Real Estate & Construction
Time to Reflect
Unlike the boom and bust cycles that affect the real estate markets of many oil exporters, Abu Dhabi has managed to avoid most of the pain, though growth has been sluggish. Authorities in the Emirate have taken advantage of the current property cycle to update legislation, adding a good dose of confidence to the industry, consumers, and investors alike. However, for the residential market to escape from its current holding pattern, consideration may need to be given to improve access for both UAE nationals and foreigners to mortgages by reducing the minimum deposit caps introduced in late 2013.
Long-awaited reforms to the real estate market in Abu Dhabi finally arrived in January 2016, with the implementation of Law No. 3 of 2015 on “Regulating the Real Estate Sector in the Emirate of Abu Dhabi.“ The law formalizes a number of key areas for real estate developers and buyers, while offering further security for property owners. Under the new law, the Abu Dhabi Department of Municipal Affairs (DMA) will take over responsibility as the main regulator of the real estate market in the Emirate. As part of this, a real estate registry will be created covering all types of real estate within Abu Dhabi, and also including off plan property purchases. Registration fees for properties, normally charged at a rate of 2% by developers, will eventually be paid to the DMA for property registration services. A new treatment of strata titling has been introduced, covering both vertical and horizontal dimensions, and a standardized model of calculation will be adopted by the DMA. Owners associations will also receive legal standing under the law and these associations will hold the title over common areas within a designated area, ensure a property’s repair and maintenance, and charge for its services. In addition, an owners association can sell its properties should management and maintenance fees fail to be paid over a significant period of time. For those leasing properties, the mooted rent cap was not included in the law, meaning that market forces will continue to determine prices.
On the developers side, changes are also afoot. Developers must now prove ownership over a piece of real estate before proceeding to commence off-plan sales. In addition, all monies should be paid into an escrow account and are only accessible in line with an agreed project completion timeline. In essence, developers will need to find the first 20% of project costs from their own resources before they can unlock monies stored in escrow. As well, the DMA will have the ability to fine developers who are more than six months behind their agreed project delivery schedule, and in extreme cases can award the project to a different qualified developer. Off-plan buyers now will also have the right to cancel their purchase and receive a full refund in cases of “substantial prejudice,“ thus improving the rights of consumers and property investors. However, even after a project is complete, developers will remain responsible for any major structural defects for a period of 10 years following completion, with minor building defects receiving a 12-month warranty period. While the law is still in its infancy in terms of adoption, it should act to remove some of the more speculative developers in the market, and provide a higher level of protection for consumers and investors.
The short-term development pipeline for the residential segment slowed down over 2015, with just 1,000 units being added to the 244,000 available at the start of the year, according to JLL. While some 10,000 units were expected for delivery over 2016, early indications from 1Q2016 point to a continued pushing out of completion schedules, with some 719 units completed over the period, and JLL expecting a more sober 4,000 units delivered over the following 9 months of the year. With the nature of new supply being weak, residential sale and rental prices held up or saw small single-digit falls in the worst cases over 2015. Cluttons saw that average villa sale prices declined by 1.4% over 2015 to some AED1,250 ($341) per square foot, equating to AED13,455 ($3,666) per sqm. Property prices were considered to be relatively stable for the affordable housing segment, with the top end of the market seeing the main falls, a result of reduced government spending activity in the economy at large. Apartment sale prices saw a small rise of 0.8% in Cluttons’ opinion, though Cavendish Maxwell estimated a sharper fall of 3% for apartment values, with villas doing worse over 2015, down 4%. Still, JLL estimated the average 2-bedroom apartment price at around AED16,000 per sqm ($4,350) to buy, or AED163,000 ($44,414) to rent for a year. For JLL, average apartment prices were up 4% over the year, though it was foreseeing a stagnant market over 2016.
Another aspect that has helped support the rental market has been the imposition of the federal mortgage cap on borrowing for housing. Originally instituted back in late 2013 by the UAE Central Bank, the policy requires expatriates to stump up a 25% deposit on residential sales up to AED5 million ($1.36 million), and a 35% deposit for properties above that value. For second and subsequent properties, the 40% deposit rule remains in force, while for off-plan sales a 50% deposit has been stipulated by the Central Bank of the UAE for foreign nationals, with only marginally lower rates of some five percentage points in some categories for UAE nationals. In the face of fairly resilient residential sale prices in Abu Dhabi, many expatriates find it more affordable to rent rather than buy for the short term, thus increasing the number of those engaging in the rental market, and drying up some of the potential demand for new projects.
In line with the slower economic activity caused by oil prices and reduced government spending, rental levels in Abu Dhabi’s office segment have proved soft at the bottom, though still quite solid for the more limited number of prime properties. Office stock in Abu Dhabi rose some 146,000sqm of gross leasable area (GLA) over 2015, with a further 343,000sqm expected to be delivered over 2016 and a further 56,000sqm planned for 2017. The slightly accelerated delivery of new office space may see increased weakness in the office segment over 2016. Overall vacancy rates in the UAE capital were at 20% in 1Q2016, according to JLL calculations, down 5 percentage points on the 1Q2015 figure.
At the top end of town, rents rose some 7% in year-on-year terms by end-2015 to AED1,850 ($504) per sqm of GLA according to JLL, with Cluttons seeing a further rise of 8% to AED2,000 over 1Q2016, though more based on limited supply. Cluttons underlined that a number of headline projects have sharply cut back their rental demands, with the Abu Dhabi Global Market (ADGM) paring back its own by 26% to AED2,600 per sqm. The ADGM is a special economic zone located on Al Maryah Island set up to appeal to foreign companies to establish investment activities aimed at the large high-net worth individual (HNWI) community in Abu Dhabi and transform the Emirate into a global offshore investment industry center. Another iconic project, the World Trade Centre Tower, reduced its average asking rent to AED1,850 per sqm, close to the market average, in order to better position itself and attract quality tenants.
News from the Grade B and Grade C ends of the market showed larger signs of the market slowdown, with Grade B space estimated by Cluttons to have fallen by 7.7% alone over 1Q16 to AED1,200 ($327) per sqm, with Grade C sliding a more significant 11.1% to AED800 ($218) per sqm. For the rest of the year, most market participants see the market softening further in the single digits for office rents.
The retail sector is also witnessing a slowing of supply, matching with the overall market attitude, though two big completions in 2018 may see the sector jolted back into attention. At the end of 2015, some 2.6 million sqm of GLA was available across the Emirate. For 2016, a minor increase of 63,000sqm is expected, with most of this located in mixed-use developments, JLL estimates. Equally, 2017 is also looking sluggish, with just 28,000sqm of GLA set to arrive. However, should completion timetables be held, the Reem Mall will deliver an extra 270,000sqm of GLA in 2018, with Al Maryah Central rivaling it with a further 214,000sqm in the same year. In terms of rent, JLL saw prices stagnant in 2015 at some AED3,000 ($817) per sqm annually on Abu Dhabi Island, while those considered “off island“ were at a reduced AED1,860 ($507) per sqm.