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Abu Dhabi property market update - January 2011

Jan 15, 2011
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Abu Dhabi property market update
January 2011

Comment As the city of Abu Dhabi grows, diversifies and evolves, the
demand and requirement for hotel accommodation has increased rapidly. The first of a new wave of hotels was completed in 2009 and has continued through 2010.

The number of hotel rooms set to double
The economyThe significant increase in demand for hotel rooms is
a result of the interplay of numerous different factors, largely originating from the Government's desire to diversify the economy. The most significant and perhaps most obvious example of this is the ongoing boost in tourist numbers. Tourists visit Abu Dhabi
Average oil price per barrel (OPEC basket)
160 140 120 100 80 60 40 20 US$ 2004 2005 2006 2007 2008 2009 2010 0

for the weather, sights, to visit family and increasingly for events. The recent Formula One Grand Prix saw every hotel room taken on Yas Island and good occupancy rates across the city. The opening of Ferrari World and the staging of music concerts and activities, will become an ongoing draw for visitors, particularly for the Yas Island hotels. As other attractions such as the planned museums, golf courses and marinas are completed, the range of attractions for tourists will grow, making the targeted growth in tourist numbers seem realistic and achievable. Business travel is also now a significant factor in the market, with an increasing number of international companies locating in Abu Dhabi and numbers of travellers visiting for meetings / expos also increasing. Abu Dhabi National Exhibition Centre (ADNEC) is becoming something of a hotel hub with Aloft already trading and a Hyatt, Premier Inn and Rotana in close proximity, at various stages of construction all with a view to serving the ADNEC market.

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

Other revenue streams for hotels comprise conferences, AGM's and other such gatherings, which can be a lucrative source of revenue for the dedicated business facilities and food and beverage division. There has been a general trend in place to promote Abu Dhabi as a `high-end' destination, with an emphasis on the Capital's cultural qualities and on attracting the more affluent visitor as opposed to the mass-market appeal of Dubai. There has therefore been consequent `excess' of five star luxury hotel brands appearing in the local market. This is now being tempered somewhat by the construction of a number of branded mid-market, three and four star hotels in recognition of meeting the demands of a broader clientele. Due to the intensities of the climate during the summer months, the number of tourists inevitably drops, but hotels are proactive and cut their rates aggressively to encourage more guests. These factors, combined with the increased competition, have seen the average revenue per available room fall. During such a period of transition, volatility seems inevitable and it will take perhaps ten years for all of the planned hotels to be completed and for the market to stabilise and equilibrium to be reached.
762

2006 601 163.7 8.7 6.5 9.5 9.3

2007

493 134.2 8.2 1.6 10.8 6.2

207.6 6.1 -2.7 9.1 11.6
Source: IMF

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

cluttons.com/abudhabi

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Cluttons Abu Dhabi property market update - January 2011

Residential Levels of interest for lettings and sales in October and
November, were lower than predicted, during what are historically busy months of the year.

Abu Dhabi continues to see downward pressure on rents
There has been a continuation of downward pressure on rental prices, albeit at a slower rate throughout Q4 2010. In comparison market values have remained relatively constant for most stock, with relatively small falls in the primary areas. The handover of hundreds of units in Marina Square is still awaited, with predictions that owners won't be able to gain access until Q2 2011. These delays are hindering market
Sales rates (Q4 2010)
1600 1400 1200 1000 800 600 AED per sq ft 400 200 Al Raha Beach Al Raha Gardens Al Reef Villas Marina Square 0

confidence which waits in anticipation for the release of the stock. We expect a spell of increased activity in the spring of 2011, once these units become tangible assets. Average rental rates have continued to drop for a fourth consecutive quarter as newer stock feeds the market which promises to balance out demand. Additionally, the opening of the new Sheikh Zayed Bridge has reduced commuting time to and from Dubai which may prove a further temptation for workers to continue with their commute. Rental rates have seen an average drop of 16% in the lower sector of the market, in areas such as Mohammed Bin Zayed City, where, thanks to a continuous supply of new stock, one bedroom flats are now available from around AED 50,000 per annum. The higher end of the market towards the northern areas of Abu Dhabi Island have also seen drops, but to a lesser extent, with a typical one bedroom flat now at around AED 110,000 per annum, down 8% from Q3. Al Bandar, the first phase of Al Raha Beach to be completed, has seen good occupancy take up, with approximately 20% of the units occupied within ten weeks of handover. Time will tell if this rate of occupancy continues as other schemes throughout Abu Dhabi

