The Abu Dhabi real estate sector was something of Dr Jekyll and Mr Hyde last year. Sales prices have been flat since the last quarter of 2014, but leasing failed to read the script and was up by as much as 7 per cent in some areas last year, according to JLL – although that is still much reduced from the pace in 2013 and 2014. What has caused this divergence, and what will sales and leasing do this year?
On the supply side
When it comes to new units coming on to the Abu Dhabi market, the property pipeline is looking bare. Many new projects are planned, such as Mamsha on Saadiyat Island from Tourism Development and Investment Company; Ansam, Mayan and West Yas on Yas Island from Aldar; and Al Hadeel on Raha Beach, also from Aldar. These are just a few examples – but these projects will not come online until at least next year. Abu Dhabi’s large developers were badly stung by the 2008 crash and have lain dormant almost ever since, with only the serious rental spikes in 2014 prodding them out of their slumber and back to the construction site. High-rise buildings have a lead time of up to four years, so the delay in restarting stalled projects or launching new ones has long-term effects. Most third-quarter 2015 reports are saying that only 2 to 3 per cent will be added to the total housing stock per year over the next two to three years.
Demand stays strong
Demand for units in Abu Dhabi, at least on the leasing side, has remained strong, as according to most reports rents went up by 5 to 7 per cent last year. This rise was mostly because of the low supply coupled with an increasing population. Population predictions in such a fluid, immigrant-based economy are hard to come by, but according to the Statistics Centre Abu Dhabi, the average annual population growth rate between 2005 and 2014 was 7.6 per cent. If this holds, then population will continue to outstrip housing supply and rents will continue to rise – simply put, demand is greater than supply.
The oil effect
But what of the oil price slump? Will this affect population statistics? According to Monster.com, it seems it has not yet. Companies are still hiring even in the middle of what would seem like reduced sentiment in the region. Abu Dhabi’s population is closely linked to government spending and jobs, so people will be looking closely at the emirate’s budget for this year. The federal budget was cut by a modest 1.1 per cent for the coming year, and Dubai’s budget was increased by a whopping 12 per cent. The IMF said it expects the UAE economy to grow by 3 per cent this year, so outlook is reasonably positive. Rents should increase at an inflation level of 4 to 5 per cent this year.
Outlook for sales
It seems that people are holding their breath waiting to see what will happen in a new “lower for longer” era of oil prices, and how the Abu Dhabi government will respond. Continued increases in rental prices should signal rises in sale transactions, but the two have temporarily decoupled over the uncertainty. This has led to yields on investment property getting bigger and some rich pickings for more confident investors. A positive budget and continued rent increases would snap the uncertainty in the back end this year, and a flood of investors could return to take advantage of high yields, with end users buying to control rents.
The fly in the ointment for sale prices may be interest rates. The US Federal Reserve is expected to raise rates by a further 0.5 per cent through this year (and the UAE is likely to follow because of the dirham-dollar peg). Couple that with lower liquidity in the UAE banking system as the government withdraws money, and borrowing will get more expensive. Expensive borrowing makes buying harder for end users and less profitable for investors using leverage.
The property market will generally hinge on population statistics. If people keep arriving, then rents will rise and returns will start looking too good to ignore; buyers will come back to the market in droves to take advantage of yields and cost savings. However, if Abu Dhabi’s government spending falls and it lays people off outside the oil and construction sectors, which have taken the brunt of the reductions, then the population might stagnate. If that happens, there will be bloated housing inventories and sale prices and rents will start to fall.
Ben Crompton is the managing director of Crompton Partners Estate Agents.
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