Abu Dhabi real estate still climbing a wall of worry

Let us divide these risk factors into two categories: imaginary and real. This is a pretty fair framework of analysis for a new market where there is little by the way of hard facts and much hype and speculation.

One red herring is the shortage of mortgage finance argument. Only this week a report from the Department of Planning and Economy warned rather alarmingly that commercial banks are tending to provide short-term money for speculation rather than mortgage finance.

Well, given that almost nothing has been handed over yet, is that very surprising? Yes, there is speculation in flipping properties - like that seen in Dubai a few years ago - but this is a sign of a healthy market and rising prices.

Mortgages

What would be a worry is if commercial banks failed to come up with mortgage products when they are needed. This might entail capital increases for the sector, which is not presently allowed to lend more than 20% of deposits against property.

So how about real risks to the sector? Building material costs are certainly rising but then so are property values. This could signal problems for developers who sell cheaply off-plan today and face higher than expected construction costs tomorrow.

You could also wonder who is going to live in the residential mega-projects now under construction. Oil and gas is not a big employer and is by far the main business in Abu Dhabi. Ancillary concerns and related industry are expanding but there could be a supply and demand mismatch in the future.

Projected future growth of Abu Dhabi entails the attraction of millions of expatriates and is not down to internal population growth. That means an economic downturn would result in a loss of population.

Supply shortfall

On the other hand, in the short term the Colliers International forecast of a shortfall of 100,000 residential units by 2010 compared with the current supply of 180,000 suggests that oversupply will not become an issue for many years. Indeed, when likely time over-runs on very ambitious mega projects are considered supply seems hardly an issue.

The real risk, of course, in Abu Dhabi property is not getting involved. Colliers points to a 100% increase in land values from 2005 to 2007, but still to a very reasonable $1,000 per square metre.

Add in spiraling oil prices - with Goldman Sachs predicting $150-$200 within 18 months - and negative real interest rates courtesy of the dollar-pegged dirham, and you have a formula for successful real estate investment. As ever though, remember the rule on location and be careful who you do business with.

Nothing lasts forever, of course. Perhaps too much luxury housing will be built and not enough for workers. But investing in the capital city of the oil-rich UAE at current prices still looks a no-brainer.