According to the latest analysis from Cushman & Wakefield Core, Abu Dhabi’s real estate market is witnessing a period of change having an overall beneficial effect on the market fundamentals, with offer and demand in the process of readjusting to more sustainable levels. The capital’s residential and office prices softened, recording faster depreciations in the first half of 2017 than in 2016, with a mirroring effect on rent and a stabilisation expected to start in 2018. Residential: sales performance and rental market
Contractions in household incomes and workforce redundancies in both the public and private sectors have weakened real estate demand in Abu Dhabi. This has had an amplified effect on residential sales, as the market has witnessed widespread drops in the range of 4 to 16% within the last two quarters.
The research paper reveals that the prime market has unsurprisingly witnessed steeper softening, as occupiers favour affordability and investors face increasing challenges to lease high-end products. New supply, coupled with the rise in secondary stock coming to the market, are expected to exert further downward pressure on sales prices in the short term, although the mid-term prospective is not as dark as many say.
Andrew Ausama, Associate Director at Cushman & Wakefield Core, explains “Despite these market conditions, we expect the pace of price drops to slow down over the next 6-12 months as the market reaches a critical point with sales price bottoming at AED 1150-1250 and leasing prices at AED 70-75 psf. Developers/landlords may resist further drops in pricing as these reductions undervalue their portfolio as lower rental yields affect or may breach bank covenants which may require vendors to increase capital security or reduce debt in keeping with banking requirements.”
David Godchaux, CEO of Cushman & Wakefield Core adds that “This resistance for further drops may result in developers withholding stock in a healthy adjustment mechanism already witnessed in Dubai in the past 5 years. This would in turn, cause a prolonged period of lower volumes and flattened sales prices.”
According to the report, “The rental market mirrors the sentiment of the sales market as housing allowances remain under pressure. Whilst mid-segment apartments located within close proximity to offices have been relatively resilient, villas have witnessed rental decrease in the range of 14-17%; with an exception of Saadiyat Villas which displayed a lower rental decline under 9%. In the wake of these challenging market conditions, landlords in the city area are finally starting to adjust to these market conditions, while others are continuing to lose tenants as a consequence.”
Offices: level of vacancy
The report highlights that the vacancy rate continues to increase across the market on the back of a weaker demand, particularly for office stock located in secondary areas.
David Godchaux, CEO of Cushman & Wakefield Core, said: “Abu Dhabi’s warehousing market has displayed a relative resilience to the widespread rent drops that have affected other asset classes, such as the commercial and residential markets.”
The introduction of VAT is expected to add interim compression on corporate and retail businesses, as they may face higher operational overheads due to administrative and compliance costs combined with lower consumer confidence, adding further downward pressure on rents. This effect is expected to be particularly marked in smaller, mid-size firms, as profit margins remain under pressure - although structurally enhancing company performance, by streamlining services in a way to comply with VAT over the mid to long-term.
Regarding other markets, Mr Godchaux explains that “the ongoing development of freezones and ports are actively diversifying revenue streams. This continued investment in infrastructure is in turn attracting industrial occupiers seeking large parcels of land to develop facilities.”
The report also details that, ”although mall retail performance remained flat in a backdrop of weaker disposable incomes, we have seen a rise in interest levels from mid-segment F&B occupiers.”
In his concluding remarks, Mr Godchaux says: “tenants have the upper-hand to negotiate lower rents in both the residential and office sectors while slowly building up demand on the back of oil stabilisation and government spending. Although short-term recovery in real estate prices is unlikely, we expect the downward trend to slow down over the next 6-12 months - as the market softens, yet continues to strengthen its fundamentals.”