Abu Dhabi Market Report 2007

In association with CB Richard Ellis - Quarter 4 2007

Property Market Commentary

The Abu Dhabi real estate market concluded the year in a blaze of publicity with the announcement of numerous new developments. Q4 2007 threw back the covers on in excess of AED 25 billion’s worth of emergent projects as the capital enters a new era of intense activity designed to propel Abu Dhabi into the global spot light.


Year on year, the Abu Dhabi Government has kept a tutored eye on the detail surrounding its development programme, covering every aspect from geographic urban transformation to structural regeneration. As a key component of their development strategy, the local authority launched the new Abu Dhabi brand identity. The marketing objective, aside from galvanising tourism and foreign investment levels, is to present an intriguing vision of Abu Dhabi in the 21st Century to a global audience. The Office of the Brand of Abu Dhabi is specifically tasked to perfect, position and project an image of the Emirate with international appeal.


Buoyed by major construction sector activity, Abu Dhabi continued to demonstrate energetic growth underpinned by positive economic conditions. Increased momentum in the property market is attributable to a flurry of project announcements and the construction focus on mainly tourism oriented developments. Running in parallel, a Government instigated diversification program aims to realign the economy in terms of oil dependency.


Abu Dhabi, while it holds approximately 90% of the UAE’s oil reserves, has nevertheless demonstrated strong commitment to rectification of the present economic imbalance. The graphic representation, of GDP forecasts generated by the Abu Dhabi Chamber of Commerce and Industry (ADCCI), predicts a non-oil related contribution of 45% toward total GDP by 2010. In order to achieve this statistic, the Emirate must continue to structure a proactive commercial investment environment that both encourages and accelerates the development of a spectrum of alternative industries. Tourism and real estate are natural candidates.


As 2007 ended, the latest report from Abu Dhabi Tourism Authority (ADTA) revealed a healthy 16% growth in tourist arrivals to a total of 1.37 million visitors compared with 1.17 million in 2006. Based on a target of 3 million visitors by 2015, the implementation of the necessary infrastructure and support services is imperative. Development of significantly expanded hotel room inventory is a critical factor.
While undoubtedly commercial expansion is taking place in all sectors, the absolute barometer of successful urban generation is sustainability; a factor requiring careful synchronisation of the constituent fundamentals which underwrite viable value added longevity. Leveraging experience from the positive investment indicators and challenges experienced in Dubai, points to the urgent need for the Abu Dhabi Government to implement owner/investor protective legislation.


As with fellow Emirates, the overall success of Abu Dhabi’s property market will be determined by the legal land tenure and residency visa status of its developments. Definitive regulation in situ, would quite clearly raise the marketability and competitive profile of projects taken to the international market.


Market activity was generally strong across all property segments during Q4 2007. Increased demand for most products accelerated against a backdrop of healthy economic growth and expanding alternative business activities; lifted by heavyweight Governmental commitment to the economic diversification strategy.

Office Market Overview

The Abu Dhabi office market was characterized by strong demand pressures, extremely low vacancy rates within the slim band of 1 – 2%, and increasing rental levels during Q4 07. Rental levels have surged by an average of 20% since Q1 2007.


In Q4 2007, the average asking rental rate for prime office space rose to AED 2,900/m² from AED 2,200/m² in the previous quarter or a robust 53% growth from Q4 2006 average rental rates. The following illustration depicts the historical trend of prime office rental rates in Abu Dhabi covering Q4 2006 to Q4 2007.


The combined arrival of more internationally recognized firms and a dearth of appropriate supply on the market, pushed up rental levels and confined some large companies to an interim period spent in alternative accommodation of inferior quality. Some of the prevailing gap in availability of good standard office space, coupled with insufficient parking facilities and congestion in the current CBD has been temporarily filled by conversions of residential units to commercial spaces.


Within the Abu Dhabi Island, circa 24, 520 m² of space available for immediate letting was identified during the quarter. However, the common obstacle to leasing these properties was the limited number of parking spaces allocated to potential tenants. In fact, reduced take-up levels were recorded as a result of the shrinkage in the amount of quality office buildings ready for immediate occupancy.


Concerning investment, our research indicates that despite the lack of available product, investors’ interest in the commercial property market in Abu Dhabi has remained high. This was mostly under the influence of low interest rates alongside economic and political stability, with property seen as offering secure, long-term returns. In addition, yields for commercial properties were observed to remain stable at around 8% in general during the quarter.


By end 2009/early 2010, rents are expected to stabilize based on the substantial amount of space projected to enter the market by that time. However, any rental level forecast is highly dependent on the ‘actual’ amount of office space delivered versus the corresponding overall demand two years hence.

