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Abu Dhabi Report Q1 2010

Property Market Summary

 
Highlights

• Apartment rental rates recorded decreases and are expected to drop further in line with additional supply entering the market.
• Villa rental rates have also fallen, particularly at the upper end of the market.
• Demaind for the office space remains subdued with tenants generally adopting a wait and see stratergy due to expections of further price reductions as more supply enters the market.
• The Al-Ain market is seeing further declines for all asset types and this trend is set to continue as supply enters the market.

Real Estate Monitor

"2010 will be a ground-breaking year for the Abu-Dhabi real estate market with the first phases of 'Investment Area' stock being delivered. This new 'freehold' supply, along with many sizable build to lease projects on and off the main island, will bring a significant quantity of new supply, with a total close to 20,000 new homes by the end of the year. This will being movement to the market and, for the first time in Abu Dhabi, some truly high-end residential developments."

Elaine Jones

CEO, Asteco Property Managment

New Supply Increases Downward Pressure on Rents

• Apartment rents have fallen on average between 5 and 15% over the last three months and, with significant quantities of new supply under construction, this downward trend is set to continue.
• A trend of falling rents strongly contradicts the pent-up demand and under-supply argument. Asteco estimates that as many as 15,000 apartments will be delivered to the market by the end of 2010, with over 9,000 of these units being built specifically to lease.
• In addition, a substantial quantity of the new ‘Investment Area' stock due to complete in the next three to six months on Al Reem Island is likely to become available to lease.
• A large proportion of the pent-up demand for housing is being diverted to Dubai, demonstrating how closely interconnected both markets have become.
• Asteco has seen low leasing take-up rates amongst new developments, which have been handed over in the last three months or are due for imminent completion. This is due, principally, to a mismatch between landlords' price expectations and prospective tenants' budgets. Landlords have tended to test the market with initial high quoting rents to gauge demand and have found downward price adjustments to be necessary.
• The delivery of new stock is a good test of market appetite and, as this new supply is absorbed, will define key rental benchmarks that should lead to pricing adjustments amongst existing stock, reflecting variances in location and quality. In addition, these rental benchmarks should assist other landlords with new buildings in terms of their pricing strategies.
  • Sale prices for apartments, on average, have shown decreases from AED50 to AED100 per square foot (3-7%) over the last three months. This reflects the increase in the number of listings coming to the market and the fact that some investors with a motivation to sell are more willing to accept lower prices and exit. Current motivation to sell is being driven by the following factors:
    • The investor cannot afford their final payment due on hand-over.
    • The investor is unable to obtain a mortgage or refinancing.
    • The investor did not intend to keep hold of the property.
    • The investor bought multiple units and requires consolidation.
  • Asteco considers that as completion draws closer more stock will become available and put further pressure on prices. Conversely, Asteco has noted that some investors that were looking to sell and are fully paid up or with finance in place have decided to withdraw their units from the market with a view to holding it for one to two years. This has become a more plausible option for some investors following the announcement of Law Number 4 2010, which provides landlords with much more flexibility in terms of obtaining possession of their property. Previously, if an investor let their apartment the tenant would have had security of tenure for five years and hence, if the investor wanted to sell within this period he would have had to do so with a sitting tenant in place impacting marketability and therefore price.
  • In the last six weeks, Sorouh released the remaining inventory within Sun Tower, with quoting prices ranging from AED1,600 to AED1,680 per square foot on the back of a subsidised mortgage rate of 4.99%. It is Asteco's understanding that enquiries have been strong but it is too early to analyse how many of these enquiries will turn into sales.
  • Of the 15,000 apartments being delivered this year, around 4,600 will be completed in the first phases of Al Reem Island (Marina Square and Shams Abu Dhabi) in the next three to six months, with a further 511 units due to complete at Al Bandar, Al Raha Beach within the next three months.
  • At present, demand continues to be entirely focused on these close-to-completion developments.
  • Given that the current market is being driven by end-users looking to buy for owner-occupation or as a long term investment, the overall affordability of the purchase price versus the cost of mortgage repayments and potential long-term rental returns are the key considerations, as opposed to the price per square foot.
  • There is a preference amongst buy-to-let investors for smaller one- and two-bedroom apartments, which are perceived to offer the best prospects for securing the highest yields. In addition, whereas buyers may normally expect to pay a higher price per square foot for a smaller unit, at present the market is not factoring this into pricing; consequently, there is little or no differential to be found on a price per square foot basis between units of different sizes

