Abu Dhabi, the capital of the United Arab Emirates and the largest of the seven, has been overlooked for years by investors and entrepreneurs who tended to consider Dubai a more attractive destination. Yet the capital did not stand idle. The fact that Abu Dhabi possesses 10 percent of the world’s oil, five percent of its gas reserves and that it produces 90 percent of oil in the UAE, has enabled it to diversify its economy by investing heavily in infrastructure, real estate, tourism, financial services and other key sectors. In 2007, the Urban Planning Council released the Abu Dhabi 2030 plan, which has been the foundation for the growth of the real estate sector. Dr. Hanni Shammah, CEO of Bloom Properties, believes that Abu Dhabi is trying to become a global city, in line with New York, London and Hong Kong.
“Abu Dhabi is in the midst of a structural change. It is rebranding and repositioning itself with the rulers aspiring to transform the city into a global and cosmopolitan city, while keeping a proud Arab/Emirati identity,” says Shammah.
A major problem for Abu Dhabi since the beginning of its boom has been the lack of real estate supply, whether residential or commercial. Consequently, the capital became more expensive than Dubai. Mohammed Al Haj, CEO of MBI, a venture capital firm that specializes in properties and financial investments, say that since the UAE government aims to attract investors from around the world, it expected the inflow of expatriates would take 10 years.
“What happened is that the region was attractive and the oil prices were dramatically high, which attracted all those people in only three or four years,” he explains. “Therefore, the demand was really high and the infrastructure wasn’t ready.”
Due to the tremendous shortage of supply and Abu Dhabi’s long-term plan, the real estate market grew quickly. Major residential and commercial projects were being launched and developed, while demand escalated. But oil wealth has proven to be insufficient to protect Abu Dhabi from the impact of the current crisis. Although the capital has strong market fundamentals, demand for most real estate segments has gone down, prices and rents of residential properties are decreasing, and bank financing is becoming less available.
Residential prices
Before the financial crisis started to impact residential real estate prices in Abu Dhabi, they were escalating rapidly. Buyers were acquiring property despite the high prices, encouraged by the promising economic growth of the capital in general and the housing market in particular. According to the Landmark Advisory first quarter 2009 report, even though the fourth quarter of last year witnessed a softening in villa and apartment prices, they increased 80 and 55 percent respectively for 2008.
End-user demand is high in Abu Dhabi, but it was not the only reason prices escalated. Speculators saw the capital as the next best thing after Dubai and aimed to make the same returns on real estate investments.
Shammah says, “I know several people who got a bit greedy and instead of investing in a single property they went for whole floors and multiple units, while not necessarily having the means to digest such investments.” He added that prices in restricted areas have been more resilient to the current conditions as opposed to freehold areas. “Most price decreases that I have seen in freehold areas were within the 20 to 30 percent range,” he adds.
Hussain Ali Al Shamkhani, chief investment officer at Escan, agrees with Shammah, but he believes that because Abu Dhabi opened up its market recently, speculators have not had as much time to affect the market. This means end- user demand has been a more significant factor.
“There was not enough time — [the speculators] would have made one flip, two if they were lucky, but I believe that most of them did not have the chance to,” he says.Whether the prime driver of the market was speculators or end-users, one sure thing is that the former are out of the market right now and the latter are more conscious about purchases. The factors behind the decreasing demand are mainly the lack of financing, as well as uncertainty and lack of confidence in the real estate market and the economy in general. Consequently, prices started to decline, going back to their original values in some cases. The Landmark report states that since their peak in the third quarter of 2008, prices of villas have decreased 20 to 25 percent, while prices of apartments declined by 15 to 20 percent. The report adds that Abu Dhabi’s master developments like Al Raha Beach, Al Reef, Al Reem Island and Hydra Village were the most affected. Al Reem witnessed the biggest plunge declining from 20 to 25 percent between the third quarter of 2008 and March of this year. Listings for Al Raha Beach and Reem Island suffered a 10 to 15 percent decline in the same period.
Hesham Ikhwan, branch manager at the newly opened Landmark Properties in Abu Dhabi, believes the fundamentals of Abu Dhabi are still sound, since demand is still higher than supply. He attributes the fall in prices to two things: the financial crisis and the soaring prices featured at last year’s Cityscape.