Q4 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)

come online and fight for market share. In 2011, developments on the Corniche and Airport Road will be introduced to the market, with schemes such as Etihad Towers and Landmark Tower due to be released in Q2. These two developments alone will bring over 1,200 residential apartments to the market. This additional supply will continue the shift from a landlord's market to a tenant favourable one, as people look to renew tenancy contracts or move to better quality product. Freehold villa values in developments such as Al Reef have seen a continuation of falling capital values of up to 12% from Q3 levels, where a standard two bedroom villa will typically sell for around AED 1 Million. In comparison, the private freehold GCC restricted villa market, in areas such as Al Raha Gardens and Golf Gardens have remained relatively robust with sales rates from AED 800 - 1100 per sq ft, as they have been for some time. The same trends can be seen within the villa rental market, as Al Reef villa rents fell some 9% in the last quarter, where as Al Raha Gardens and Golf Gardens rents hold firm.

past

future

cumulative supply

Source: Abu Dhabi UPC

cluttons.com/abudhabi

Cluttons Abu Dhabi property market update - January 2011

Office As the economic slowdown continues, the Abu Dhabi commercial
office market remains subdued with rental values falling and take-up becoming increasingly sluggish.

Rental values fall as supply increases
With the number of office development completions continuing to rise, the supply increase is likely to result in a further softening in rental values throughout 2011, with use of incentive packages increasing. Prime rents have fallen 45% from the Q3 2008 peak and currently stand at AED 2,500 per square metre per annum. Although these headline figures make less than sanguine reading, it is worth noting that Abu Dhabi rents are still
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

comparatively robust when compared with neighbouring Dubai. As rents continue to decline for secondary grade space, good quality Grade A space will see a smaller reduction as premium properties will continue to attract the highest rents. Buildings such as Sowwah Square, Etihad Towers and International Tower represent the best stock in town with completion due in early 2011. One ongoing problem is that many landlords are still quoting Grade A rents for secondary grade stock. Abu Dhabi office supply has been artificially constrained in previous years and so some landlords have been slow to adjust their expectations in line with current market conditions. Tenants are expected to relocate to higher quality space at the same rent as the space they currently occupy. In the prevailing market, incentive packages will become more prominent as an effective way for landlords to encourage occupancy. One of the common incentives being seen is the offering of rent-free periods which have become an automatic feature of most office lettings. The tenant effectively gets the benefit of a lower effective rent, after the value of the incentive is deducted, while the landlord's property maintains its face rent and a secure a long-term tenant. Corporate entities are still under pressure to cut costs and many are in the process of consolidating from multiple locations into single buildings on favourable terms or are seeking to take advantage of moving to higher quality premises for equivalent rental levels. It is the developers that provide high quality, efficient, international specification Grade A office accommodation and on flexible lease terms who will benefit from the best rental levels. Emphasis on good management should be a key consideration when it comes to tenant retention. Properties offering lower quality accommodation, with poor parking availability, will suffer from lengthy void periods and a greater reduction in rents.

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

The slowdown has forced developers to reassess their schemes, scale back more ambitious projects and plan product more aligned to the end-occupier. The medium to long-term outlook for the Abu Dhabi's office market remains stable however, driven by the weight of sovereign and private wealth and government development initiatives.

major commercial office developments

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Cluttons Abu Dhabi property market update - January 2011

Industrial In Q3 and Q4 of this year we witnessed a slowing in the
rate of reduction in rents in the main industrial areas of Abu Dhabi. The steady deterioration of rental prices which we had seen over the previous 12 months, has begun to stabilise as affordable open land and completed warehouse accommodation returns to Abu Dhabi.