A Buyers Market

Affordability Puts a Ceiling on Villa Rental Rates

• As was the case in the previous quarter, some rental reductions have been witnessed for villas and this has been particularly pronounced at the upper end of the market.
• In terms of off-island villa communities, with the majority of the villas at Golf Gardens having been handed over, Asteco's research shows that around 70% of these villas are being made available for rent, with the remaining 30% occupied by the owners. Moreover, approximately half of the villas which have been rented out to date are company contracts.
• Close to 3,800 villas, specifically being developed for the leasing market, are due for handover in 2010. A large majority will consist of low- to mid-quality stock in Khalifa City A and B, and Mohamed Bin Zayed City. Asteco expects many of these to be subdivided into smaller units, making it difficult to predict how many residential units will actually come onto the market in those areas.
• As previously mentioned, a large proportion of villas at Golf Gardens have come onto the rental market. The majority of tenants in this development are western expatriates. Demand from this group of residents is driven by housing allowances which are generally in decline; on average, allowances tend to be in the region of AED300,000 to AED 350,000 per annum for senior management positions. Consequently, five-bedroom villas quoting above AED400,000 are struggling to let and prices have fallen to more realistic levels, with some five-bedroom villas now available for less than AED350,000.
• At the other end of the market, the handover of the first phases of Al Reef has brought a new dynamic in the form of expatriate landlords. Given that these new landlords have mortgage commitments, their desire to secure tenants early and avoid vacant periods has already seen rental prices fall from original quoting levels.
• As more phases are handed over in the next few months, rents in this development are likely to come under increasing pressure to drop further.
  • Asteco has not seen any significant fluctuation in villa prices over the last three months.
  • From an investment perspective, based on current prices, the large villa developments of Al Raha Gardens, Golf Gardens and Al Reef are, on average, all achieving gross yields of around 9-10%.
  • Approximately 1,400 villas are likely to be handed over in Investment Areas throughout 2010, with the majority located at Al Reef and a small number of luxury villas/townhouses at Marina Square on Reem Island. In addition, 200 villas/townhouses are due to be delivered to the market at Al Raha Beach early next year.
  • Despite its out of town location, in terms of volume of enquiries, Al Reef is currently the most popular development amongst potential buyers, reflecting the demand for more affordable, good value for money property and the fact that the first phase is now being handed over.
    • With little open market transactional evidence emerging, it is difficult to gauge current market rents. It is clear, however, that current supply and demand dynamics prevailing in the market dictate that rents are under significant pressure to fall.
    • Those landlords who have been more flexible in their pricing and reduced rents below AED2,000 per square metre (for new shell and core stock) have found reasonable levels of interest.
    • Currently, there is over two million square feet of new office supply available for occupation/tenant's fit out works in the market, with a significant amount of additional space under construction.
    • Demand continues to be subdued in the office sector, with tenants generally adopting a wait and see strategy due to expectations of further price reductions as more supply enters the market.
    • With take-up rates remaining low, some landlords offering new office space in a shell and core condition are now undertaking partial fit-out works with a view to improving letting prospects.
    • In addition to lowering rents, landlords will increasingly need to offer rent-free incentives to encourage tenants to lease space within their buildings.
    • Some tenants that signed pre-let agreements with landlords are seeking to re-negotiate terms prior to taking possession.
    • There is a large quantity of pent-up demand from prospective tenants already based in the city occupying poor quality space at high rents.
    • As higher specification, completed office space enters the market, the gap in values between truly Grade A stock and secondary space will continue to widen significantly.
    • The higher end rents quoted in the table above are only applicable for new/modern high quality ‘Grade A' buildings with adequate parking. The prevailing average rate for the majority of existing stock is towards the lower end of the range.
      • Overall, apartment and villa rentals have fallen over the last quarter by close to 10%, as new supply comes to the market and demand is slightly reduced - especially as some commuters working in Dubai have chosen to move back to Dubai due to falling rents.
      • The new Al Hili development, with over 1,220 two- and three- bedroom units, is ready and handover is expected within the next two months. Consequently, little leasing activity can be seen as both tenants and landlords wait for this new supply to enter the market to align their expectations.
      • While some landlords still prefer to keep their units empty instead of dropping asking rents, it is expected that more of them may be willing to reduce their expectations in the coming months and, therefore, rents will drop further in the next quarter.
      • Al Ain has virtually no purpose-built office space and, as a result, the market closely follows trends in the residential market as units can be easily converted from one use to the other.
      • Average office rentals have reduced by around 5% compared with the previous quarter, although little leasing activity was seen over the period, once again, as tenants and landlords wait for new supply to enter the market.
      • New Supply To Provide Key Market Benchmarks
      • The table below provides summary details of some residential projects which have recently completed or are due for imminent completion (within the next one to three months) all located on the main Abu Dhabi Island. The rents stated in the table are the latest quoting rents. This new supply is a real test of the local market and as deals are done and the buildings are let over the coming months a clear picture will emerge and key pricing benchmarks will be set
        • This removes a tenant's previous right to continued occupation. With effect from 9 November 2010, upon expiry of the lease, the tenant's right to automatic renewal ceases provided notice of non-renewal has been given (two months for residential property, three months for commercial) by either party.
        • A tenant will have protection against eviction only until 9 November 2010. Unless this date is extended, the new provisions will automatically apply thereafter. Provided the landlord has given notice of vacation (under Article 20(3)), the tenant cannot remain in the property after expiry of the term except with the landlord's consent.
        • One exception to this is where the Rental Disputes Resolution Committee resolves to evacuate the property before 9 November 2010, where it rules that the tenant's continued occupation of the property may cause serious harm to the landlord, but only where the tenant has used the property for at least two years.
        • Even under this ruling, a tenant will be given up to six months to vacate the property.
        • In effect, Article 20 will allow landlords to remove tenants who are paying low rents due to the previous rent cap and protection against eviction provisions. The rent cap of 5% remains unchanged but this amendment goes some way to weakening it.
        • A ‘Committee for the Settlement of Rent Disputes' has been set up which is now affiliated to the Abu Dhabi Judicial Department, and is chaired by a judge. Therefore, the existing Rental Disputes Resolution Committee and its Appeal arm is placed under the authority of the Ministry of Justice, with a third committee – the cassation committee – added. For the first time, judges will settle rent disputes under the umbrella of the Ministry of Justice, instead of persons with no legal qualification who have been appointed by the Executive Council.
        • The above legal information is supplied courtesy of Al Tamimi & Company. (For more information go to www.tamimi.com

