Abu Dhabi short of residential units until 2013

Despite a spate of new developments under construction and in planning stages, Abu Dhabi is still expected to be short of residential units until 2013.

The emirate, however, is expected to see a significant oversupply of hotel rooms over the next four years, while the commercial and retail sectors are set to see moderate oversupply.

Abu Dhabi had a shortage of 48,600 residential units last year, or a 22 per cent supply gap, and will continue to experience a nine per cent residential supply gap in 2013, according to a report prepared by the Abu Dhabi Urban Planning Council (UPC).

The report, obtained by Emirates Business, says while supply is set to increase by 9.1 per cent every year to reach 251,200 in 2013, demand will still outstrip supply by 26,300 in the same period.

The UPC says it is studying measures on how to better bridge this gap by streamlining and expediting the approval processes of various projects.

John Achari, Regional Planning Manager, Abu Dhabi Urban Planning Council, said: "There is currently an undersupply of residential units and there are developments that are happening over the next two to three years to bridge that gap. But the study shows that there's still going to be a slight undersupply in 2013.

"There's a need to consider how we can better bridge that gap. Through our planning process we are looking at areas where we can optimise land [use] as well as facilitate development. We recently set up an electronic review process, which helps us in the approval process."

Achari added: "The UPC, as the agency responsible for the future of Abu Dhabi's urban environment, has through its Development Review Process approved 80 prominent development projects in the past two years. A significant number of future development projects are also currently under review."

In 2009, the Abu Dhabi real estate market was undersupplied in residential, office and retail sectors, with the hotel sector being relatively in balance. There was a shortage of 1.13 million or 38 per cent in the commercial sector, and a supply gap of 680,000 units or 32 per cent of the total market demand. The hotel sector, meanwhile, saw equilibrium, with the 13,500-room demand equally matched by the available supply.

Demand is forecast to increase in line with the continued growth in the population and economy of Abu Dhabi. The average economic growth in the emirate over 2009-2013 is projected at 6.1 per cent, while the population is expected to increase by an average of 5.2 per cent per year in the metropolitan area.

The report, Abu Dhabi Real Estate Market Forecasts, projects the emirate's real GDP will reach Dh398 billion in 2013 from Dh314bn in 2009, with the population reaching 1.19 million from 969,000 in the same period.

It forecasts total employment to rise 4.8 per cent every year to touch 693,000 from 574,000; hotel nights to increase by 10 per cent every year to reach 7.18 million room nights from 4.9 million; and retail spending to increase 5.4 per cent annually to reach Dh23.3bn in 2013 from Dh19bn in 2009.

Due to the growth in the underlying demographic and economic drivers, the construction industry has responded to the current shortage of supply by proposing a large number of new projects, which are scheduled to be completed over the next few years.

The fastest increases in supply will be recorded in the office, retail and hotel sectors that are forecast to grow between 15-19 per cent annually during the five-year period.

There is, however, a caveat to these demand projections, given its geographical proximity with Dubai; future demand levels in Abu Dhabi will also be inextricably linked to trends in the Dubai market. This is expected to be most closely felt in the residential sector, where continued declines in residential rental levels in Dubai could shift the residential demand curve for the Abu Dhabi market in 2010 and 2011.

"While not an explicit component of the real estate demand and supply model prepared for this assignment, changes in real estate prices and rentals will have a critical impact upon future demand," the report said.

"The expected fall in residential rentals in the Abu Dhabi market will unlock much of the current latent demand that will contribute to the projected level of future demand," it added.

The report forecast the supply for office space will increase at a faster rate than demand. The proposed supply will lead to a total stock of approximately 3.6 million sqm by the end of 2013, compared to a forecast demand of around 3.5 million sqm – this translates to a two per cent oversupply. "This is not a concern because what you see is that the quality of office space improves as a result of new planning," said Achari. "The provision of additional office space is the provision of additional quality office space, so you can find an equilibrium happening at some point.

"We plan to look at a revitalisation programme in the downtown area – part of that is to improve existing buildings, improve connectivity, make more open spaces and more facilities as well as deal with parking. We will look at the quality of existing buildings and look at whether they should be retained, upgraded or demolished," he added.

The retail sector, which is currently under supplied by approximately 700,000 sqm, is forecast to move into a surplus situation as more than one million sqm of new space enters the market by 2013. This translates to eight per cent of the slated retail demand space. A tighter competition in the hotel sector, on the other hand, is to be expected as the sector embraces a 34 per cent oversupply. The sector is slated to see a total of 26,500 rooms expected by 2013, compared to a demand for 19,700 rooms.

The major driver for the emirate's growth is the fact that Abu Dhabi remains an oil and gas power hub. Being the largest oil producer in the UAE, controlling more than 85 per cent of the UAE's total oil output capacity and over 90 per cent of its crude reserves, oil and gas production is anticipated to remain a major contributor to GDP. It is expected that the oil price will be supportive of relatively strong growth from next year and will assist to increase the share of the oil sector in nominal terms in the short term. The research has based this conclusion on the basis that oil prices are expected to grow to an average of $74 per barrel in 2010, a 22 per cent increase from the $61 per barrel average in 2009.

