental rates have been exceeded in a small number of buildings which have capitalised on the oil and gas sector and government tenants, the expert said.
Asking rents for Grade A space are expected to decline further, in line with upcoming supply but should stabilise in the short to medium term. Grade B buildings are expected to experience a sharper decline in rents, it added.
According to JLL, in such a scenario the leasing incentives such as rent free periods and fit out allowances were expected to increase across all building grades over the next six months and net effective rents were expected to decline.
The secondary / lower quality buildings will be hardest hit as more high quality space is introduced to the market and therefore the gap between Grade A and Grade B rents is expected to widen, said the report.
The average Grade B rents which are currently Dh1,400 per sq m will likley fall as new product continues to come on stream in 2012, it added.