Partial recovery for Abu Dhabi real estate market

Selective sub-markets in Abu Dhabi are heading back in to recovery, according to Jones Lang LaSalle’s Q1 2013 market report.

Jones Lang LaSalle, the world’s leading real estate investment and advisory firm, has released its first quarter (Q1) 2013 Abu Dhabi Market Overview report covering the office, residential, retail and hospitality market segments, highlighting that selective sub-markets are heading back in to recovery.

Commenting on the report, David Dudley, Head of Abu Dhabi office at Jones Lang LaSalle, Middle East & North Africa, said: “Quarter 1 2013 has been an encouraging start to the year. It seems the worst is now behind us and we are turning the corner. While not a full market recovery, we see that recovery is at least in sight for prime real estate.”

The report highlights:

• Overall real estate markets remain in over-supply, with additional new supply still in the pipeline leading to further increases to market-wide vacancy rates. However, there continues to be a significant distinction between high grade and low grade product – with recovery now in sight for prime real estate as performance of lower grade stock continues to decline.
• During Q1 2013 for the residential sales market, there was evidence of an increased volume of residential sales transactions and approximately 8% increase in residential sales prices for prime stock.
• Similarly during Q1 2013 prime residential rents increased by approximately 8% in selected higher quality schemes. Conversely, rents in secondary quality residential stock have continued to fall.
• The overall office market remains over-supplied, pending further progress with government economic development initiatives to diversify the economy and generate new jobs. However, prime office rents have started to stabilize, with prime office rents having remained stable the last three quarters.
• The key trend for 2013 will be a continued divergence of the market between high and low grade stock – with high quality developments meeting end user requirements achieving stabilization, or improved performance, and poorer quality stock continuing to decline.

Commenting further on the report, David Dudley said: “While it is encouraging to see the market moving upwards again, it is important to note that these improvements do not represent a market-wide recovery, but relate to selected high quality developments – with performance continuing to diverge between high grade and low grade product. However, this is certainly positive news for the market, indicating the first signs of recovery and a maturing market.

The increase in prime residential sales prices over the past quarter can be attributed to a wide range of factors. Abu Dhabi’s market cycle is at a time lag to Dubai, and therefore the current recovery in Dubai will certainly influence Abu Dhabi’s recovery. Abu Dhabi, like Dubai, is also benefiting from the UAE’s status as a safe haven destination following political unrest in the wider region. Furthermore, as government progresses its major economic development, infrastructure and city building initiatives, this has a major impact on purchaser demand – as increased job stability and greater liquidity leads to more people looking to buy property rather than rent, together with expectations of value growth from a future upswing.

A further point is a greater distinction of product, with only higher grade stock benefiting from an increase in volume of transactions and values. In the previous upswing, dominated by off plan sales, there was limited differentiation of product. The reality is that many projects which had been conceived and marketed as high grade stock are were not delivered as such. Now that stock has actually been completed, purchaser demand and price growth is for residential product that meets end-user requirements – for instance functional design and layout, high quality specifications, a high level of amenity and facilities, sufficient car parking and high quality property management.

“Similar themes apply to the increase in residential rents. There may be an element of increased demand stemming from the government regulations to reduce the level of commuting from Dubai – by encouraging Abu Dhabi employees to live in Abu Dhabi to qualify for housing allowances. However, it is difficult to separate this from other factors. Better community facilities and amenities now being available and greater critical mass within masterplanned areas is leading to better ‘liveability’ and demand for product. Job growth is starting to materialise from major infrastructure and economic development projects – for instance the expansion of Abu Dhabi Airport has led to increased demand for apartments at Al Raha Beach. Again, the real estate that will perform well is the product which is functionally designed, well located, well managed and most aligned to end-user requirements.”

Summary highlights, Abu Dhabi Market Overview, Q1 2013:

• While developers have scaled back projects, additions to supply remain significant, with an over-supply across most asset classes. That said, recovery is now in sight particularly for prime real estate – as performance continues to diverge between high grade and low grade product.
• New supply entering the office market has increased the total stock to approximately 2.9 million sq m. Major additions to supply in Q1 included Al Bahr Towers (ADIC HQ) adding a total of 26,000 sq m GLA. There are currently some major pre-commitments for office space awaiting handover.
• A significant level of further office supply is due for delivery later in 2013, which is expected to place downward pressure on average rents, particularly for secondary quality assets. This will also drive occupier relocations, improving gross take-up rates. On the other hand prime office rents have started to stabilise.
• Residential stock increased by almost 2,000 units over the quarter. Additions to supply included Al Bateen Park development in Al Bateen, Nation Towers on the Corniche, Al Reef near the Airport and Sea View on Reem island.
• During Q1 there is evidence of an increased volume of residential sales transactions, with rental and price growth occurring in selected higher quality schemes. Conversely, rents in secondary quality residential stock have continued to fall. We expect a continued divergence of the market in 2013 with those developments meeting end user requirements achieving the strongest performance.
• Despite the large supply of residential product that has been recently delivered, there remains healthy demand for well designed stock, due to the relatively poor quality of many of the existing developments. Good quality developments have experienced healthy absorption and achieved premiums.
• Retail stock increased by around 11,600 sq m of GLA in Q1, owing primarily to the opening of Al Muneera and Al Zeina retail components. An estimated 349,000 sq m of retail GLA could be delivered to the market over the remainder of 2013 in a mix of stand alone malls and retail space within mixed use projects.
• The retail supply pipeline is dominated by regional malls including Yas Mall, Sowwah Central and Saadiyat District. In the near-term there will be significant additions to the retail elements of large mixed use developments – including The Collection at the St. Regis on Saadiyat Island, the Galleria on Sowwah Square, Nation Towers and the Emporium at Central Market.
• The first quarter saw positive news for the hotel sector with increases in occupancy, and average-length-of-stay. Two new hotels, The Ritz Carlton and Premier Inn, have added 774 rooms, placing continued downward pressure on Average Daily Rates (ADRs).

Craig Plumb, Head of Research for Jones Lang LaSalle in MENA, further added: “Abu Dhabi may not see a full recovery in 2013 but the government is taking the right steps for a sustainable recovery. Recent capital injections into infrastructure will boost the demand for real estate in the longer term, as will requirements for government employees to live in the Emirate. However, given the high levels of current supply, the market is likely to remain tenant favourable throughout 2013.

The Abu Dhabi market is typically 12 – 18 months behind that in Dubai in terms of its position on the property cycle. Given that the Dubai market is now witnessing recovery across all sectors (residential, office, retail and hotels), for the first time since 2008, the current signs of stability in Abu Dhabi are likely to be translated into a more broad based recovery during 2014 / 2015.”