“At Cityscape last year, developers launched their projects at very high prices, which were around 2,000- 2,500 AED ($540-$680) per square foot, so when investors bought [the properties] they could not sell them right afterwards as usual. So it took the market a while to realize that obviously prices were too high, therefore it leveled off for a while and then [prices] started to decrease.”
It is important to differentiate between off-plan units and those completed or under construction. Off-plan units have been the worst hit since people are currently looking for properties that will give them immediate returns, either by renting or occupying them so they don’t have to pay rent. Loshini Lawrence, operations manager at the Abu Dhabi branch of Better Homes, explains “banks are not offering mortgages on off-plan properties right now. They are more focusing on ready projects in Abu Dhabi.”
Since end-users currently dominate the market, they will certainly find finished properties more suitable. Paying rent for a couple of years until the delivery date of a new apartment is expensive, further completed projects are easier to finance and less vulnerable to volatility.
“If you have an off-plan unit and you are trying to sell, good luck!” says Al-Shamkhani, explaining that while completed projects are best positioned, those under construction have had their share of price declines as well. “People are hearing that developers are going to delay or top construction, citing the lack of funding. For example, if it is now the time to make your fourth or fifth payment, you have to rely on your own money,” he furthers.
Experts agree that the price correction in Abu Dhabi residential real estate is healthy in the long run and essential to bring prices back to more affordable levels.
“If prices can be in a range from 400AED ($108) per square foot to 1,000AED ($270) in residential properties, [it]
Distressed assets ripe for the picking
The ongoing global liquidity crisis has put the completion of many real estate developments in the UAE and the region into question, since developers, who relied heavily on banks or off-plan sales for construction, have found themselves with empty pockets and no equity to cover their costs. Consequently, these projects have decreased in value and some institutional investors and high-net- worth individuals who can still secure financing see these assets as good investment opportunities.
Duncan Pickering, real estate partner at DLA Piper in Abu Dhabi explains, “distressed assets generally come from borrowers who default or who are about to default. Banks would generally be working with the company to negotiate an exit or sell the property, and generally, for companies that are holding on to the distressed assets, time is running out for them so they need to find a resolution quickly.”
Property consultant Jones Lang LaSalle announced mid- March that $1.98 billion worth of equity is waiting to be invested in distressed assets in the GCC region, the most attractive destinations being Abu Dhabi, Qatar and Saudi Arabia. The Dubai real estate developer Cirrus Development revealed in the same month an international fund to buy distressed assets in Dubai, the US and the UK, targeting prime real estate and hospitality assets. Moreover, the US- based property firm Tate Capital also began a two-month study to identify investment opportunities in the UAE. By acquiring distressed assets, Tate Capital is aiming to create a long-term income stream for the company. Morgan Stanley also announced in January its plan to acquire distressed assets around the world, including in the Middle East, by establishing five global funds.
Pickering expects that “there will be funds from all around the world that are looking at the Middle East to see whether they can pickup distressed assets.” However, these assets are associated with some risks. “One of the key risks is failure to carry out adequate due diligence either because the deal has to be done very quickly or because the seller has limited information or inaccurate records. The seller may be under pressure from the lender to sell,” says Pickering. For example, in Abu Dhabi, there is no public register to check if a particular development was partly sold and contracts were exchanged, which would make it harder for the investors to make a decision. The lack of reliable information would make the right price of the asset very hard to determine. “The opportunity to buy distressed assets is really only as good as the investors’ ability to negotiate the right price,” adds Pickering.
“We always recommend a buyer get full disclosure from the selling management team as soon as possible. Unless information is available, the purchaser cannot decide if there is an investment opportunity that is worth exploring — it takes a lot of money and time to carry out such an investigation,” he further explicates.
Investors appear to still be in the exploration and investigation process, since there have been no big announcements about this type of transaction yet. However, it is expected that in the near future investments of this nature will take place.
