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ABU DHABI – MARKET REMAINS STABLE

UAE
OVERVIEW EGYPT KUWAIT QATAR SAUDI ARABIA TURKEY UAE

December 2015

Declining oil prices have of course been a big discussion topic for the UAE’s capital throughout the year. Erik Volkers, Senior Consultant, Research and Consultancy, CBRE Middle East has a positive note to share about investor sentiment in Abu Dhabi:

“Despite the challenges of the current oil situation, Abu Dhabi maintains a high AA Investment Grade credit rating with agencies such as Moody’s and Fitch, reflecting the strength of investor and business confidence in the market. The current outlook is categorised as ‘stable’, reflecting the importance of good fiscal management, sound leadership and a healthy financial buffer,” he says.

Real estate performance

Looking at real estate performance however, Volkers notes that Abu Dhabi’ office market is starting to feel the strain of lower oil prices with declining demand and rentals, particularly for secondary accommodation. “With the Oil & Gas and Public Sectors serving as the primary office demand generators, demand for office space from both new occupiers and expansion of existing end-users has notably started to slow. These conditions have also had a knock on impact on other parts of the office sector, including some professional services companies, such as law firms, which rely heavily on the work from the government and government related institutions,” he says.

Residential rents have also marginally declined of around 1% quarter-on-quarter after maintaining around 2-3% growth over the past quarters, Volkers says, which he attributes to the general economic slowdown in Abu Dhabi. “Given the relatively small development pipeline, we expect the residential market to remain broadly stable despite potentially lower demand,” he says.

Overall, the residential market has been the most dynamic in 2015 in Abu Dhabi. “This market is showing some signs of fragmentation, with older and poorer quality apartments, particularly those in secondary locations, experiencing rental declines. These declines have dragged down the performance of the wider market. However, residential villas depicted a contrasting trend, recording a small increase of <1% during Q3 2015. The limited supply, particularly within the main Abu Dhabi island, reinforced the steady performance of this segment,” Volkers explains.

In the sales market, which has been somewhat subdued in recent quarters, CBRE noted that key investment locations such as Raha Beach and Reem Island have still witnessed marginal growth in annual terms while prices for more affordable masterplan developments, such as Al Reef and Hydra Village, have remained unchanged during the last two quarters.

The hospitality market has performed relatively well over the past year, Volkers says, highlighting that according to data from STR Global, Abu Dhabi’s year to date occupancy rate up to Q3 2015 was around 72.5%. “There has also been a slight increase in the average ADR which was recorded at just under AED 500/room/night. According to the Abu Dhabi Tourism and Culture Authority (ADTCA) total guest arrivals into Abu Dhabi during the first half of 2015 reached close to two million, reflecting healthy growth of nearly 17% versus the same period last year. The positive impact of higher visitor numbers also translated into higher revenues, with hotels recording an 8% increase to AED 3.346 billion. This was driven by 11% growth in room revenue and a smaller 1% increase in food and beverage revenue,” Volkers says.

According to CBRE, whilst low oil prices and their impact on corporate demand is a concern, it is important to note that there are other major positive drivers to consider and factor into future real estate demand in Abu Dhabi. “These include the opening of new leisure and cultural facilities, such as the long awaited museums on Saadiyat Island, but more importantly is the upcoming completion of the Midfield Terminal at Abu Dhabi International Airport. With opening expected in the second half of 2017, the capacity of the airport will increase significantly facilitating new flight routes, new aircraft and higher passenger volumes, which in turn will drive tourism growth,” Volkers explains.

 Outlook for 2016

With ongoing economic challenges brought about by a period of lower oil pricing, U.S. dollar strength, and sustained global uncertainty, CBRE believes “the outlook for Abu Dhabi’s real estate market is for a period of deflation in the short term.” The firm expects to see a fragmented marketplace, with more pronounced declines to be experienced in secondary locations and for inferior products. Prime developments in the office and residential sectors are forecasted to see steadier performances across rentals and occupancy rates, aided by the availability of limited available stock, both currently and within the future development pipeline.

“Whilst the hospitality market performance has been steady in recent quarters, there may still be some short term negative impacts to be felt as a result of declining demand from government/corporate activity.  However, as yet the slowdown which has impacted Abu Dhabi’s commercial market, hasn’t manifested itself in the form of negative ADR or occupancy growth,” Volkers concludes.

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