Increased opportunities for residential and commercial occupiers in Abu Dhabi
ABU DHABI PROPERTY MARKET OUTLOOK
Weak economic conditions, rising inflation and high costs of living continue to curb demand in Abu Dhabi’s real estate market, resulting in high vacancy rates in both the residential and commercial markets, where landlords have started to offer more flexible deals to attract occupiers.
Abu Dhabi Property Market Outlook, Spring 2017 indicates that 2016 saw capital values across Abu Dhabi’s residential investment areas decrease by 6% on average, with sea view villas on Saadiyat registering a 19% downward adjustment during the year, leaving average values in this submarket at AED 1,800 psf; some AED 600 psf higher than the average across the rest of the submarkets that are monitored by Cluttons. Apartments on Reem Island (-11.1%) experienced the second largest correction last year, dragging average prices down to AED 1,300 psf. The general weakness in the sales market has persisted into 2017, with a further 1.9% drop being registered during Q1 2017, which has dragged the annual rate of change to -7.6%.
The report says that wide ranging redundancy programmes in both the private and public sectors stemming from the weaker economic conditions, are adversely impacting overall buyer demand levels.
Edward Carnegy, head of Cluttons Abu Dhabi, said: “Anecdotal evidence shows that organisations continue to trim senior level executive positions, which are a key source of requirements for high end homes. In other cases, companies are removing housing allowances to cope with the financial pressures, which is making it harder for potential buyers to purchase a property. That’s why this segment of the market is currently experiencing the most significant price corrections.”
On a similar note, the weaker economic conditions are also affecting the residential rental market. Cluttons’ report indicates that evolving market conditions have kept rental values under pressure, with 2016 registering a 12.6% fall in average rents across Abu Dhabi’s residential investment areas. High end villas on Saadiyat Island (-28.2%) registered the most significant decreases in average rents last year, with five-bedroom villas experiencing a rent fall of over a third on average. The downward pressure has lingered into 2017, with average rents dropping by a further 2.3% during Q1, which leaves rents 15% lower than this time last year.
Carnegy added: “Landlords are now demonstrating a greater amount of flexibility around tenancy terms, with many agreeing to shorter than normal break clauses, while also increasingly willing to accept offers below advertised rates. Other service providers are also coping with the market conditions. For instance, Khidmah is now offering a range of incentives including a free month of rent, shopping vouchers, and is also accepting rental payment in four cheques instead of one, which had been the norm previously. In cases where landlords are more amenable to discussing and renegotiating lease terms, we have seen tenants being extremely responsive and it is these landlords that are the best placed to weather the current downturn in the residential rental market.”
On looking ahead, Faisal Durrani, head of research at Cluttons, said: “With no respite expected from the economic pressures curtailing jobs growth and also catalysing redundancy programmes, it is our view that the residential rental market will continue contracting throughout 2017. The supply demand equation is also clearly out of kilter, with supply levels likely to continue edging ahead of demand as the year progresses and more schemes complete. We forecast that average rents are likely to end the year 5% to 7% down on 2016. The top end of the market is expected to register more substantial declines.”
Durrani added: “As for the residential sales market we also forecast that it will deteriorate further throughout 2017, with values on average likely to fall by between 8% to 10%. Like the rental market, it is the top end of the market that will likely register steeper capital value drops.”
Similar to the residential market, the stability of rents in Abu Dhabi’s office market has given way to a widespread softening of rents. During Q4 2016, prime (AED 1,850 psm), secondary (AED 1,050 psm) and tertiary (AED 750 psm) rents all declined by AED 50 psm. The cascading impact of economic fragility in the form of a wide scale reduction in requirements and enquiries has contributed to weaker rents across the board.
Cluttons’ research shows that the liquidity squeeze faced by the public sector as a result of the fall in oil revenues has resulted in the cancellation, or delay, of a multitude of high profile projects across Abu Dhabi. As a result, a number of businesses reliant on public sector spending are being forced out of the market due to a lack of lucrative contracts, which is adding to the diminished number of enquiries and requirements.
Carnegy explained, “The city’s Grade A market, which had been relatively well insulated to the downturn previously, is beginning to show cracks, with rents in most prime buildings dipping back throughout 2016. Some landlords have begun to respond reactively to the softening conditions by increasingly offering rent free incentives and being open to negotiating headline rents, depending on the covenant strength of potential occupiers”.
Durrani concluded: “Clearly the rising vacancy rates and falling rents are creating an excellent opportunity for occupiers to cherry pick from locations they may have previously been priced out of, whilst also remaining firmly in the driving seat during rent negotiations.
"With this in mind it is our view that rent corrections of between 5% to 10% are likely across the board by the end of 2017 and the market’s performance will remain hinged on the ability of the economy to shake off the drag generated by the low oil price environment. Elsewhere in the city’s commercial landscape, the warehouse sector appears to have emerged as a relative bastion of stability, with headline rents across the city’s main industrial estates holding steady over the last six months.”