Oct 10, 2010
Abu Dhabi property market update
October 2010
Comment As Abu Dhabi progresses towards the aims of the 2030
Vision plan, it has recognised the crucial importance of a sound infrastructure. Population growth and an expanding real estate market are not sustainable without the backbone of an efficient infrastructure system to support them.
Abu Dhabi commits US$15 billion to infrastructure projects for the period 2009-2012
The economy The Government has recognised the long-term value of
Average oil price per barrel (OPEC basket)
160 140 120 100 80 60 40 20 US$ 2004 2005 2006 2007 2008 2009 2010 0
infrastructure assets, as it seeks to move away from its historic economic reliance on oil. In this vein, and as part of its drive to diversify the economy, Abu Dhabi has recently acquired a 15% stake in London Gatwick airport, narrowly missed out on a £5 billion consortium bid for EDF's UK electricity distribution network and is currently in the process of bidding for High Speed 1 the UK section of the Channel Tunnel rail link. Locally, the development of a railway network is now seen as a priority and will take two forms. Firstly, a light rail Metro/Tram system serving Abu Dhabi city, similar to that already in operation in Dubai. Secondly, the federal Union Railway has been established to provide freight and passenger services linking Ras al Khaimah to Sila at the Saudi Border. Spurs will also link Fujairah, Al Ain and the desert towns of Al Gharbia. With a length of 1,500 kilometres and a total cost of US$11 billion, the whole project is envisaged to take eight years to complete. In the fullness of time, this rail service will link with others in neighbouring countries, to form a GCC wide service. In addition to rail transportation, the Emirate is also focussing on the road network to
past
current to date
minimum
maximum
Source: OPEC
UAE economic data 2005 Nominal GDP (AED bn) Nominal GDP (USD bn) Real GDP (at factor cost) Real hydrocarbon GDP* Real non-hydrocarbon GDP* Average CPI inflation (%)
*annual % change
2006 601 163.7 8.7 6.5 9.5 9.3
2007 762 207.6 6.1 -2.7 9.1 11.6
Source: IMF
serve newly developed areas, to facilitate trade and transport and to meet the needs of a growing population. Projects include the upgrading of Salam Street, new links to Reem and Suwwah Islands and the imminent awarding of a contract to improve the E11 through Al Gharbia to the Saudi Arabian border. The new expressway over Yas and Saadiyat Islands, linking Shahama to Mina Zayed has significantly reduced journey times for those travelling to/from the Corniche. The first phase of the US$7 billion new Khalifa Port facility at Al Taweelah is well advanced and on schedule to open in late 2012. This will eventually usurp the existing port at Mina Zayed, which will itself then be redeveloped. Khalifa Port will be linked to a vast new industrial free zone, with occupiers already scheduled to include the aluminium manufacturers EmAl. The development will tie in with the existing Abu Dhabi and Al Maktoum airports as well as the new Union Railway, detailed above, to create a state-ofthe-art multi-modal transport hub. The overall effect of this distribution of oil-based wealth into modern infrastructure will ensure extensive opportunities for jobs, training and consultancy services in the short to medium term. In the long term it will provide a sound platform for the future prosperity of Abu Dhabi as it looks towards a non-oil reliant future.
493 134.2 8.2 1.6 10.8 6.2
UAE economic data 2008 Nominal GDP (AED bn) Nominal GDP (USD bn) Real GDP (at factor cost) Real hydrocarbon GDP* Real non-hydrocarbon GDP* Average CPI inflation (%)
*annual % change
2009 846 230.3 -0.7 -6.3 1.0 1.0
2010 910 247.7 0.6 2.7 0.0 1.5
Source: IMF
960 261.4 51 1.6 6.3 11.5
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Cluttons Abu Dhabi property market update - October 2010
Office Historically, many businesses in Abu Dhabi have had little choice,
but to `make do' with poor quality office accommodation. In some instances, occupiers have been forced to operate from converted residential villas, which are unsuitable for modern office requirements, purely due to a lack of viable purposebuilt space.
