Abu Dhabi real estate prices to surge 25%

There was a 22% increase in rents and an 18% surge in residential property prices in the second half of 2007, said HSBC. It is a similar picture for commercial property with rents up 20% per annum on average over the past two years.

Last week another market study suggested a shortfall of 20,000 units for 2008, but this depends on how the population growth pans out and 50,000 is another figure discussed by experts.

Nobody can be exactly sure in a year of $100-a-barrel plus oil how demand for property will expand in Abu Dhabi, but commuting from Dubai may be the only option for many as the homes they need simply do not currently exist.

Material costs

The UAE government has recently dropped import tariffs on key construction materials to help dampen inflation of building costs but the cost of materials such as cement and steel is expected to rise by a fifth this year.

HSBC also reiterated the bank's earlier comments about the relatively low cost of housing in Abu Dhabi in comparison to other cities with a similar level of GDP per capita. Again with the upward pressure on demand the logical conclusion for prices is that they will go up.

Abu Dhabi is trying to control rental inflation with a rent cap and has followed the example of Dubai in lowering its cap from 7% to 5%. The difficulty is that with interest rates falling in line with the slashing of Fed funds to 2.25% there is a compression of yields.

In other words, landlords will increasingly bid up capital values and accept lower returns because the return they can obtain elsewhere has collapsed. This phenomenon has been seen around the world in major cities as the buy-to-let investment trend has spread.

What alternative?

UAE investors in 2008 are faced with a declining local stock market and rates of less than 1% on bank accounts. They are therefore likely to want to invest their cash in a relatively small supply of property which is actually completed as opposed to being under construction, and this will drive prices up.

Abu Dhabi development giant Sorouh Real Estate said earlier this month that supply constraints would lead to residential price rises of at least 20% in the UAE capital this year.

This kind of capital gain encourages the flipping of off-plan property where a 20% price increase might mean the doubling of the amount paid on a deposit. Already AME Info has reported on cases of smart traders doing precisely that, so this looks like being a great year for Abu Dhabi property as an asset class.

See also:
Off-plan speculators double their money in Abu Dhabi
HSBC guaranteed note offers low-cost home finance
Abu Dhabi real estate boom follows Dubai pattern