Rents stabilise throughout Q4
Open storage rates
240 210 180 150 120 90 AED per sq m 60 30 Q1 2010 Q2 2010 Q3 2010 Q4 2010 0

Although rental prices are now perceived as low by landlords, we may witness further reductions for poorer quality accommodation, mirroring the patterns seen in Dubai. This flight to quality is a recurring mechanism of a property cycle, as affordability returns to the marketplace. This two tier industrial property market began when companies that factored in high real estate costs to their business plans subsequently found that they had the luxury of using the high budgeted cost to acquire better quality warehouse facilities in better locations. We anticipate that the demand for high quality accommodation will continue to rise over the next 12 months as operators who seek a specialist building increase. To support this demand for better logistics accommodation, Abu Dhabi will witness the development of European specification distribution centres built on a bespoke basis. This activity in new builds will be driven by the reduction in rent, allowing international companies to relocate to premises of similar specification to the rest of their portfolio. We see the retail, pharmaceutical and food supply sectors as particularly interested in improving the quality of their stock. Investment in infrastructure, to the benefit of the industrial sector, continues with the government driving forward the growth of the international airport and KIZAD at Taweelah Port, supporting warehouse and logistics facilities. On a federal and regional basis Abu Dhabi will benefit hugely from the Union Railway, being at the crossroads of the freight focused rail network, which will link the capital with Dubai, Saudi Arabia, Qatar and Oman, enabling vast quantities of goods to be transferred quickly, directly and more efficiently than the road haulage solutions being used presently.

storage rates

Rental rates for completed warehouses, ICAD
900 800 700 600 500 400 AED per sq m 300 200 Q1 2010 Q2 2010 Q3 2010 Q4 2010 0

The infrastructure growth government directive will help Abu Dhabi attract continued inward investment and will assist in not only sustaining the growth in population and economic activity witnessed to date, but also pave the way for further growth and appeal to international companies earmarking the GCC in their expansion plans.

rental rates

Abu Dhabi contacts
Steven Morgan, MRICS Head of UAE +971 2659 4001 steven.morgan@ae.cluttons.com William Dewsnap, MRICS Director Valuations +971 2659 4001 william.dewsnap@ae.cluttons.com Harry Goodson-Wickes, MRICS 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. 2011 Cluttons LLC

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Cluttons Abu Dhabi property market update - January 2011

12 .

:


, . .
Open storage rates
240 210 180 150 120 90 AED per sq m 60 30 Q1 2010 Q2 2010 Q3 2010 Q3 2010 Q4 2010 Q4 2010 0

12 . . '` '` , . .

storage rates

Rental rates for completed warehouses, ICAD
900 800 700 600 500 400 AED per sq m 300 200 Q1 2010 Q2 2010 0

rental rates

Abu Dhabi contacts
Steven Morgan, MRICS Head of UAE +971 2659 4001 steven.morgan@ae.cluttons.com William Dewsnap, MRICS Director Valuations +971 2659 4001 william.dewsnap@ae.cluttons.com Harry Goodson-Wickes, MRICS 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

. . , , . . .. 2011 . .

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Cluttons Abu Dhabi property market update - January 2011

.

:


. 2011 2008 %45 2.500 , . .2011 , .

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 Q4 2011 Q3 2010 Q1 2012 0

, . . . .

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 0

major commercial office developments

r research

Cluttons Abu Dhabi property market update - January 2011

.

:


2010 .
Sales rates (Q4 2010)
1600 1400 1200 1000 800 600 AED per sq ft 400 200 Al Raha Beach Al Raha Gardens Al Reef Villas Marina Square 270 250 230 210 190 170 150 130 2009 2010 2011 2012 2013 0 Cumulative supply (000 sq m) 0

, 2011 , . 2011 . %16 50,000 . %8 110,000 %20 2011 , 1,200 . %12 1100 800 . %9

Q4 2010

Residential supply (no. of units)
30 26 22 18 Annual supply (000 sq m) 14 10 6 2 0

past

future

cumulative supply

Source: Abu Dhabi UPC

cluttons.com/abudhabi


2011
2009 .2010

:


. .

:

Average oil price per barrel (OPEC basket)
160 140 120 100 80 60 40 20 US$ 2004 2005 2006 2007 2008 2009 2010
maximum

. , . . 5 . .

0

past

current to date

minimum

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

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

r research

cluttons.com/abudhabi