Abu Dhabi realty faces credibility challenge

Rome was not built in a day, and neither are property markets. In 2006 the Abu Dhabi real estate sector burst on to the map with a series of very large and glamorous projects, attracting worldwide interest.

Aldar Properties' $40 billion Yas Island project launched last month is the largest single development scheme ever in the Middle East, topping even the original estimates for the Dubailand theme park.

Yet speak to the major developers and they admit that investment interest to date has come mainly from UAE nationals in Abu Dhabi. They are happy to be able to buy a stake in their future, and to see the development of their city after a moratorium that lasted a decade.

Market doubts

The next stage is to convince individuals to buy apartments as some of the major schemes release considerable numbers of off-plan units. And the hope is that expatriates and foreigners will figure highly among these buyers. However, several major issues appear to be holding back a Dubai-style buying boom.

First, the freehold ownership title is being restricted to nationals, and other buyers want to see exactly what the 99-year leasehold terms and conditions will be. Developers hint at a strong tenure with automatically renewable leases but buyers may want to see the small print.

Secondly, Abu Dhabi's record on delivering major projects is mixed with previous large development plans for Lulu Island and Saadiyat Island ending up being axed to a certain amount of embarrassment.

Would-be buyers in Abu Dhabi may therefore decide to hang back on their commitments until they can see projects actually coming out of the ground. That could be the price paid for policy reversals in the past, and what has been done can not be undone.

International funds

However, international property investment funds are following the Abu Dhabi real estate story with immense interest. They find the prospect of investing in the city with the highest per capita income in the world hugely attractive and even the conservatism of the market is exactly what these funds like to see.

For funds look for steady returns over a long period rather than a boom-to-bust property cycle. Thus the stability of Abu Dhabi's oil and gas revenues, investment income and huge hydrocarbon reserves is music to the ears of property fund managers who are cynical about markets that promise too much.

Such long term commitment is a factor that should not be lost on individual buyers whose buying time horizons may be very similar. But the capital gain for early entrants to this new market could still be very strong, especially if international funds later push rental yields down to global levels.