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Abu Dhabi

Abu Dhabi Real Estate Market Remains Stable in Q3, despite slowdown in government spending and weaker sentiment, According to JLL Real Estate Market Overview


​JLL, the world's leading real estate investment and advisory firm, today released its third quarter (Q3 2015) Abu Dhabi Real Estate Overview report that assesses the latest trends in the office, residential, retail and hospitality sectors.

David Dudley, International Director and Head of Abu Dhabi Office at JLL MENA, commented: "The general trend for Q3 and indeed the first three quarters of 2015 has been stability, with value performance of most sectors remaining flat, and a slight increase in hospitality performance.

"While the market has remained relatively stable there are increased signs of caution – with a slow-down in government domestic spending and a reduction in transaction volumes and investor sentiment.  

"In Q2 we had reported that the market was at a 'tipping point' with its future direction being dependent on the extent to which government maintained domestic spending in the current period of reduced oil prices.. During Q3 it has become clear that the level of domestic government spending will reduce in the short-term, as the government remains cautious and re-allocates funds to regional priorities. Job cuts have occurred in the oil and gas and government sectors and some of Abu Dhabi's mega projects are expected to be delayed further and phased over a longer timeframe. On the positive side however, supply remains under control."

He commented: "Following a two year bull-run where residential price growth at 25% per annum outstripped GDP growth of 3% to 5% per annum, a period of stabilization is not a bad thing – allowing market dynamics to catch up with sentiment.

The UAE government announced that it plans to cut spending by 4.2% this year, following the decline in oil prices, the first such cut in spending for 13 years and all indications are that this trend will continue.  "We still expect demand growth to continue, but at a slower pace. Demand growth will continue to be sustained from projects commenced while oil prices were high – with projects such as the airport and Etihad expansion having an economic multiplier effect – but there will be greater scrutiny of new projects, which will be phased outwards. 

SECTOR SUMMARY HIGHLIGHTS

Office:  

  • Supply completions during Q3 2015 were limited to Addax Tower on Reem Island. With no other major deliveries, total office stock increased slightly to reach approximately 3.3 million sqm GLA. An additional 73,000 sqm of office GLA is expected to enter the market throughout the last quarter with the delivery of Bloom Central on Airport Road, Al Qudra HQ in Khalifa Park and Al Hilal Bank HQ on Al Maryah Island.  
  • ​​Demand for office space has reduced due to the decline in oil prices directly impacting the oil related sector and indirectly impacting other sectors due to a slow-down in government spending.  Large-scale requirements continue to be driven by the government sector and state-owned enterprises with the bulk of private sector demand focused on smaller office suites.
  • In spite of weak demand, Grade A office rents have generally remained stable  (averaging AED1,850 sq m) due to minimal vacancies and in some buildings, rental growth has been achieved Grade B office rents remained stable at AED 1,180 per sq m and are likely to be under greater pressure next year as more Grade B stock is delivered.
  • David Dudley commented "While we are going through a period of weaker demand, Grade A Office Rents have generally performed well this quarter, as supply remains under control with limited vacancy in high quality buildings. Market-wide vacancy will continue to increase slightly as further office space comes on stream during a period of weak demand – however the majority of new office space which has not been pre-committed will be Grade B; Grade A vacancy remains low and therefore we expect Grade A rents to be upheld".

Residential:  

  • Approximately 700 units were added to the residential stock during Q3 with the delivery of two buildings in Hydra Avenue on Reem Island and the C59 building in Rawdhat. With no major deliveries during this quarter the total residential stock has remained almost the same as last quarter at 244,000 units.
  • Approximately 5,000 residential units are scheduled to enter the market by the end of 2015, dominated by the delivery of Amwaj 2 at Al Raha Beach, The Views in Saraya and The Wave, Sea Side Tower and Sigma Towers on Reem Island. However, some of the developments are likely to experience delays.
  • We expect future residential rental demand to be affected by the decline in oil prices – directly impacting the oil sector and indirectly affecting other sectors due to a reduction in government spending. The UAE government plans to cut spending, leading to job cuts and cost controls in government entities and a delay to the commencement of new mega projects. Further increases to cost of living (through the removal of utilities and fuel subsidies combined with further potential measures to introduce taxes) may further impact future end-user demand. 
  • However, residential supply remains under control with minimal vacancies in high quality schemes, and rents being maintained. While we expect weaker end-user demand next year, annual supply completions remain lower than historic levels. "As we predicted earlier in the year, we are expecting single digit rental growth during 2015, following 17% growth in 2013 and 11% in 2014, as supply and demand become more balanced."
  • While the rental market is linked to end-user demand, the residential sales market is principally sentiment driven. While prices have been maintained, transaction volumes have reduced due to weaker sentiment. There has also been an increased tendency this quarter for residential owners to increase leverage and release capital. David Dudley commented "While Residential Sales prices have remained stable during Q3 2015, the decline in investor sentiment has impacted transaction volumes and this trend is expected to continue in the short-term."

Retail:  

  • No major deliveries took place during the third quarter keeping retail supply stable at 2.6 million sqm of retail GLA.  Approximately 44,000 sqm of retail GLA is expected to enter the market by the end of the year, dominated by non-mall retail within mixed-use developments such as Gate Towers and Oceanscape retail on Reem Island, Landmark Tower retail on the Corniche and Saadiyat Beach retail on Saadiyat Island. 
  • Retail supply is expected to increase significantly from 2018 with the delivery of new Super Regional Malls. Demand for the new malls will partly be supported by new population and tourism growth. Progress has been witnessed on consented malls – notably Al Maryah Central and Reem Mall. Gulf Related has appointed Brookfield Multiplex as the main contractor for Al Maryah Central which has now started construction.
  • David Dudley commented Retail Rents remained stable and are expected to remain stable over the next 12 -18 months. While significant retail space is set to enter the market from 2018, the development pipeline has reduced and demand growth remains positive, particularly linked to hospitality growth. With greater competition, we expect the market to polarise with lower quality malls needing to be re-positioned. In the meantime, retail rents are expected to remain stable."

Hotels:  

  • The third quarter of 2015 did not witness any major hotel openings in Abu Dhabi. However, the serviced apartments sector has seen the opening of the 62-key Jannah Place on Muroor Road in mid-September. Major openings expected for the coming months are the Grand Millennium Bab Al Qasr (677 keys), the Grand Hyatt with 368 rooms and the 315 room Marriott paired with Marriott Executive Apartments.
  • Demand continues to grow quarter on quarter, principally driven by wide-ranging government initiatives to increase tourism, including the expansion of the International Airport and the national carrier Etihad Airways, the further improvement of Abu Dhabi's leisure offering and attractions, the hosting of world-class events and major campaigns by the Abu Dhabi Tourism and Culture Authority to promote Abu Dhabi internationally.
  • David Dudley commented "The Hospitality market continued to outperform compared to the same period in 2014. ADRs increased by 3% in YT August compared to the same period in 2014, while hotel occupancies registered a marginal increase in YT August, reaching approximately 72%. Over recent years, while there has been a steady increase in tourism arrivals, the positive increase in demand was largely offset by new supply coming through, impacting on performance. The pace of supply additions is now slowing down while demand growth continues quarter on quarter."

Abu Dhabi Prime Rental Clock

This diagram illustrates where JLL estimates each prime market is within its individual rental cycle at the end of the relevant quarter.



*Hotel clock reflects the movement of RevPAR.

Source: JLL​