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According to JLL Real Estate Market Overview
JLL, the world's leading real estate investment and advisory firm, today released its second quarter (Q2 2016) Abu Dhabi Real Estate Overview report that assesses the latest trends in the office, residential, retail and hospitality sectors.
JLL reported that, after 18 months of relatively stable conditions with the lack of demand growth being matched by minimal growth in supply, the market is now starting to show initial signs of declining performance.
David Dudley, International Director and Head of Abu Dhabi Office at JLL MENA, commented: "Demand has been weak since the decline in oil prices at the end of 2014 – impacting the oil sector, government spending and general sentiment. However, while demand took a big hit, annual supply completions have been at an all-time low, leading to relatively stable market conditions over the last 18 months – characterised by low vacancy rates in high quality stock and prime rents generally remaining stable across each asset class."
"During Q2 2016, we have started to see the first signs of a downward trend as the decline in the oil sector, reduced government spending and weak sentiment continues. While supply remains stable, the reduction in demand has now started to cause vacancy rates to nudge upwards, indicating we have now reached a tipping point with rents declining for the first time in 3 years."
JLL reported that the oil sector comprises half of Abu Dhabi's GDP therefor, the reduced oil price and the announcement by ADNOC that it plans to cut 5,000 jobs by year-end, has had a major impact on GDP and employment growth. The reduced oil price has also resulted in a continued pause in government spending on economic diversification and infrastructure and job cuts in the government sector, impacting the other half of the economy. Recent announcements of mergers between NBAD / FGB and Mubadala / IPIC may lead to further rationalisation.
David Dudley added "We expect the impact of these job cuts and reduced incomes to become more pronounced over the summer, as some people look to either leave or downsize. This will push vacancy rates up further and cause rents to decline at a time-lag but given the numbers we are talking about relative to the overall size of the market, this is expected to be a soft correction rather than a sharp decline."
He continued "While we commend the government's prudent approach to re-prioritising spending in the current period of low oil prices, we hope that the tap is not turned off for too long or Abu Dhabi will lose the momentum it has built and we could enter a more damaging downward spiral. The extent to which a down turn can be mitigated depends on the return of domestic government spending in spite of a reduction in oil revenues."
He commented further "The good news is that government remains committed to the 2030 Vision and has recently announced its priority projects to 2020. While we are going through a period of weaker demand, demand growth continues from projects commenced while oil prices were high, new projects are in the pipeline and supply growth remains suppressed. However job cuts and reduced investment is expected to result in further rental decline in the second half of 2016."
SECTOR SUMMARY HIGHLIGHTS – ABU DHABI:
David Dudley commented "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. There is increasing evidence of oil companies and government entities reducing headcount and office space requirements."
He added "While we expect market-wide vacancy rates to increase in the current period of weaker demand, Grade A vacancy remains relatively low and therefore we expect Grade A rents to be broadly upheld".
David Dudley commented: "During Q2 2016 we have seen a nominal decrease in rents of about 2%. While there are signs of vacancy rates starting to increase slightly, many landlords are still able to maintain the same rental levels – with tenants often accepting this to avoid the additional costs and hassle of moving. However we expect vacancy rates to increase during Q3, causing further rental declines in the second half of the year."
He added "It is important to put this in perspective. Average prime rents in Abu Dhabi increased at 17% in 2013, at 11% in 2014, and at 5% in 2015 representing a 33% aggregate increase from 2013 to 2015. While we expect rents to decline further from the second half of the year, this is likely to be a relatively modest decline compared to the growth that occurred from 2013 to 2015 – we are not anticipating a major fall."
Commenting on the residential sales market he said "Over recent years, prime residential prices went up at 25% per annum which was unsustainable. As the market softened during 2015, prices have remained stable but transaction volumes have dropped significantly which is starting to put pressure on sales prices. While we expect this pressure to continue we also do not anticipate a sharp fall in prices."
David Dudley commented "While significant retail space is set to enter the market from 2018, the development pipeline has reduced and demand growth remains positive from the spending power or the local population and continued tourism growth. The new malls, building on the success of Yas Mall will lead to a continual upgrading of this sector. 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."
David Dudley commented "The outlook for the hospitality sector remains positive. Amidst general spending cuts there is increased evidence of continued government continuing to invest in mega tourism projects, particularly on the flagship Yas and Saadiyat Islands."
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.
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