Residential Market Overview

The Abu Dhabi residential market is subject to shifting market forces as supply fails to keep pace with the demand for an increasing volume of affordable housing in line with the influx of working population.


This quarter, rental rates in Abu Dhabi soared to historical highs, ending the year at AED 80,000 for a one bedroom unit. Effectively this commands the same return as its two bedroom equivalent a year earlier. Even relatively remote districts like Muroor enjoyed Q4 2007 rents almost on a par with those in more prestigious areas.


Rising inflation has placed increasing emphasis on affordability. Cost is now by far the most important selection criteria, in terms of housing for the bulk of the resident workforce in the Emirate. However, other factors such as location, views, proximity and availability of amenities remained an essential attractions specifically in the residential segment.Construction of mega-projects with residential components continues at pace both on and off main island Abu Dhabi. During the quarter, a number of new residential releases were announced in Abu Dhabi. Mainly within the scope of large-scale developments like Al Reem Island and Al Ghadeer. The latter, is offering around 6,000 affordable units located on the border of Abu Dhabi, a recent addition to a growing list in the development pipeline.


Abu Dhabi witnessed an active Freehold residential market during Q4 07, particularly for developments on Al Reem Island with the majority of the sale transactions and product offerings focused on residential properties.


As one of the designated Freehold areas, developments on Al Reem Island are available for sale to both UAE and non-UAE nationals.


The following table below depicts the original sale prices for selected Freehold residential products on Al Reem Island with expected completion dates from late 2009 onwards.

Industrial Market Overview

Two years ago, the Emirate of Abu Dhabi successfully launched Abu Dhabi Industrial City (ICAD) at the southern end of Mussafah industrial area. The decision to expand the present ICAD land allocation from 14 km² to 50 km², comes as a result of dramatic growth against an overwhelming response from a booming industrial market.


This quarter, Abu Dhabi witnessed a robust increase in the rental level for prime industrial land in ICAD III reaching AED 15/m² from the AED 2/m² in Phase I, and 5/m² in Phase II.


In general, the Abu Dhabi industrial sector benefits from massive Government initiatives and funds injected to further accelerate and strengthen the industrial activities in the Emirate. By the end of 2007, the UAE reported total investments of AED 72.6 billion in the non-oil industrial sector of which Abu Dhabi accounted for 54 percent or AED 38.9 billion.


Abu Dhabi’s vision is to strengthen specific industries of which the Emirate has an innate competitive advantage. As an essential support facility to the expanding industrial sector, Abu Dhabi launched a AED 418 million labour residential area in the Al Mafraq district with the capacity to house a working population of 32,000. The facility is equipped and designed to afford workers with better quality living conditions.

Retail Market Overview

In Q4 2007, Abu Dhabi welcomed Khalidiya Mall as a new addition to the growing retail segment in the Emirate, offering circa 52,000 m2 of NLA. Currently at a soft-opening stage, the mall is scheduled to be fully operational in early 2008. The opening of Khalidiya Mall is expected to widen consumer choice and thus strengthen Abu Dhabi’s appeal as a tourism destination.


Over the years, the Abu Dhabi retail market has evolved from the traditional suoq and high street retail market to the development of circa 376,500 m2 NLA of one stop shop destinations combining high-end retail, entertainment and other recreation facilities.
During the Q4, annual rental rates for prime retail space in Abu Dhabi malls ranged between AED 4,000 - 4,500/m², as reflected in the following table.

Furthermore, prime yields for shopping centres in the Emirate hovered between 7.8 to 8 percent in Q4 2007.
Mall culture is notably gaining momentum further pushed by the rising per capita of the local populace and the significant number of visitors to the Emirate. Retail destinations have become an essential component, if not the centre, for newly created mixed-use developments.


With the advent of economic growth currently happening in Abu Dhabi, retail expansion both in size, scale and number becomes an essential requisite for a development to effectively achieve relevant market pull outside the immediate geographical area. Heavy investments in tourism in the Abu Dhabi market is viewed as supporting the expansion of retail spaces across the Emirate.

Market Outlook

Despite the numerous announcements describing new developments on a grand scale, the Abu Dhabi market is shackled by limited delivery of completed projects. Taking into account the extremely high ratio of pre-let spaces, the arrival of any new inventory is unlikely to have significant short-term impact in easing current market constraints. Within a very tight property market, further escalation in commercial and residential accommodation rental levels is anticipated next quarter.


The local Government’s desire to develop untapped investment potential is much in evidence. Abu Dhabi’s prolific growth in construction is likely to be maintained for the next 15 years.


The unprecedented performance of world oil prices are giving real estate growth the valuable support of rising indigenous wealth and political stability. Add structural reforms and Abu Dhabi’s property becomes an attractive investment opportunity.