Lower government spending, job cuts and reduced housing allowances have helped steepen declines in property rents and sales prices in Abu Dhabi, analysts said ahead of the capital's Cityscape real estate exhibition which opens this week.
As developers showcase stock and launch new off-plan projects, analysts voiced their concerns about the continued delivery of new units amid oversupply, the ongoing impact of the lower oil prices and weak macroeconomic conditions.
Abu Dhabi apartment rents fell around 10 percent in the first quarter versus a year earlier, real estate consultants JLL said in a report this week. Sales prices for prime apartments dropped 3 percent quarter-on-quarter and 13 percent year-on-year, JLL estimates.
Rival consultants CORE predicted in its 2017 residential outlook that a market recovery was unlikely over the subsequent 12-18 months, instead forecasting a steepening drop in sales prices particularly in the first half of this year.
Subdued Cityscape
“We believe the mood at Cityscape is not going to be extremely bright,” CORE chief executive David Godchaux told Thomson Reuters Projects. “It (Cityscape) was already a little bit quieter last year than the year before and I think we are continuing with the same trend.”
Godchaux said market conditions have “not really recovered” in Abu Dhabi.
“On the contrary, we still see the effect of lower level of government spending,” he said. “And still a lot of supply that has come - or is expected to come to the market - has had, and is still expected to have, a relatively negative effect on the overall absorption and level of rents and level of prices.”
CORE’ expects prime and mid-prime villa rents to fall around 15 percent this year as demand ebbs. The firm also sees apartment rents dropping by around 7 percent.
Cluttons was another consultancy to give a gloomy outlook for Abu Dhabi, warning the residential rental market will “deteriorate further” throughout 2017, with residential property values likely to fall 8-10 percent.
“When you’ve got an economy like Abu Dhabi where 50 percent of GDP or thereabouts relies on oil income, we’re in a situation where the public sector is having to reassess its position almost every year,” Edward Carnegy, head of Cluttons in Abu Dhabi, told Thomson Reuters Projects.
“And as a result, the redundancy programs that commenced two or three years ago are still rumbling on and we’re seeing more jobs being trimmed across the public sector, and even in the private sector, particularly at the top end.”
Cluttons said Abu Dhabi’s residential property values fell 6 percent on average in 2016. Rents last year dropped 12.6 percent over the same period.
Developers struggle
A public-sector liquidity squeeze caused by falling state crude revenues has also led some construction projects to be cancelled or delayed, Cluttons noted.
“The Louvre and The Guggenheim, for example, where contract and completion dates have been pushed out further, just to stall payments,” Carnegy said.
CORE’ Godchaux warned Abu Dhabi developers are faced not only with financing challenges but also oversupply and waning demand.
Larger developers nevertheless hope that by the time their under-construction units are delivered the market will have recovered, said Godchaux.
“They have to launch because they need to generate cash flows,” he said. “Even though the market is generally oversupplied, we expect to see more launches.”
For instance, Aldar, the Tourism Development and Investment Company and Bloom Properties are expected to launch off-plan projects despite the soft market, he said.
Smaller players are in a far more precarious position, however.
“Some smaller developers who have difficulty to access finance have been in a very difficult situation in the past few months in Abu Dhabi,” said Godchaux. “We’ve seen a few buildings not going above the G [ground] or G+1 level as construction stalled.”
Affordable gap
Developers are focusing on trying to meet a longstanding shortfall in affordable housing in the capital.
“We are expecting a lot of the stock to be in the affordable or lower mid-market segment, to reflect the sentiment buyers, to reflect the relatively softer economic condition,” said Godchaux.
Abu Dhabi-based real estate developer Aldar Properties launched its mid-market ‘The Bridges’ residential development on Monday. The project, located on Reem Island, has been priced starting at 450,000 dirhams ($122,616).
“We’re now focusing on this (affordable) segment, which was a bit ignored by all the developers,” Aldar chairman Abubaker Seddiq Al Khoori said at the launch. “We definitely see demand for mid-market products."
Cluttons’ head of research Faisal Durrani called the affordable segment in the UAE “vastly underserved”.
“I think there’s a long way to go, both in Dubai and across the UAE generally before we see a true affordable housing market,” he told Thomson Reuters Projects.
“Realistically speaking, the amount of product that’s available in the market anywhere in the UAE is between 600,000 to 800,000 UAE dirhams for a family home, which is extremely limited if not nonexistent,” he explained.
An affordable family home would be priced at 600,000-800,000 dirhams, but such units are virtually non-existent in the UAE, Durrani said.
Developers with inefficient designs would struggle to sell stock regardless of pricing, said Cluttons’ Carnegy.
“Most completed and under-construction projects that we see are highly inefficient and poorly laid out, which directly affects their marketability to sales or leasing,” he said.
Aldar Chief Development Officer Talal Al Dhiyebi said his company was counting on both new and existing demand, while pushing the quality of its offering as its unique selling point.
"Whilst there's new demand, there's also a lot of shifting of existing demand that's in there, where there is a lot of supply in Abu Dhabi of poorer quality and that lacks amenities,” Dhiyebi said. “So we look at the majority of residential product that's in downtown or old Abu Dhabi, a lot of them lack parking, a lot of them lack facilities... (or) they are not well maintained."
Aldar’s Khoori said demand was still strong despite price and rent declines caused by redundancies and housing allowance cuts.
"We're hearing people say there is a huge supply, there is no demand... when we launch our developments we see quite huge demand and we sell big percentages of them,” he said. "We're delivering three projects this year of which we've sold 85 to 90 percent.”
He said the economy remained “fundamentally strong”.
“People are still worried about stability in the region, but the region has been not stable for quite a long time. And it proves more and more that, unfortunately, despite the instability, countries like UAE benefit a lot from it,” added Khoori.
The 11th edition of Cityscape Abu Dhabi takes place on April 18-20 at the Abu Dhabi National Exhibition Centre.