Abu Dhabi Property: what will be the impact the 7% rent cap?

It was interesting to hear a presentation from Linda Loughnane, Managing Director of LLJ Property at the MEED Abu Dhabi 2006 conference this week. This seasoned property professional said that her firm was receiving a very different type of enquiry from potential investors in Abu Dhabi than in Dubai.

In particular major international property investment institutions were showing interest in the UAE capital. She noted that the economic and political stability of the UAE's oil rich capital was more attractive to them than the more volatile commercial economic cycle of neighboring Dubai.

Viewed in this context the news last week that Abu Dhabi Government was imposing a seven per cent cap on rental increases for the next 12 months might well be seen as another example of prudent government. For by restricting speculative gains available to investors Abu Dhabi will ensure that upswings are less spectacular than in some markets, but equally protect against any dramatic downturns.

Free market property prices

Long term investors appreciate government interference if it reduces volatility while allowing asset prices to continue to appreciate.

And it should be noted that the action of the Abu Dhabi government does nothing to cap property prices which are still subject to free market forces, albeit that so few projects have yet launched that we do not have much to benchmark prices against except neighboring Dubai.

So it is perfectly possible that while rental prices are kept down, property prices could still take off in a fairly dramatic fashion, particularly if investors perceive the market risk as low and are therefore happy to accept lower rental yields.

Indeed, it could be that Abu Dhabi rental yields quite quickly adjust to global levels which would still allow some spectacular capital gains. For at present Dubai appears to be the benchmark for property pricing - understandably due to the proximity of the market - while rents are very high in Abu Dhabi ensuring a high yield for investors.

Capital values may triple

What if instead of eight to 10 per cent rental yields investors in Abu Dhabi accepted what they would get in London? Then property prices in Abu Dhabi could triple while rents remained static.

Does that mean that Abu Dhabi might be a hidden gem of a property investment opportunity? That could well be that case, and the instincts of major investment institutions may be rather sharper than is immediately apparent.

So investors should not be put off by rent control in Abu Dhabi, for the rents are already very high by world standards, and a reversion to global rental yields would assure a handsome capital gain.