Price spike sees land prices double

It has been even better in the commercial property market where rents are up 43 per cent and prices by 35 per cent.

The authors acknowledge a slow start to the year but say this was followed by a pick up in sale activity in the second half. They also caution that the market is still in its infancy with an almost non-existent secondary market.

'We believe Abu Dhabi will consolidate credibility through further deregulation. While there has been some progress this year, as some apartments are now being offered on a freehold basis, expatriates are still not allowed to own the corresponding land and are limited to very few investment areas. Furthermore, unlike Dubai, foreign property owners in Abu Dhabi are still not eligible for residency visas.'

The immediate reason to be positive about the outlook for Aldar and Sorouh is the likely upward revaluation of their land banks to reflect increase land values. HSBC says its calculations show a potential for revaluation of 28 per cent but caution this may be spread over time.

Cheap stocks

'Despite this year's run, we think valuations [of the shares] are still cheap. Current discounts to net asset values imply very high developer margins (50 per cent for Aldar) - translating into abnormally high return on investment.'

HSBC forecasts that shares in Aldar and Sorouh will more than double. This is reminiscent of an investment report published by the bank in February 2001 recommending the purchase of Emaar Properties at an adjusted price of Dhs2.39 compared with Dhs12 at the time of writing and the 2005 peak of Dhs30.

The arguments used to support the Emaar share revaluation were strikingly similar. But investors might like to remember that it took more than two years from the original recommendation for the Emaar share price to move. That was dynamic Dubai, will Abu Dhabi be quicker?

Slow market

It will clearly take time for the real estate market to really take-off in the UAE capital. HSBC points to the website of a leading estate agent with 67 listings in Abu Dhabi and almost 2,000 in Dubai. But it was the same story in Dubai back in 2001 before foreign ownership was legalized in 2002.

Indeed, HSBC agrees: 'We mainly attribute the initial slowness in residential sales to restrictive regulation and market rigidities. On the regulatory side, while there has been some progress this year, regulation is still lagging.

'Additionally banks have been slow to react to the real-estate boom taking place in the emirate, and are not actively creating a home financing market. Also, spreads are extremely wide with average mortgage rates standing at seven to eight per cent, and in 2006 Abu Dhabi accounted for only three per cent of total mortgage lending in the UAE.'

Rents and property prices to surge in 2008
Buying Property in the UAE