New supply to raise the quality of stock in the market
Prime average office rents
5.5 5 AED per sq m per annum (000) 4.5 4 3.5 3 2.5 2 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 0
Undersupply became increasingly evident between 2006 and 2009, forcing rents to escalate and tenants to occupy secondary stock. New supply is now starting to come online, with over 400,000 square metres of office space due to be released to the market over the next 18 months. Tenants who were once forced to pay rent annually in advance or risk losing the space, increasingly find themselves in a stronger bargaining position than the landlords who have become more flexible in their lease terms. This has enabled tenants to negotiate lower rents, secure longer rent free fit-out periods and benefit from more favourable lease terms. Abu Dhabi now offers a greater supply of good quality, high grade office space than at any previous point in its history. This trend looks set to continue into 2011 as projects such as International Tower at Capital Centre reach completion. Suwwah Square, also due for completion early in 2011, is likely to command higher than average rents because of the high level of specification and facilities. Anchor tenants, in the form of the Abu Dhabi Securities Exchange and major banks, will attract other financial and support companies, bolstering demand.
prime average office rents
Commercial supply
160 140 120 100 80 60 sq m (000) 40 20 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 0
In locations where stock is typically secondary, supply now exceeds demand as historic occupiers move to better quality space. As a result static or falling rental values are expected to continue for the foreseeable future. The landlords that succeed will be those that adapt to market conditions by shifting their attention to tenant retention and managing their properties well. There is recent evidence of guide rents for good quality, new build stock in the Mina Road area dropping significantly. This is indicative of sound management, as the owners have clearly recognised that the investment value of a building fully let at a lower rent is greater than that of a vacant building with a higher headline rent. In the medium-term, large-scale regeneration projects led by the Urban Planning Council are likely to lead to large amounts of secondary stock being cleared. This will have the effect of reducing the glut of average property on the market and also forcing those in occupation to move to new properties elsewhere. The majority of demand for space is coming from tenants seeking to renegotiate lease terms and take advantage of current market conditions. In addition, companies that have had their main office in Dubai whilst operating a satellite office in Abu Dhabi are now seeking to increase their presence in the Capital as the balance of power shifts between the two cities. After the quiet months of Summer, we see tenant demand increasing again as business activity picks up and tenants seek to take advantage of being able to secure better space on favourable terms.
major commercial office developments
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Cluttons Abu Dhabi property market update - October 2010
Residential As the summer months draw to a close, the Abu Dhabi
market has seen a continuation of the downward pressure on rental rates, whilst capital values remain steady.
Abu Dhabi rental market more vulnerable than `Freehold'
Freehold transactions over the last quarter have been slow with buyers adopting a `wait and see' attitude. With approximately 55,000 new residential units expected to be
Sales rates (Q3 2010)
1600 1400 1200 1000 800 600 AED per sq ft 400 200 Al Reef Villas Al Raha Beach Al Raha Gardens Marina Square 0
delivered by the end of 2013, buyers are wary of a further drop in prices as fears of an oversupplied market grow. Accordingly the handover of hundreds of units in Marina Square has been further delayed, with delivery unlikely before Q1 2011, at which point we expect there to be a flurry of transactional activity. This will be the first `community' to be completed on Reem Island which, when the apartments become tangible assets, is likely to instil some confidence in the market. Average rental rates have fallen for the third consecutive quarter, as new supply continues to exert downward pressure on rents. Tenants now have an increasing number of options across the whole range of accommodation levels. Mainland areas such as Mohammed Bin Zayed City and Khalifa City A and B are at the lower end of the scale, with one bedroom apartments letting from around AED 60,000 per annum. At the high end locations, towards the northern end of Abu Dhabi Island, one bedroom apartments are letting from around AED 120,000 per annum.
Q3 2010
Residential supply (no.of units)
30 26 22 18 Annual supply (000 sq m) 14 10 6 2 2009 2010 2011 2012 2013 0 270 250 230 210 190 170 150 130 0 Cumulative supply (000 sq m)
In the principal new developments, progress has been ongoing in the last quarter. At Al Reef sale prices have fallen approximately 5% as new clusters of villas are handed over. The apartment blocks with retail on the ground floor are well advanced, with the first units scheduled to be handed over in Q1 2011. There have been a low number of transactions in Al Raha Beach and Marina Square, but prices have remained largely stable. Developers still holding stock on Reem Island are attempting to lure investors with incentives. For example, Sorouh are offering a two year, guaranteed 9% return on units at Sun and Sky Towers in the Shams district. In recent years the three large developments of Raha Beach, Reem Island and Al Reef have been the focus of much of the media's attention in terms of new residential developments. There are however numerous other large schemes which started a little later than the `Big Three' but have been quietly progressing and now deserve more attention. On the mainland, examples of these are the various projects along the Corniche, Danet and Rihan Heights off Airport Road while off the island, areas such as Saadiyat and Baniyas are progressing well. As construction progresses and completion approaches, residential occupiers will start to consider such areas as potential locations. Given the falls in the rental market, we see future demand coming from those who currently commute to Abu Dhabi from Dubai. As the summer draws to an end and expatriates return from their holidays, we see enquires and transactions increasing as people look to take advantage of an increasingly tenant friendly market.
