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Why the rental market is set to remain in disarray

In Abu Dhabi there are signs of slow recovery in the rental sector

Too much office space in Abu Dhabi is being blamed for a 10% fall in yields compared with last year.
Too much office space in Abu Dhabi is being blamed for a 10% fall in yields compared with last year.
Residential sales picked up in Q2 and certain areas of the city are showing strong demand, especially planned communities.
Residential sales picked up in Q2 and certain areas of the city are showing strong demand, especially planned communities.

In Abu Dhabi there are signs of slow recovery in the residential rental sector but with so much empty office space, the commercial sector is set to coninue suffering, according to the latest CBRE report. By Gary Wright.

Rents in both the residential and office sectors continue to fall in Abu Dhabi despite government efforts to force employees to live in the emirate, according to a new report from the CBRE.

And while residential rents are predicted to start a slow recovery, office rents look set to fall even further over the next 12 months, it concludes.

The second quarter Marketview Report by international real estate consultancy the CBRE shows residential rental fell by 4% between April and June 2013.

That continues the trend in the emirate with rents down 10% compared with 12 months ago despite government residential rules forcing public sector workers to live in the emirate or lose their housing allowance.

The report notes some positive signs but the interest seems to be coming from people moving within the emirate to newly- completed developments.

It says: “The completion of a significant number of new residential units from master planned locations is also encouraging widespread relocation within the capital, as tenants look to capitalise on prevailing affordability as they search for new and better quality housing options.”

The highest demand is currently for two-bedroom units, with rentals for upper middle and high-end focused accommodation, ranging from $24,500 (AED90,000) to $39,500 (AED145,000) a year.

In the office market supply continues to outstrip demand and while rents remained stable for the top A class buildings during the quarter they still showed a 5% fall year on year. Class B offices continue to slide with rents down 3% during Q2 and almost 10% down year on year.
The average annual prime rental rate is now $476m2 (AED1,750) with secondary office rental rates in the capital at $347m2 (AED1,215).

Mat Green is Head of Research & Consultancy UAE with CBRE Middle East.

He said: “The completion of a significant number of new residential units from master planned locations is also encouraging widespread relocation within the capital, as tenants look to capitalise on prevailing affordability as they search for new and better quality housing options.

“However, despite a noticeable rise in leasing activity during the first half of the year and record sales transactions, average rents continued to fall. Rental rates have dropped a further 4% during the quarter and are now down around 10% over the last 12 months.” 

Prime developments around Raha Beach and Saadiyat Island remain hotspots for luxury housing with two-bedroom apartment units at St Regis ranging from $45,700 (AED168,000) to $52,200 (AED197,000) a year.

On the main island similar units at Etihad Towers now start from $36,750 (AED135,000) a year.
The report concludes Abu Dhabi’s residential sector is on the road to recovery though the office sector looks set to flounder and see further falls: “Abu Dhabi’s real estate market remains fragmented with sector performance varying by individual asset types and locations.

“Whilst an imminent recovery is anticipated for the residential sector, a similar revival appears unlikely for the commercial office sector. As a result, office rental rates are expected to see further declines, led by the weak performance of the secondary market.

“The residential sector is expected to return to positive growth territory by the end of the year, with occupier and investor activity intensifying.

“As the recovery gathers pace, we expect to see rising growth specifically for good quality properties within established masterplan communities and desirable locations on the main island.

Off-island secondary residential locations and inferior products without access to good transportation services or the benefit of a masterplan are expected to see further deflationary trends in the short term before the recovery becomes more broad based.

“Newly delivered residential developments such as Marasy Abu Dhabi and Nation Towers are commanding relative high rental rates, due to their superior quality finishes, waterfront views and wide ranging facility and amenity offers.

This trend reflects sustained demand for true high-end residential properties which offer tenants a real point of difference against existing inventory.”

Off-island, Al Reef Downtown is proving to be “a hit amongst workers at Abu Dhabi Airport” and local industrial areas. The development is the first masterplanned community targeting middle-income groups. Average rents for a one-bedroom unit are now around $17,700 (AED65,000) a year, significantly higher than similar unit types in non-masterplan locations such as Khalifa City.

The report says: “After a long period of inactivity, investor’s are now starting to refocus on Abu Dhabi’s residential sector, with rising interest levels for completed properties in key Investment Zone locations.”

Average sale prices now range from around $2,640 (AED9,700) to $3,811 per m2 for typical units at Al Reem Island and Al Raha Beach development.

The commercial market has shown searly signs of a revival, with an increase in leasing transactions and rising interest. However, this was not sufficient to stop the decline of average rents, according the MarketView.

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