Development of high end residential units attractive in the near term in Abu Dhabi : Markaz Study


Kuwait Financial Centre “Markaz” in its recently released research note has provided with an outlook on the residential real estate sector of Abu Dhabi and opined on the attractive development strategies. The authors of the report opine that attractive opportunities for development are present in high end residential segment in the near term (2-3 years) due mainly to the willingness of the quality seeking high income group to pay a premium to equivalent units in Dubai to compensate for the avoidance of commuting. Near term developments targeting the middle income group may have to face the uncertainties caused by price and rental contraction in Dubai as well as from supply off the main island.

Market Overview : The authors argue that the causal factor behind the attractiveness of residential real estate in Abu Dhabi is the pent-up demand which remains undersupplied till 2011 even in case of a no expat growth scenario. However, they also refer to the fact that real estate prices contracted 47% from the peak on an average, in  extent similar to that of Dubai and more than the regional average of 30% while rentals contracted by 13-15% as well, seemingly in contradiction of this undersupply argument. The report argues that the expectation of contraction in the non-oil GDP growth during 2009 impacted income growth expectations halting the real estate demand. It also claims that lack of financing, the wait and watch approach adopted by developers in the wake of the uncertainty and changes in risk appetite as a byproduct of the crisis exacerbated the extent of fall in prices which we can attribute to the uncertainty regarding the prospects of the future demand.  

The report also argues that the release of supply amidst such uncertainty aggravated the rental contraction in certain property types, like 3 BR apartments (-15%) and 4 BR Villas (-22%). Expansion in the Abu Dhabi – Dubai rental multiple from 0.7 to 1.6 on an average in a span of 4 quarters due to rental contraction in Dubai lead to an increase in mid-income commuters leading to marginal increase in demand diversion as well.

Estimating the near term trends:  The report cites IMF’s forecasts of 2.4% growth in the UAE economic activity (real GDP) in 2010, up from 0.2% in 2009. It reiterates an increased dependence on  Abu Dhabi as expansion is driven mainly by stability in oil prices and government spending. The report expects the Abu Dhabi’s share of UAE real GDP to increase by 2-3% from its current level of 55%.  Overall project spending in Abu Dhabi stands at 14% of the nominal GDP of UAE in 2009 and expands up to 19% in 2010, mainly driven by the marked expansion of government projects from 26% of total projects in 2009 to 41% in 2010. The report argues that these developments in economic activity levels should generate both income and population growth which should lead to the reinvigoration of the pent-up demand. However, the forthcoming supply in Dubai during 2009-11, estimated at 30-112k units would influence the prices and rentals in Abu Dhabi to tend downwards due to demand diversion resulting in a volatile short term future for rentals and prices.

Development Strategies : The report argues that the primary housing decision driver for the high income segment, having a household income more than AED 25,000 per month is quality and amenities. Hence, provided with a property of an equivalent quality, they would be willing to pay a premium to Dubai to compensate for the avoidance of commuting. The current rental premium over Dubai for this segment stands at 10-45% as well. These factors implies that the impact of Dubai on this segment will be lower. However, the mid income category (AED15-25k per month) would  evaluate the tradeoff between the cost savings as well along with the quality and proximity considerations. Thus, to serve the demand from this segment, rentals and prices should track that of Dubai more closely as falling rentals and prices in Dubai will increase the attractiveness of the commuting option. The release of supply off the main island which commands lower rents would contract the rental multiple from the current 1.8 levels to 1.2 levels implying stronger influence from the developments in the Dubai market.

Development strategies: The report argues that although Abu Dhabi is short of more mid end units than high end, development of high end units would be more attractive in the near term despite the possibility of an oversupply in that segment. The mid end developments are more susceptible to the developments in Dubai market, which is characterized by oversupply driven by the forthcoming supply of 30-112k units during 2009-11. Until the uncertainty settles in Dubai, the report views development of mid end units unattractive. The report also claims that the financing constraints faced by the developers should delay the planned supply of 20,000 high end units forecasted to be delivered during 2009-12.

The report also argues that the longer term trends would be determined by economic diversification, supply side controls, improvements in infrastructure and regulatory architecture and in garnering the ability to compete and integrate with Dubai.

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Kuwait Financial Centre S.A.K. "Markaz", with total assets under management of over KD 950 million (USD 3.3Billion) as of September 30, 2009, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. "Markaz" was listed on the Kuwait Stock Exchange (KSE) in 1997.