past
future
cumulative supply
Source: Abu Dhabi UPC
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Cluttons Abu Dhabi property market update - October 2010
Retail Currently, the majority of the retail space within Abu Dhabi is
not of a standard that international brands would consider suitable for their requirements. As a result, new supply in the pipeline will satisfy pent up demand for good quality retail space.
Supply looks set to increase based on good demand
Retail supply
3.2 2.8 2.4 2.0 1.6 1.2 sq m (mn) 0.8 0.4 2010 2011 2012 2013 0
Around two thirds of Abu Dhabi's retail stock comprises `street shops' while the remainder is enclosed in malls and shopping centres. As with the office sector, the retail market has been undersupplied relative to potential demand. The two principal shopping malls of Abu Dhabi - Marina Mall and Abu Dhabi Mall are currently operating at 95-100% occupancy. Accordingly the city has not realised its potential in this sector which has resulted in a loss of spending to other more retail orientated cities in the region. Many residents of the capital opt to travel to Dubai at the weekend to take advantage of the wide selection of retail opportunities there, including Mall of the Emirates, Dubai Mall and most recently Mirdif City Centre. With new projects already under construction, a further 400,000 square metres of retail space is expected to be delivered to the market by the end of 2011 and an additional 600,000 square metres by 2013. This new supply will come from major developments such as Bawabat Al Sharq Mall at Baniyas, Yas Mall on Yas Island, Paragon Mall on Reem Island, Mushrif Mall, The Emporium at Central Market and the Al Wahda Mall extension.
retail supply
Supply and demand
3.2 2.8 2.4 2.0 1.6 1.2 sq m (mn) 0.8 0.4 2010 2011 2012 2013 0
This supply will naturally vary in terms of quality and location, however it is expected to go some way to addressing the current supply/demand imbalance. As well as alleviating pent up demand, the increase in supply looks set to encourage residents to shop locally rather than travel to Dubai. It will also be an added attraction for tourists who currently account for less than 10% of total retail spending. Tourist numbers are expected to increase as Abu Dhabi transforms itself into an international destination, with dozens of new hotels and an increasingly diverse range of activities on offer. As the supply of apartments and villas increases and rents consequently drop to more affordable levels, a large number of residents currently commuting from Dubai are expected to relocate to the capital. Similarly, as more competitively priced office space comes on stream, we will see an increase in the number of businesses relocating to Abu Dhabi which will underpin demand for retail space.
supply
demand
Abu Dhabi contacts
Steven Morgan, MRICS Head of UAE +971 2659 4001 steven.morgan@ae.cluttons.com William Dewsnap, MRICS Associate Director Valuations +971 2659 4001 william.dewsnap@ae.cluttons.com Harry Goodson-Wickes, MRICS Associate Director Agency +971 2659 4003 harry.goodsonwickes@ae.cluttons.com
Middle East contacts
Bahrain & Saudi Arabia +973 1756 2866 tim.glover@bh.cluttons.com Dubai +971 4334 8585 steven.morgan@ae.cluttons.com Sharjah +971 6572 3794 lesley.preston@ae.cluttons.com Oman +968 2456 4250 philip.paul@om.cluttons.com
Whilst every effort has been made to ensure the accuracy of the data and other material in this report, Cluttons LLC does not accept any liability (whether in contract, tort or otherwise) to any person for any loss or damage suffered as a result of any errors or omissions. The information, opinions and forecasts set out herein should not be relied upon to replace professional advice on specific matters and no responsibility for loss occasioned to any person acting, or refraining from acting, as a result of any material in this publication can be accepted by Cluttons LLC. © 2010 Cluttons LLC
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