ABU DHABI REAL ESTATE MARKET MATURES
Despite reduced activity on the back of low oil prices, demand for Abu Dhabi real estate remains intact in response to population growth, strong consumer spending power, growing tourism, the provision of diversified free-zones, and improving market regulations.
Over the past decade, the Abu Dhabi skyline has transformed significantly as the real estate market has developed in line with a growing economy and population.
During this time, Abu Dhabi has made impressive progress towards achieving its long-term goals of developing a world class health and education sector, as well as encouraging greater private sector participation and attracting foreign investment, in a move to liberalise its economy and diversify away from hydrocarbons, as outlined in the Abu Dhabi Economic Vision 2030.
With the 10th edition of Cityscape Abu Dhabi just around the corner, it’s time to take an in-depth look at current market dynamics in the emirate.
The oil question
Hydrocarbons still represent about 50% of Abu Dhabi’s GDP and the steep fall in oil prices has not gone unnoticed.
“Oil revenues have always been a key driver of Abu Dhabi’s economy and real estate markets – in generating a significant proportion of GDP, FDI, employment and consumer spending,” says David Dudley, International Director, JLL MENA.
“The oil sector forms over half of Abu Dhabi’s GDP, so a reduction in oil price directly impacts a major part of the economy. Indirectly, low oil prices also lead to spending cuts in the government sector and a reduction in government spending on economic diversification and infrastructure. If low oil revenues are to remain for the foreseeable future, there is a case to say that there is an even greater need for the government to continue to invest to diversify the economy,” Dudley comments.
Faisal Durrani, Partner and Head of Research, Cluttons, says that due to the oil price rout, government deposit levels have fallen by AED 56 billion in the 12-months to the end of September 2015 (according to the National Bank of Abu Dhabi), suggesting a liquidity crunch may be building in the background. “This will have a direct impact on the mortgage market, which is already very restrictive and business lending may also come under increased pressure,” Durrani explains.
On the positive, Dudley says that real estate demand growth continues from major capital projects commenced when oil revenues were strong. “Projects such as the airport expansion, the growth of Etihad Airline and major tourism attractions have an economic multiplier effect, ensuring continued GDP growth,” he says. He adds however that it is increasingly evident that job cuts are happening, and government spending on the next wave of major projects will be on hold for a while, leading to a slowdown in the pace of demand growth.
Abu Dhabi’s real estate markets experienced an upswing from 2013 to 2014, led by residential price growth at 25% per annum and a general recovery of all sectors, which was driven by improved economic conditions, investor sentiment and increased government spending, as per JLL.
“This bull-run came to an end in Q4 2014, triggered by the decline in oil prices, sentiment and a slowdown in Dubai’s real estate markets – with most of Abu Dhabi’s real estate sectors remaining flat during 2015,” Dudley says.
According to JLL, the short term outlook is for reduced demand growth, but also reduced annual supply completions – leading to relatively stable market conditions characterised by low vacancy rates in high quality stock and prime rents remaining relatively stable across each asset class. “The extent to which this stability is maintained very much depends on the return of domestic government spending in spite of a reduction in oil revenues,” Dudley says.
While JLL say that supply and demand dynamics remain relatively balanced for end-user demand, the decline in oil price has led to a reduction in investor sentiment, which has negatively impacted the sale market and transaction volumes.
Cluttons’ Durrani adds that since the market remains sentiment driven, it would be remiss not to factor in the oil price story. “Depending on whether your glass is half full, or half empty, the oil price fall may be viewed as the catalyst that drives further economic diversification, or the primary reason for the real estate sector slowdown. In reality, the sentiment is probably a combination of the two,” he says.
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