Cashing in on Abu Dhabi's rental boom

Unlike Dubai, Abu Dhabi has a long way to go before the available supply catches up with the increased demand in the UAE capital.

A report by the Abu Dhabi Chamber of Commerce and Industry (ADCCI) puts the current shortfall at a massive 20,000 units, up from a shortfall of 8,000 units in 2007. Rents during this period rose by 140%, and the new projects that are coming online this year will only account for 20% of this need.

Any available properties are therefore likely to be snapped up as soon as they come on the market.

The bad news for potential investors, however, is that the only real estate that can be bought is all off-plan. Buyers will therefore have to pay mortgage or payment plan instalments for anything between six months and three years before they can begin to reap returns from the rental market.

Percentage rental returns

A recent report by regional investment bank EFG Hermes concluded that rents in Abu Dhabi would grow by 25% in 2008. Landlords can expected a further increase of between 15% and 20% over the course of 2009.

The report points to the rising wealth in the emirate, attracting investment and a new workforce from outside the country, and the plethora of projects that the government is financing as part of its Plan 2030, to show that the housing market still has a long way to go before it hits saturation point.

The Abu Dhabi government plans on making the city the GCC's cultural capital; the Louvre and Guggenheim museums are the first permanent sites of their kind for the brands outside of their home country, and purchases such as the UK football Premier League's Manchester City serve to draw ever more international attention to the city.

Added to this, the shortage of available housing, increased demand and immigration and rigid government oversight on the amount of units that can be built in a year, means that there is no danger of the market being flooded and prices collapsing.

'Given the current supply and demand dynamics, where supply is not expected to catch up with demand over the next 18-24 months at least, prices and rents will continue to rise in all real estate segments over the short to medium term,' said EFG Hermes research analyst Sana Kapadia.

A report by Morgan Stanley concurs, stating that prices in Abu Dhabi are likely to increase until at least 2012, when supply will finally begin to catch up with demand. The report says that rental increases specifically are likely to continue their upward trend for the next two to three years.

Median asking prices

Because the majority of developments are still off plan, average rental returns can only be based on properties in existing districts, rather than possible future earning potential for the new communities.

According to Kershaw Leonard, one bedroom apartments on Airport Road fetch Dhs90,000 per year at the top end. Those on Muroor Road can bring in Dhs100,000 for new contracts. Two bedroom flats in the same locations can fetch Dhs140,000 and Dhs180,000 respectively.

Villas can fetch from Dhs260,000 for a two bedroom house, to Dhs350,000 for a four bedroom unit.

The average rent levels across the city put the returns at higher than for properties in Dubai. A two bedroom apartment fetches $2,264 per month, compared to $1,811 in Dubai. Both of these top the median asking price in New York, which stands at $1,729 for the Metro area.

Optimum apartment size

According to Fadi Antar of Better Homes, most speculators and people buying properties as financial investments tend to navigate toward one and two bedroom apartments: 'Speculators tend to think in the short term, so they usually won't exceed two bed places. One bed is very popular. These are the easiest to then rent on or resell.'

The asking price for villas also tends to be much higher than for apartments so investors may find that the ratio of returns from their outlay are not as high. Villas on the rental market will also mostly attract families, whereas young professionals are more attracted to apartments, meaning that the bar for asking rent can be set higher, thus giving healthier returns.

Apartments are also more likely to attract corporate contracts as they can be used for visiting or relocating executives. Corporate contracts tend to be set at a much higher bar than private leases and offer a higher certainty of renewals.

Rent caps

Potential buyers should be aware, however, that there are legislative checks in place to try to dampen accommodation-driven inflation. A 5% annual rent cap is in place (lowered from the limit of 7% that was originally put in place in 2007), meaning that rents can only be raised up to this level when the tenancy contract is renewed.

For the second renewal the landlord is not allowed to add any further hikes. This could effectively mean that if tenants are in situ for an extended period of time, neighbouring properties that are taking on new tenants could be fetching a much higher asking price.

Nor can landlords summarily refuse to renew existing rental contracts in order to accept tenants who are willing to pay more. Unless stipulated in the primary contract, the landlord has to show that the property will be reserved for their own use.

The service charges and property fees are also the responsibility of the landlord, unless specifically stipulated. They cannot be left up to the tenants to settle, but usually also cover the building insurance.

Agent's and management fees for those leaving the letting to onsite agencies will also be a percentage of the annual rental rate. Most fees average between 5% and 8% for overseeing all aspects of the letting.

Landlords may have to pay for repairs or damage to the property. The good news is that all gains from property appreciation and rental returns are tax free.