Could off-plan speculation undermine the Abu Dhabi realty boom?

A recent report from EFG Hermes argues that there is no bubble in prices, and that prices should stay strong for the next five years.

The report attributes this largely to the control exercised by the government over both the supply and demand for property.

It is not wholly a controlled market, of course.

Demand is currently huge for all real estate types, as EFG Hermes points out.

That is not surprising with oil at $140+ per barrel this summer, and a massive urban development plan in progress for the city.

However, it is hard to see oil prices deteriorating to a level that will impact on Abu Dhabi, such are the government's depth of pocket and commitment to the plan.

EFG Hermes sees a further 20%-25% increase in prices over 2008, bringing prices up 100% over the year.

They also predict a further 15%-20% rise in 2009 before any units are actually completed. The report is equally clear on the government's ability to keep supply under control with 'controlled delivery of supply to avoid a glut'.

It is also confident that demand for office space will remain strong and that not until significant supply appears next year will rents and prices stabilize.

Retail space is due to grow from 5.7m to 15m sqft by 2010, with supply catching up with demand in 18 months to two years.

Moratorium to blame for property shortfall

On the other hand, Abu Dhabi would not have had a shortfall of real estate if it had not been for the five-year moratorium on construction following the Asian Financial Crisis in 1998 which does not suggest that the government has a monopoly on wisdom with regard to determining supply.

It could still overdo it this time.

Moreover, there is concern over the level of speculation in the residential sector with properties being flipped on the back of low deposits for a quick profit.

This is typical of a market where prices are surging. But is not a 100% price appreciation in one year unhealthy? Could this not be a price spike?

This is a higher rate of price appreciation than seen in Dubai during 2002-2004 or even in the 2005-2006 boom period.

But EFG Hermes' confidence is most likely justified as Abu Dhabi property prices were perhaps set too low to start with.

And they still do not look unreasonable in comparison to other cities with similar GDP per capita.

See also:
Abu Dhabi property price increases 'certain'
UAE cost of living report - Accommodation
Dubai average price index