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Analysis: Hot in the city

Are more new apartments needed in Abu Dhabi to slow price inflation?

Making a mark: Landmark Tower (centre) is one of only a handful of recent completions in Downtown Abu Dhabi.
Making a mark: Landmark Tower (centre) is one of only a handful of recent completions in Downtown Abu Dhabi.

While last year, Abu Dhabi’s property market witnessed an increase in residential prices, growth in 2014 will be selective in terms of location, design and management, according to a panel of experts at this year’s Cityscape Abu Dhabi.

Research published just ahead of the event by Jones Lang LaSalle (JLL) showed that property sale prices in investment areas increased by 9% during the quarter to AED14,000 per m2. Year-on-year prices have climbed by 27%, fuelled by a number of factors including the fact that stock within investment areas (the only places where expats can buy) has largely been absorbed, greater levels of job security and a growing trend among renters in the market to consider buying their own properties.

“The theme (at last year’s Cityscape) was turning the corner and we saw an increase in residential prices in rents and stability in the market,” said David Dudley, head of JLL’s Abu Dhabi office.

“The theme now is selective growth – how we’ve come from turning the corner and into upward growth.”

As real estate developers showcased their latest projects at this year’s Cityscape Abu Dhabi, senior executives gathered at the Abu Dhabi National Exhibition Centre’s conference room for a panel debate on the Emirate’s property market.

The panel agreed that one of the main focuses in the coming years will be to concentrate development on areas where infrastructure is already in place.

“That will help deal with land speculation and value speculation,” said Anthony Mallows, director of Masdar City. He added that it would also allow development to “occur in a cost- effective way”.

This would also help with funding developments, as Abu Dhabi Finance CEO Christopher Taylor explained. As a lender, he said, he is more attracted to community extension projects and expansion in established areas.

“If you provide developments that are in established or close to established communities with infrastructure, that makes me more comfortable as a lender,” he said.

In fact, Gurjit Singh, chief development officer at Aldar, said that many of the projects in Aldar’s property portfolio lie in the corridor between Abu Dhabi and Dubai because of the massive investment in infrastructure in that area.

“You have a very strong logistics and business concentration,” he said. “This entire corridor is dotted with infrastructure investments, huge infrastructure investments on their own.”

In eight to 10 years, he adds, the Etihad Rail network will complete, which will provide a link between many of the UAE’s cities, as well as connecting with the GCC railway network – linking the UAE to Saudi Arabia and Oman.

“If you develop in Abu Dhabi in as close proximity in Dubai, you are building in an area where utility rates are much lower, transaction costs are lower – 2% in Abu Dhabi, compared to 4% in Dubai. So, you are at a very advantageous position,” he said.

However, Singh noted that recent price rises have had an impact on yields, which have shrunk as the 29% year-on-year sale price rise in investment areas was much higher than the 11% average rental increase for a two-bed apartment.

“You’re looking at residential price and the increase has been more than in rents. There is an increasing trend of yield compression going on with residential properties,” he said.

Singh added that pricing trends in Abu Dhabi generally lag behind Dubai by about 12 months.

He added: “The interesting phenomena is that the rate of increase of yield compression in Abu Dhabi is faster than in Dubai. Too much yield compression means that prices are running away from themselves.”

Cyril Lincoln, head of real estate and asset based finance at Abu Dhabi Commercial Bank, added that from an investment point of view, the trend of declining yields suggests that there is a lot of cash in the system but not enough investable assets.

“I’m reminded a lot of what we saw when the markets were overheated in 2007-2008,” he said.

“I’m not suggesting we’re in that kind of mode at all, but we are seeing some of the cross points and it just points to the effect that there’s too much money chasing too few investable assets.

“So, this hangover of this 3-4 year lag of development has caused now an oversupply of cash.”

For that reason, according to Singh, it is becoming more important to shorten the delivery times and delivery periods of construction stocks.

“The lifecycle for new development is becoming shorter. Only then will you be able to deliver to the market and create some stability,” Singh stated.

With the upcoming FIFA 2022 World Cup and Expo 2020 mega-events, there will be a drain on construction resources, manpower and management resources across the region, Singh added.

“At some point, all of these resources will be over-stretched for these two events. Construction starts need to be very cleverly procured, arranged; delivery times need to be short,” he asserted.

Dudley added that developments need to be carefully phased and they need to be more aligned with end users.

“From a residential point of view, while there is market-wide vacancy, there remains a shortage of quality residential stock (in terms of quality of design, parking, amenities, management, etc.) across all price points.”

However, opportunities in Abu Dhabi extend beyond residential needs. Mallows and Singh both pointed to the need to attend to the gaps in Abu Dhabi’s real estate market – in housing, schools and mid-tier hospitality sectors.

“There is a shortage of schools in Abu Dhabi right now,” said Mallows. “One of my strategies is to get those schools built – quality schools – but then negotiate what other facilities are needed. Not only negotiate with private school developers, but also look at their full needs, such as housing.”

Singh believes that apart from housing, there is a gap in the market for mid-tier retail and hospitality projects.

“This is grossly lacking… The market has to respond because people in the mid-income track are finding it difficult when prices are escalating too fast.”

To avoid prices from climbing too quickly, Dudley suggests that an increased supply of residential units can help control a spike in prices.

“We need to see more residential stock coming forward to help prevent any spike in prices,” Dudley explained. “We’re saying: let’s not go crazy there and let’s make sure that it’s the right work for end users.”

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