The silver lining in a slow real estate market
A bearish market sentiment coupled with a number of major mergers and companies downsizing have had an unfavourable effect on real estate demand in the last two years in Abu Dhabi. With substantial new inventory putting further pressure on the market, the pattern looks set to continue. But analysts are seeing the silver lining as developers offer more incentives to buyers.
“Rental rates and sales prices are expected to follow a similar path to 2017 with further moderate declines for Abu Dhabi due to the continuous delivery of new supply,” says John Stevens, managing director of Asteco. “However, while transaction activity for completed properties has slowed compared with previous years, newly launched off-plan quality projects with attractive payment plans and discounts will continue to benefit from good levels of demand and ultimately increase investment in real estate for 2018.”
Approximately 9,000 residential units, including 6,200 apartments and 2,800 villas and town houses are slated for completion this year, according to Asteco’s Q4 Abu Dhabi Real Estate Report, with most projects located on Reem Island, Al Raha Beach and Yas Island. However, based on previous years, the delivery of some of this year’s inventory may be postponed until 2019, says Stevens. Average apartment and villa rents went down 10 per cent and 7 per cent respectively compared with 2016, while apartment and villa sales prices declined 10 per cent and 4 per cent year-on-year, Asteco figures show.
A tale of two cities
Meanwhile, the Propertyfinder Trends report reveals an increase in asking rents in some non-freehold communities and relatively affordable areas with limited stock in the final half of last year. Mohammad Bin Zayed City, Abu Dhabi’s most affordable apartment community, along with Al Mushrif and Electra Street, saw increases of 13.8 per cent, 12.8 per cent and 8 per cent respectively.
At the other end of the spectrum, apartment rents continued to decline in the Corniche area (7.8 per cent), Al Ghadeer (7.7 per cent), Al Raha Beach (6.6 per cent), Al Reem Island (5 per cent) and Al Bateen (4.7 per cent). Despite a decline of 2.8 per cent, Saadiyat Island remains with the most expensive apartment rents, followed by Al Raha Beach at Dh105 and Dh99 per square foot respectively.
Apartment rental yields in Abu Dhabi are still very good, ranging from 7-8 per cent across all communities, according to the report. Yields remain stable for villas, with affordable villas in Hydra Village offering the best rates at 7.5 per cent.
Figures from investment management firm JLL show a noticeable shift in supply to the new islands, which account for more than 60 per cent of projects currently under construction in Abu Dhabi. The firm also estimates that by 2020, 12 per cent of the total residential supply in the capital will be on the new islands, compared to 8 per cent last year.
The increasing inventory on the new islands is putting pressure on market rates. Sales prices on Al Reem Island, the most popular area for both apartment leasing and sales, have gone down by 6-8 per cent year-on-year, primarily because of increased off-plan listings, according to Bayut.com. Prices for studio, one- and two-bedroom apartments on the island start at around Dh680,000, Dh1.1 million and Dh1.7 million respectively.
Meanwhile, villa listings in the Dh3-million price range on Yas Island have increased, forcing the average price to fall from Dh3.8 million to Dh3.6 million. Conversely, Saadiyat Island had a smaller inventory of apartments last year, resulting in an increase in demand and a rise in the overall average sales price to Dh1.9 million, according to Bayut.com.
Other factors such as oil prices and reduced allowances also continue to play an influential role in prices.
“The reduction in employment allowances and benefits further contributed to the reduction in disposable incomes, leading many residents to downsize and to look for more affordable options,” explains Asma Dakkak, research manager at JLL Middle East and North Africa. “The introduction of value-added tax is expected to further impact purchasing power, at least during the transitory phase of adjustment.”
The silver lining
However, on the sales front, prices adjust lower in weaker market conditions, creating opportune investment options for potential buyers, explains Dakkak. And with oil prices touching $70 (Dh257) per barrel, Abu Dhabi real estate developer Aldar Properties says it is confident about the possibilities for the year ahead, particularly if a resurgent oil price leads to expansionary fiscal policy that can further propel the economy. The increase in government receipts and spending, as a result of VAT, could also contribute to growth.
“Popular sentiment is that prices are at or very close to the bottom of the cycle and will increase in the lead-up to the World Expo 2020,” says Lukman Hajje, chief commercial officer of Propertyfinder Group. “There will also be an increase in product offerings in affordable emerging communities in the sub-Dh1 million and sub-Dh1,000 per square foot segments, which were historically underserved during earlier construction booms.”
Michael Lahyani, Propertyfinder Group CEO, adds: “Falling prices, as we’ve seen, make buying more feasible for a larger percentage of the population.”
Experts generally expect the market to rebound sooner than later as the product range diversifies and property ownership becomes more accessible. “As more and more off-plan projects are completed, handed over and put on the secondary market, we can expect prices to continue attracting investors, while landlords will have to stay competitive to entice potential tenants,” says Haider Ali Khan, CEO of Bayut.com. “In the long run, as the market and the broader economy move along a trajectory of diversification and maturity, the opportunity for developers and sellers to capitalise on their investment remains strong.”
Risk of oversupply
Experts reject the notion that Abu Dhabi could become oversaturated, given the emirate’s population size and anticipated growth. “Those in shared rental accommodation suddenly can consider renting their own place,” says Hajje. “Long-term renters are buying. Transactions are up. An increase or decrease in property prices matter less than a decrease in transaction volumes.” Although the inventory is seeing substantial growth, certain properties are selling very quickly, indicating another important trend — a growing demand for value. “When you have good projects that sell fairly fast after launch, this points to a market demand for top-quality products,” says Khan. “What you also notice is more advertising by developers to reach out to a broader audience to communicate at a more personal level with the end users. This makes complete sense because the end users today are making more informed decisions and brands need to engage with them.”
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