Abu Dhabi's real estate market to stabilise in 2010, say property advisers DTZ

Philip Gray, UAE Country Manager said, "The report gives an overview of the Abu Dhabi real estate market across residential, commercial, retail and hospitality sectors and comments on the Emirate's outlook in light of the current economic conditions."

"The report concludes that Abu Dhabi's real estate market is relatively well placed to weather the economic downturn, given that government-backed real estate organisations in the city are well funded and have the capacity to rationalise, phase or delay developments to mitigate oversupply risks. Furthermore, Abu Dhabi is performing well in comparison to regional and global counterparts across all asset classes," Gray added.

According to the report, Abu Dhabi's office market is set to remain undersupplied for the next 3-5 years. Despite this, it has experienced a decline in both rental and sales prices in recent months and this trend is set to continue in 2009 before prices stabilise in 2010. However, the city's office market is set to outperform its regional peers and will overtake Dubai to become the most expensive office location in the GCC by 2010.

Office rental rates in Abu Dhabi have declined from the highs of Dhs4,500 per sq m per annum, achieved in prime locations in 2008, to current annual rental rates of between Dhs 3,200 and Dhs3,000 per sq m per annum. The highest annual rental rates are currently being commanded by schemes on Corniche Street which average Dhs3,200 per sq m per annum, whilst rents on Khalifa and Hamdan Streets currently command an average of between Dhs2,850 and Dhs3,000 per sq m per annum.

Office sales prices in Abu Dhabi have declined from the highs of over Dhs2,300 per sq ft achieved in prime locations in 2008 to current rates of Dhs1,800 per sq ft. This is due to substantively reduced levels of liquidity combined with a decreased appetite for real estate as an investment class.

The report goes on to outline that the proportion of Grade A office stock will grow significantly in the Abu Dhabi metropolitan area as the forecast development pipeline is delivered to the market.

The majority of this new office space will come from master planned schemes such as Al Suwwah; Al Reem; Saadiyat Island and Al Raha Beach which will shrink the current undersupply of office space considerably over the next 3-5 years taking the GLA from 1.3 million sq m - as of Q1 2009 - to 2.7 million sq m GLA by 2014.

Martin Cooper, DTZ's Head of Consulting and Research said, "Looking ahead, the key trends that will play out in Abu Dhabi's office market include a flight to quality as new Grade A office space is delivered to market; the release of informal office stock (such as villas and apartments) back to the residential sector as occupiers trade up; and an increasing emphasis on car parking provision as parking restrictions come into force on the island."

The residential market has experienced similar decline - despite a current undersupply of c. 44,000 residential units in the Abu Dhabi metropolitan area. DTZ predict that rental prices for apartments will decline slightly (up to 5%) in 2009, with a more marked decline for villas (up to 10%) as increasing volumes of stock are delivered through schemes such as Khalifa A, Al Reef and Mohammed Bin Zayed City.

Average rental prices for apartments in Abu Dhabi, as at Q1 2009, ranged between Dhs138,000 for a one-bed unit, Dhs198,000 for a 2 bed unit and Dhs252,000 for a three bed unit. Prime rental rates for apartments in areas such as the Corniche, and to a lesser degree the Tourist Club Area, stood at Dhs160,000 (one-bed); Dhs265,000 (two-bed) and Dhs330,000 (three-bed).

In Q1 2009, average villa rental rates stood at Dhs335,000 for a 3-bed unit, Dhs394,000 for a 4-bed unit and Dhs472,000 for a 5-bed unit. Prime locations such as Al Bateen, Al Manaseer and Al Khalidiya continue to command a premium, with 3-bed, 4-bed and 5-bed villas commanding annual rental prices at Dhs375,000, Dhs440,000 and Dhs535,000 respectively.

This decline is mirrored in the residential sales sector - where at the peak of the market - apartment sales prices in prime schemes averaged between Dhs2,400 and 2,800 per sq ft. Current prices for prime apartments in Abu Dhabi are between Dhs1,600 and 1,800 per sq ft, representing a 33% to 35% drop. Although estimates vary significantly (largely due to the widening gap between quoted and achieved prices), DTZ estimates that average quoting prices for apartments and villas in Abu Dhabi have reduced by 15% to 35% since their peak in 2008.