The rise in oil price will fuel employment in the services sectors, which will drive demand for office space and hotels and restaurants as visitor arrivals rise in parallel to increased economic activities.

This will be complemented by Abu Dhabi authorities' efforts to boost tourism by targeting the luxury market, and putting art and culture at the heart of its economic plans.

As a result of these initiatives, the total number of visitors in Abu Dhabi is forecast to increase by 10 per cent every year from 1.5 million in 2009 to more than 2.1 million by 2013. International leisure would be the fastest growing market segment, with an anticipated increase from 500,000 visitors in 2009 to more than 832,000 visitors in 2013.

On top of that, total household income in Abu Dhabi is slated to increase by an average of six per cent every year for expatriates and four per cent for nationals. While the aggregate income of non-citizen households did not experience growth during 2009, the report said employment and earnings prospects are expected to improve again from this year.

"This is predicted to result in real aggregate household incomes for non-citizens increasing by an average of over six per cent per annum between 2009 and 2013," it said.

Market forecast

Residential market

In 2009, the total stock of residential units across Abu Dhabi was approximately 177,400 units. The residential market is currently under-supplied, with prime locations commanding very high rents and operating at nearly 100 per cent occupancy, with many families sharing apartments and villas that were originally designed for single-family occupancy.

The delay of many of the announced residential projects in Abu Dhabi has mitigated the potential over-supply, which would otherwise have occurred in 2012 and 2013. As a result of many projects being delayed or placed on hold, additions to supply will be relatively modest from 2010 to 2013 compared to developer announcements.

Based upon detailed 'project by project' discussions between the project team and developers, the current supply is expected to increase to 251,200 units by the end of 2013 – an increase of 73,800 units or 41.6 per cent over the existing supply. The report says the total demand for residential units is forecast to reach 278,000 by 2013 – an increase of approximately 52,000 units from 2009. This figure is still higher than the anticipated supply by 2013, which is forecast at 250,700 units, illustrating a deficit of approximately 26,300 units.

Office market

Currently, there is a limited supply of office space in Abu Dhabi, particularly of international quality, professionally managed, Grade A office space. As a result, the office markets are operating at maximum occupancy rates and rents are high in relation to the quality of space offered and compared to other regional markets.

Tenants have adjusted to these tight conditions by functioning out of villas or other buildings originally designed for residential purposes, operating at unsustainably high space densities, or maintaining a relatively minor presence in Abu Dhabi, while servicing the market from other cities in the region.

The supply situation is poised to change significantly over the next four years, with significant levels of new supply coming on line. As more office space becomes available, average rents are expected to decline, which in turn will help stimulate market absorption rates in a flight to quality, as tenants relocate to occupy higher quality product at a similar cost. As a result, poorer quality space will face severe vacancies and rental declines, with residential conversions reverting to residential usage.

Retail market

The retail market has many of the same characteristics as the office market in Abu Dhabi. These include a current shortage of international quality projects and an undersupply of retail floor space relative to potential demand. As with the office market, the current lack of retail space has resulted in a loss of spending for Abu Dhabi, with some residents opting to travel to other major regional and global cities.

Increased spending by both residents and tourists, combined with the existing below average per capita provision of retail space, will provide a favourable outlook for the Abu Dhabi retail sector over the next four years.

The report said the transformation of Abu Dhabi into an international tourist destination, with the continuous support and promotion by the government, will act as a major driver of additional retail demand, with tourist spending expected to increase as a percentage of total retail spending over the next few years. "The completion of more than one million sqm of additional retail space in Abu Dhabi over the next few years will address the current under supply the market is experiencing. Although the demand is also expected to register an increase, the market is perceived to move into a surplus position in 2012," it said.

Hotel market

Abu Dhabi has embarked on an active campaign to improve its tourism and leisure offering. Abu Dhabi's various government entities have been investing in large-scale master-planned projects such as Saadiyat Island and Yas Island that include major visitor attractions and event venues along with luxurious hospitality developments introducing international hotel brands.

Capital city district to serve as second downtown

On completion, the 4,900 hectare Capital City District will serve as a second downtown for Abu Dhabi proper and will be home to 370,000 residents.

It will be situated between the Abu Dhabi International Airport and Mohammed bin Zayed City, and is designed to blend national government institutions, city life and Emirati culture through a fusion of distinct districts connected by grand boulevards, walkable shaded streets, open spaces and a public transit system.

At the heart of the Capital City District will be a Federal Precinct, which will serve as the national seat of the UAE government. Federal ministries and government offices will line the Capital Boulevard, which will provide a connection to the Presidential Palace and the Grand Mosque on Abu Dhabi Island.

Seven grand boulevards, symbolising the seven emirates, will connect the city centre with the surrounding districts. The boulevards will have a functional aspect, as will effectively move traffic in and out of the city while being lined with national institutions, landmark buildings, public art and monuments. Dedicated bike routes will be integrated into the streetscape.

It will have two main street types: retail streets dotted with shops, cafes, restaurants and plazas, and the quieter neighbourhood streets.

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