      Law No 20 of 2006 regarding the relation between landlords and tenants in the emirate of Abu Dhabi has been amended by Law No 4 of 2010. Important features of this amendment are as follows:

      Article 20

      Articles 24-33

      UAE Residential Comparison

      The graphs below show the current average rental rates (in AED‘000) for apartments and the percentage change in rental rates over the last three months for the different units across the emirates

      Please note that the areas used to calculate the average rental rate in Abu Dhabi have been adjusted to better reflect market conditions. The percentage change has therefore not been included as a like-for-like comparison is not possible this quarter. The average is calculated using average rates from 16 locations across Dubai.

      UAE Mortgage Market Update

      Over the past three months, most lenders have reduced their mortgage rates by 25 basis points or more, making mortgages more affordable than they were last year. Lenders are very focused on completed developments rather than those which are still under construction in Dubai, although in Abu Dhabi lenders favour the major developers and are prepared to lend against ‘under construction' properties, as well as those that are soon to become available. Most banks still remain active and offer borrowers that are assessed on very low risk between 60% and 85% of the property valuation. Interest rates range from 5.75% to 8.50%, and most banks have moved from EIBOR-linked rates to their own Base Rates to reflect the true cost of funds. Lenders are also prepared to take "buy outs" from other financial institutions for those clients who have an existing mortgage and want to refinance to take advantage of special rates as low as 6.5%. Additionally, some lenders may release equity funds against the property so that funds can be utilised for personal needs or to improve cash flow.

      NOTE:
      1. (*) The above lenders reserve the right to change their product policy, fees and charges, interest rates and other credit-scoring criteria at any time without prior notice.
      2. Banks will generally only finance properties from developers on their approved lists. John Charcol Middle East is an independent mortgage broker based in Dubai. For queries or assistance in relation to mortgages, contact John Charcol Middle East's sales team Toll Free on 800 JCME (5263) or +971 (4) 341 7466 if dialling from outside the UAE, or by email to mortgages@johncharcol.com

      Asteco Property Management LLC

      With over 25 years of Middle East experience, Asteco's Professional Services team brings together a group of the Gulf's leading real estate experts.

      Asteco's network of offices in Abu Dhabi, Al Ain, Dubai, Northern Emirates, Qatar, Bahrain and Jordan not only provides a deep understanding of the local markets but also enables us to undertake large instructions where we can quickly apply resources to meet the clients requirements.

      Our breadth of experience across all the main property sectors is underpinned by our sales, leasing and investment teams transacting in the market and a wealth of research that supports our decision making.

       

       

       

      Download the pdf file

  Residential Apartments and Villas

  Office Market Sees Little Activity

  Project Focus

Abu Dhabi Office Market

Villa Sales Prices

About the Author

Over the years, the Asteco brand has been synonymous with growth and trust, leading us to become the largest property management company in the UAE.

The sheer diversity of our expertise, coupled with over two decades of experience and success, in one of the world's most dynamic property sector, leaves us with an enviable track record that is second to none.

This pedigree has enabled us to forge lucrative relationships with the exclusive Savills of London and other leading property portfolio managers.

We provide:
-Clarity to new investors
-Flexibility to a diverse range of clients
-The best Return on Investment (ROI) on existing property assets

It's no wonder we are attracting attention from global investment funds, corporations and private investors alike, for advice on the Middle East property market.

So whether you're an investor searching for the right properties, a developer requiring valuations, feasibility studies or sales and coordination services, or whether you're an owner requiring property management, Asteco is the only brand you need remember.

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