Villas sales prices on major master planned developments such as Khalifa City A have declined by 10% to 25% since their peak in 2008. Prices in Q1 2009 range between Dhs6.2m and 8.8m in prime areas such as Al Bateen, down to Dhs2.2m to 4.9m for lower priced product in Al Raha Gardens.

Commenting on the residential market, Cooper said, "Sales rates in Abu Dhabi's residential sector were largely inflated by traders buying off plan and seeking to realise a return prior to the completion of the development and did not necessarily represent true occupier value. DTZ consider that sales prices in Abu Dhabi are now returning to more sustainable levels."

As with the office and residential sectors, Abu Dhabi's hospitality market has also been undersupplied and characterised by a lack of internationally branded hotels. This is set to change with the launch of c. 12,000 new hotels rooms over the next two years alone - rising to over c. 20,000 units by 2012.

Average room rates in Abu Dhabi have witnessed an increase of 54% from Dhs676 in 2007 to Dhs1,040 in 2008 which placed the Emirate 4th in the world rankings behind Moscow, Geneva and Dubai. Revenue per available room (Revpar) increased by 7.9% between 2007 (Dhs786) and 2008 (Dhs848) maintaining Abu Dhabi's 4th place position in the global rankings.

Jan Boman, Director of DTZ Hospitality for the MENA region stated, "The effects of the global economic downturn will have an impact on performance and hotel operators will have to change their marketing strategies to sustain revenues. However, ongoing demand from the corporate sector, coupled with increasing visitor numbers attracted to major projects such as the F1 Circuit, the Guggenheim
Abu Dhabi Museum and the Louvre Abu Dhabi, means that the Emirate is relatively well placed to maintain its advantage over competing global cities."

The retail sector will face similar challenges as a result of the economic downturn as anticipated consumer slowdown beings to impact on retail revenue. Essentially this will limit landlord's ability to raise rates - despite the fact that Abu Dhabi's retail market continues to be undersupplied compared to global and regional peers - when assessed from a Gross Lettable Area (GLA) per capita perspective.

However, this is expected to change in the medium term with a large number of retail malls currently under construction. These include developments such as Yas Mall, Dalma Mall, Central Market and Deerfields Town Square. This will add to the current retail mall GLA in Abu Dhabi of approximately 444,000 sq m, 60% of which is accounted for by just three shopping malls, namely the Marina Mall (27%), the Abu Dhabi Mall (17%) and the Al Wahda Mall (13%).

Average rents within the major malls vary significantly according to location, age and retail unit type. Average rents in the first quarter of 2009 ranged between Dhs3,000 and 4,500 per sq m per annum. Vacancy rates in the malls of Abu Dhabi have historically been very low and are often at 5% or less but are set to move out slightly in the future, particularly for new developments.

Andrew Goodwin, DTZ's Head of Retail for the MENA region, summarised the challenges facing the Abu Dhabi retail market, "We expect to see the effects of the current market conditions impact on some of the more speculative retail developments in Abu Dhabi, as funding remains a challenge. Successful retail operators in Abu Dhabi will be determined by their ability to control costs whilst maintaining the quality of their retail offer. Neighbourhood malls targeting local communities and providing essential services are set to dominate their sectors and to perform well. Additionally, large malls such as Yas, with sufficient scale to provide diversity of offer are also set to suceeed."

This report is the product of DTZ's regional research team and is the third in a series of reports to be released by DTZ to focus specifically on the real estate market in the Middle East. Previous reports include Bahrain and Qatar. Other reports published by DTZ globally include the industry-renowned Money Into Property report, published annually and covering investment in real estate around the world.

DTZ is the most established firm of real estate advisers in the Middle East, with its first permanent operations beginning in 1975. Today, DTZ has a presence in six GCC locations (Abu Dhabi, Dubai, Bahrain, Kuwait, Qatar and Saudi Arabia). Each DTZ office provides a full range of real estate services staffed by qualified expatriates and experienced Nationals.