Rental hikes point to a very bright future for Abu Dhabi property

Step forward Abu Dhabi. The UAE capital is probably the newest property market in the world with off-plan property having been available for barely a year. Yet the auguries are already very good.

Let us start then with rental levels. Local newspaper horror stories tell of the man whose rent doubled to Dhs70,000 this summer and then was up another Dhs30,000 on his return from holiday so he went home again. If you thought Dubai and Doha rents were high welcome to Abu Dhabi.

But what is a nightmare for a long-term tenant is music to the ears of any prospective landlord for the link between rents and capital values is clear enough, although levels of yield vary over time.

Under-priced property?

Initial off-plan sales prices in Abu Dhabi have been benchmarked against neighboring Dubai whose property market was opened to foreigners two years earlier than in the UAE capital. That has meant that a lively market in re-sales has already developed, as with rental levels higher in Abu Dhabi logic suggests that these prices are on the low side.

This is also a logical move by the newly created Abu Dhabi property companies. They appreciate the need to create critical mass in a new property market and the fastest way to do that is to give the buyers a good deal. So far the rapid sell-outs of new projects suggest that buyers have got the hint.

Buying property in a country with very high inflation also makes a lot of sense, as real interest rates are strongly negative. For example if you take the IMF estimate of UAE inflation of 15% and pay 8% on a mortgage then the real rate of interest is 7% in your favor! In short, you are being paid to borrow money!

Look at this factor another way: if you want to protect your savings from inflation what you have to do is to invest in something that is rising in value at least as fast as inflation. Property in a rising market usually does that and rather more.

Inflation, inflation

Similarly an investor buying to rent out a property will benefit from the effect of inflation on rentals. For rents will tend to go up while the debt taken out, or the original equity cost of the property remains static. Hence if rents triple as in the example above, then the rental yield or investment return also triples on the original investment capital.

Abu Dhabi investors really can have it all because starting a new free-market in property from scratch - with 99-year leases for foreigners and freehold for nationals - means that prices have to be below the market rate to establish a market.

So buying into property in a fast growing, high inflation economy like Abu Dhabi, particularly given the energy price outlook, looks a very bright move indeed.