While the speculative market may be dead, experts say property values will increase in the long run. Oscar Marquez, a real estate trainer at the Leader’s Edge Training says, “real estate will always double in value. I remember when I first got into real estate [and] started to sell houses for $150,000. Now the same house is selling for $600,000. That was 20 years ago. Twenty years from today the house worth $600,000 is going to be $1.2 million.”
Residential rents
As Abu Dhabi attracted resident expatriates, the demand for leased property grew and rental rates increased accordingly, especially for residential apartments. According to the Landmark report, average rental rates for residential villas and apartments in the fourth quarter of 2008 were 35 and 80 percent higher than in the same period of 2007. During the fourth quarter, one-bedroom apartments witnessed the biggest hike as they registered a 125 percent increase in rents, followed by two and three bedroom units at 95 and 100 percent, respectively.
High rents, coupled with low availability in Abu Dhabi, caused some people to commute to work in the capital while living in Dubai.
Lawrence said, “you may pay three times [the rent] in Abu Dhabi for the same accommodation that you would pay in Dubai. People are not ready to pay that much anymore, they are doing their homework and negotiating the price and the number of payments.”
Al Haj of MBI thinks that rents soared even more than the report stated. “It depends on the location, but in some place, rents increased 90 percent and even 100 percent. For example, now if I am renting a house and paying 20,000 AED ($5,400) if I move out, the new tenant would pay 80,000AED ($21,000). Some owners are willing to pay current tenants one year of rent in order to move so that they can bring a new tenant and make him pay more,” Al Haj explained. Hence, tenants who pay affordable rents consider themselves lucky and try to renew their contracts benefitting from the low, five percent rent cap in Abu Dhabi.
Rents are holding stronger than prices since people who are reluctant to buy still need a place to live. Unlike Dubai, people are not leaving the capital due to job losses or the closing of companies. The Landmark report states that apartments witnessed an increase of two to three percent in the last quarter and another one to two percent in the first two months of the year. Villa rental rates decreased three to five percent in the last quarter and recovered by two to three percent during January and February.
The fact that villa rental rates decreased was because more units are coming on stream, which increases availability and “tenants have more [options] for villas, like in Al Raha Garden and Al Khalifa city, but for apartments they are very hard to find, especially the two bedroom apartments,” said Ikhwan from Landmark.
Rents are not expected to slowdown, since demand is still strong and supply is expected to remain short in the next couple of years.
Matthew Green, associate director of CB Richard Ellis in Abu Dhabi, says that rents are expected to hold stronger than in Dubai since “in Abu Dhabi, we can say that on average there will be 8,000 to 10,000 [new units] in the next couple of years, while Dubai has been averaging 30,000 units per year.”
Office space
Soaring demand has also hit offices, since Abu Dhabi was becoming an attractive destination for new businesses, branches and relocations. Consequently, there is an even bigger supply gap than in the residential market and new companies have found it more appropriate to use commercial villas as offices. CB Richard Ellis’ fourth quarter Abu Dhabi report stated that even though rental rates started to soften in the fourth quarter of 2008, there was a 30 percent overall increase during the year. Lawrence from Better Homes, whose office is located in a commercial villa, explains, “when we chose the villa, it wasn’t the cheapest, but we had no choice. There was no tower space available.”
Many companies opening in Abu Dhabi face the same difficulties. Not only is finding office space a problem, but finding a place to park is a major issue as well. According to Al-Shamkhani from Escan,“if you go downtown in Abu Dhabi, good luck finding a parking space. Sometimes you have to drive around 15 minutes or up to an hour to find a spot, so villas are more convenient.”
Companies are currently cautious about expansion plans and are picking more affordable and smaller offices. According to Asteco’s fourth quarter Abu Dhabi real estate report, demand for large offices has decreased slightly, while demand for smaller offices, between 50 and 100 square meters, has increased. Experts predict the market will maintain high prices until new offices come online.
Future outlook
Compared to its neighbor Dubai, Abu Dhabi has not gone as far in terms of growth and development, but that should not be considered a disadvantage in these tumultuous times. What happens in Dubai happens in Abu Dhabi on a smaller, more delayed scale. This gives Abu Dhabi the opportunity to anticipate, either by improving its property laws, trying to secure financing or controlling the market supply. Simply said, as Dubai suffers, Abu Dhabi learns.
