A supply shortfall of residential properties in Abu Dhabi is expected to fall from 40,864 units in 2009 to 29,720 units in 2012, according to a new report.

According to Investment Boutique (IB) report on the 'Abu Dhabi State of the Market 2010', an average of 7,500 residential units are expected to be delivered annually between 2009 and 2012 in the capital.

"While only confirmed projects have been considered for this review, supply estimates for 2011 onwards may be lower or higher than estimated due to a number of developers still rethinking strategies and schedules," said Heather Wipperman, CEO, Investment Boutique.

According to IB estimates, residential supply currently stands at 133,691 units, which is expected to rise by 17 per cent to 156,591 units by 2012. The report has used government figures and its own supply database covering more than 40 major projects to estimate the current and upcoming supply. The report said estimates vary between real estate advisors with current supply estimates ranging from 150,000 to 190,000, and upcoming supply estimates ranging between 30,000 and 40,000 units.

Further, occupancies are likely to fall due to high price levels over the next few years, though a substantial shortfall in terms of potential demand against supply will remain despite new supply entering the market.

The report said that although there is a definitive supply shortage in the Abu Dhabi metropolitan area relative to potential demand, prices and occupancy levels would continue to fall until the following issues can be addressed.

Value and money

In the very early days of the Abu Dhabi property boom in 2006 and 2007, projects launched in designated investment areas were priced at between Dh550 per square foot to Dh750 per square foot for villas such as Al Reef and Hydra Village while apartment projects on Reem Island were launched around Dh1,200 per square foot depending on payment plan. This pricing afforded purchasers a fair build quality with reasonable designs and specifications.

Wipperman said that as investors in the Dubai market found their own real estate market increasingly expensive and competitive, they turned to Abu Dhabi with its favourable payment plans, bountiful hydro-carbon reserves and low entry prices, bidding up values of middle income housing to upper income prices.

The report said developers launched at higher and higher prices without changing the specifications of the underlying product. Increased entrants into the development market and the hair-raising pace of activity in Dubai soon caused construction prices to escalate further still, causing developers to continue to push prices to maintain margins.

"Within the residential sector affordability analysis, we demonstrate why the market's initial pricing of product was correct and why Abu Dhabi will need to realign asking prices with product specifications and offerings if transactional activity is to increase," sasy the report.

There is in an increase in lifestyle offerings and competitively priced smaller units. At the start of the Dubai market correction, many had speculated that the Abu Dhabi market would be insulated from Dubai due to its acute supply-demand imbalance and abundant natural resources.

By early 2009, it became increasingly evident that Dubai was a credible threat and substitute for Abu Dhabi's residential real estate. Further, with the Abu Dhabi job market becoming increasingly competitive, the once very generous corporate housing allowances all but disappeared as did inflated salary packages relative to their Dubai counterparts. As such, the Abu Dhabi residential stock was priced for a particular profile of expatriate that was fast dying out.

The report said that surveys of Abu Dhabi workers show a clear preference for Abu Dhabi-based accommodation among families and professionals with particularly long work days (ie certain types of lawyers and financiers as well as technical experts working on projects that divide their time between Abu Dhabi Island and more distant areas such as Al Ain).

"Many of these members of the Abu Dhabi work force prefer units closer to work and are willing to pay more of their disposable income in order to spend time at home versus commuting."

Protection for investors

According to the IB, many of the seasoned investors of the Dubai real estate market are potential investor targets for Abu Dhabi. "Unfortunately this particular investor segment has learned painful lessons regarding investing in markets with immature legislative and regulatory frameworks," said the report.

In order to attract a healthy international institutional investor base that could aid in the development and maturity of the Abu Dhabi market, there will need to be considerable investment in a framework to provide clarity in terms of property and ownership rights, particularly in strata- owned buildings.

Further, there will need to be greater comfort over zoning and centralised supply control as well as clear procedures, accountability and enforceability of investor and landlords rights, irrespective of the local influence of the counterparty.

Office sector

Prior to 2008, there were little changes in the Abu Dhabi commercial office market. Government offices and foreign oil and gas companies made up the lion's share of office demand while the services sector required to support such entities made up only a smattering of the market's requirements. Abu Dhabi was home to the majority of available office space which was controlled by a combination of government entities and powerful local landlords.

With a firm hold on supply and little change in the composition of demand, there was little need to improve upon the commercial offering. Looking ahead to 2010, the Abu Dhabi office market is virtually unrecognisable. There has been a culling of villa to office conversions and offices rented by number of rooms or windows rather than on a square foot basis.

Grade A requirements from new multinational joint ventures across industries and services abound as well as expansion demand from international firms which had mistakenly believed they could service Abu Dhabi and Dubai customers from their Dubai offices.

The emergence of foreign national investment areas, which are now starting to offer superior space and infrastructure, are causing many owners in the CBD to upgrade or demolish and rebuild inferior office stock. Further, new master plans for the CBD itself are also changing the profile of the Abu Dhabi Office Market.

While the profile of office demand in the city has changed dramatically in the past few years, the underlying quantity and type of supply have not kept pace.

This supply-demand imbalance led to a spike in rental values in 2008 and early 2009 in much the same way that Dubai had experienced in 2007 and early 2008.

Many new tenants took whatever space was available, often in undesirable locations or with specifications that were ill-suited towards their corporate requirements. In H2 2009, despite a major shift in service sector activity from Dubai to Abu Dhabi, peak office rents have tumbled as Dubai firms force employees to commute daily to Abu Dhabi based clients and prospects and expansion plans are put on hold.

Expected real estate legislation in 2010

The real estate law will be extensive and is anticipated to cover a number of important issues such as strata titling, escrow accounts and mortgages.

Strata: The Articles of the UAE Civil Code which relate to the ownership of floors and apartments and the management and powers of a co-owners' association are unclear and difficult to apply to modern strata titled communities. The existing legislation on common ownership (Article 31 of the Implementing Regulations passed by the Abu Dhabi Executive Council) only applies to very large-scale "complexes" and does not expressly deal with the titling of strata units. As the Civil Code is unclear and Article 31 is limited, some developers have chosen to deal with the strata titling and the management of the community more extensively on a contractual basis, although this will inevitably lead to a disparity in the way strata titling is dealt with between adjoining developments. It is anticipated that the section of the real estate law dealing with strata will clarify the position in relation to the strata titling of units and the management of common areas.

Escrow: Unlike Dubai, Abu Dhabi currently has no escrow law. Although there has not been the same level of "off-plan" selling in Abu Dhabi as there was at the height of the boom in Dubai, Abu Dhabi may echo Dubai's escrow law (Dubai Law No. 8 of 2007) which provides that a developer wishing to sell "off-plan" units must apply to the Land Department to open a trust account. The introduction of an escrow law in Abu Dhabi would protect the interests of off-plan real estate investors.