Will the global financial crisis hit Abu Dhabi off-plan sales?

In the so-called advanced countries of the world the real estate sectors are being cut to ribbons by a toxic combination of prices that went too high, higher interest rates and tighter loan conditions, and weakening economies reducing demand for properties.

Abu Dhabi does not have a weakening economy. Indeed, oil and gas revenues and economic growth will be at record levels in 2008.

Nor is there much reason to worry about the outlook as the emirate has budgeted for oil at $32 a barrel, not $90 to $100.

There is also clearly still a great deal of wealth in the ground with more than a hundred years of oil at 2.5 million barrels per day, perhaps slightly less if output doubles as planned within six years.

World's largest sovereign wealth fund

Then there is the largest sovereign wealth fund in the world with estimated assets of $850bn which could comfortably pay for every project yet launched in Abu Dhabi, and still probably be the world's biggest.

However, property developers in Abu Dhabi do borrow to achieve maximum returns on their equity, and higher borrowing costs will slow their plans at the margin.

People who borrow to fund off plan property also borrow money for both deposits and payment plans. But we do know from anecdotal evidence that Abu Dhabi is a market where cash only payments are higher than in most property markets.

It is also true that Abu Dhabi property has become the hot favourite of the UAE, and people looking to invest cash locally have fewer alternatives than normally.

Stock markets have been falling this year and Dubai property perhaps has more question marks hanging over its boom, if only because it has been going so long.

Abu Dhabi prices too high?

What about selling prices being too high in Abu Dhabi? This could be a potential Achilles heel. Real estate was benchmarked from the start against Dubai and prices have doubled in just over a year.

Prices in Abu Dhabi that looked cheap in global terms a year ago are now looking much more expensive in absolute terms as other global markets decline.

However, the momentum in Abu Dhabi off plan sales still looks inexorably bullish and this kind of market fever takes time to cool down. Prices could therefore seriously over-shoot on the upside before they return to earth with a correction.

Will we see a correction in this market even before the first completed unit is handed over next autumn? It is possible, but only the most foolish commentator would stand against a crowd of enthusiastic real estate buyers with cash to spend.



See also:
Special Report: Buying property in Abu Dhabi