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28 March 2024

Abu Dhabi rents to keep climbing in short term

Study says the demand and supply imbalance will continue to trigger rent increases in Abu Dhabi. (JOSEPH J CAPELLAN)

Published
By Nadim Kawach

Tenants in Abu Dhabi, who could hardly hold their breath at the rapid increase in local rents over the past two years, should brace for another shock as there will be no let up at least in the next four years.

Two foreign banks closely monitoring the UAE property market are anticipating a steady increase in rents until 2012 and one blamed supply bottlenecks spawned by a government decision to freeze new buildings nine years ago.

"Residential property prices in Abu Dhabi are expected to continue to rise until at least 2012," Morgan Stanley said in a study. "This is due to a supply shortage caused in part by a moratorium on building imposed between 1999 and 2001, which left the emirate with a small housing stock, unprepared for the economic boom of the past five years."

Cited by the Oxford Business Group (OBG), the study said other factors have also caused the rapid rise in rents over the past two years.

They include a rapid growth in the emirate's national population, an influx of expatriates attracted by the dynamic economy and the authorities' push to ensure a broad and skilled labour pool, and strong demand which is stimulated by easily available credit and rapidly increasing salaries, the study said.

"On the supply side, high global demand and a degree of speculation have driven up construction material costs," it said.

It quoted a report by Abu Dhabi Department of Planning and Economy as saying that steel prices in the emirate leapt by 91 per cent in the first half of the year, while those of cement jumped by nearly 46 per cent. "Ironically, one factor contributing to the rising cost is demand from emirate's own building programme – the government estimates that projects worth $54 billion (Dh198bn) are currently underway.

"Despite a 24 per cent increase in domestic steel production last year, Abu Dhabi still imports more than 60 per cent of its needs."

According to OBG, a decision by the government to enforce a cap on rent rises has failed to reverse the upward trend in rents because it has loopholes.

"While the policy is intended to protect tenants from unfair rent hikes, its efficacy is questionable and according to HSBC bank, rents increased some 22 per cent in the first half of this year," OBG said.

"The limitations only apply to those already renting a property, so a landlord can increase rents as much as he wishes if a new tenant is moving in. Furthermore, the cap may encourage some landlords to overprice initial rents in the knowledge that their ability to raise prices at market rates thereafter is curtailed," it said.

In its study, Morgan Stanley said that while tenants continue to feel the squeeze and some landlords are frustrated by rent capping, the tight property supply has led to a flourishing secondary market, benefitting those who bought property a few months or years ago.

It said resale prices in Al Reem Island, The Gate district and Al Raha Beach have already shot up by an average of 52 per cent so far this year, with units on Al Reem seeing 75 per cent growth.

"Given the medium-term supply outlook, profits look set to be generous for the next few years, though tighter limits on property flipping (swift resale at inflated prices) should curtail speculation and the emergence of a property bubble.

"Over the medium-term, Abu Dhabi's property market will mature as a large number of residential and mixed-use projects come on stream," it said.

It added that encouraging investment in the sector by easing ownership restrictions and other incentives should help make the supply side more flexible and responsive to demand, lessening future price shocks.

"In the interim, though, the glut of construction will keep commodity prices high, and rents and sale prices will continue to rise."

In a recent study, the Abu Dhabi Chamber of Commerce and Industry also expected rents in the emirate to continue their rapid rise in the next few years.

The report said low- and medium-income expatriate employees are expected to be the main victim of higher rents as their salaries have remained almost unchanged.

Its figures showed the capital's real estate market was almost balanced in 2005 as the nearly 287,000 housing units were enough to cover domestic demand.

But a surge in demand in 2006 was not met with a similar supply growth, creating a shortage of around 3,000 units. In 2007, the gap more than doubled to nearly 8,000 and it is projected to jump to more than 20,000 this year.

"Most of the housing units that will enter the market this year will cater for the high-income people. The low- and medium-income people will be the main victim of the shortage and the rent increases," the chamber said.