Property prices in Abu Dhabi are set to soar, driven by dramatically increasing land costs, which have already risen by 75 per cent this year, says a report by HSBC Middle East. The bank said in a report on the capital’s real estate sector – entitled Time To Double Up – that Abu Dhabi’s land prices jumped from an average of Dh2,000 per square metre in 2006 to between Dh3,500 and Dh5,000 per square metre this year.
This has led to a stronger-than-expected growth in property rents and prices. According to the report, residential prices increased by 18 per cent while rental rates jumped 22 per cent. The office market was even more lucrative, with prices and rents increasing by 35 and 43 per cent, respectively.
“However, most notably, land prices have almost doubled [at least 75 per cent growth],” states the HSBC report. According to the bank, Aldar and Sorouh – currently the two largest real estate developers in the emirate – are likely to revalue their land bank upwards this year. “While all of our numbers indicate a potential revaluation of 28 per cent, we think that the companies will probably spread land appreciation over time,” says the report.
This implies that investors in the Abu Dhabi market may witness a rapid and substantial increase in the prices of units as, on the one hand, construction costs continue to spiral upwards and, on the other, developers delay deliveries further in the hope of yet more price escalations.
“Between now and [end of] 2008, much more off-plan property will become available in Abu Dhabi,” says Abu Baker Seddiq Al Khouri, managing director of Sorouh, which has a portfolio worth more than Dh45 billion. Its real estate market has been experiencing unprecedented growth over the past two years and is poised for another decade of growth yet. I have heard industry experts insist that residential property prices are likely to come down in the next three years in neighbouring emirates. However, they predict Abu Dhabi property will continue to gain from surging rents and capital growth. I agree with this.”
The HSBC report suggests that current real estate prices and land costs imply a developer margin of 10 per cent, which development companies can increase by dragging out deliveries in anticipation of further market appreciation, which in turn will add to supply delays. It says: “We believe these companies want to control supply by phasing deliveries while progressively increasing prices, hence creating expectations of a continuous, but healthy, price appreciation.”
The right image
Abu Dhabi is attracting vast numbers of people to the UAE through its progressive aim of attaining complete sustainability in an already thriving economy. In 2005, Abu Dhabi embarked on a massive investment programme to promote the emirate as a tourist destination, which involved the formation of the national airline Etihad and also a tourism development body.
Al Khouri says: “Abu Dhabi has performed very well in a short period of time and we’ve benefited from this. Abu Dhabi has only recently started its diversification and privatisation programmes. For a long time, it was viewed as a business rather than leisure destination. However, it is now on track to become a tourism destination to complement Dubai. Highlights include its tie-up with the Louvre from Paris and the Guggenheim from New York, and its first Formula One Grand Prix, which is to be held soon, also provided good PR for the emirate.”
Ronald Barrott, CEO of Abu Dhabi’s largest developer Aldar Properties, adds: “Aldar is a rapidly expanding organisation in a greatly changing city and we have cemented our place at the forefront of this wave of change.”
Since 2004, Aldar, Sorouh and other developers including the Tourism Development and Investment Corporation (TDIC) have launched a plethora of real estate and infrastructure development projects in the emirate, including the Dh100 billion Saadiyat Island Development, the Dh55 billion Mina Zayed Development, and the Dh54 billion Al Raha Beach Development.
With construction activity gaining momentum in the past few years, the face of the emirate is set for a major transformation in the coming years. According to Abu Dhabi Chamber of Commerce and Industry (ADCCI), GDP for the emirate will reach $159 billion (Dh584 bn) by 2010 with the share of non-oil activities rising from $44 billion (Dh161 bn) to $72 billion (Dh264 bn).
“Abu Dhabi’s urban planning approach will see it lay the overall infrastructure before it commences civil development works,” says Al Khouri. “This approach is aimed to further support the developers. The government of Abu Dhabi intends to invest more than $175 billion (Dh643 bn) in tourism, energy and infrastructure by 2012.”
Al Khouri believes that Abu Dhabi has a “late-mover” advantage in terms of its real estate sector, by which it can learn from Dubai’s development and avoid the infrastructure shortage its neighbour has suffered.
Earlier this year, a study of the UAE’s real estate sector by Shuaa Capital and Colliers International highlighted the extremely high level of occupancy in Abu Dhabi, with a projected supply of 1,100 units by the end of this year compared to a demand for 21,900 units. The shortfall is reckoned to continue in 2008 when the supply is projected at 24,000 with just 11,000 units scheduled for delivery. It is only by 2009, with 150,000 new units, that supply could catch up with demand.
The land of opportunity
“Look at the number of new organisations in the process of moving to the capital,” points out Al Khouri. “The [Shuaa-Colliers] report has predicted extremely high demand for both residential and commercial property in Abu Dhabi in 2007 and forecasts that it will be unable to meet demand during the years 2008 and 2009. I am confident that Abu Dhabi will be able to offer value-creation opportunities for some time yet.”
For real estate investors, therefore, many believe Abu Dhabi offers one of the most favourable outlooks in the region and beyond. Rents are expected to stay on a rising curve, while capital values will be underpinned by high and rising demand.
HSBC reiterates that despite witnessing huge growth rates, the Abu Dhabi market is still in its infancy, with an almost non-existent secondary market.
The report states: “We believe Abu Dhabi will consolidate credibility through further deregulation. Although sales activity has picked up significantly in the second half of 2007, it is still being held back by market rigidities and lagging regulation.” The bank blames “restrictive regulation and market rigidities” for the slowness in the emirate’s residential sales.
As an example, the report highlights the fact that foreign property owners in Abu Dhabi are still not eligible for residency visas – in contrast to the situation in Dubai. Additionally, banks have been slow so far to react to the real estate boom in the emirate and at present are not actively creating a home financing market.
Also, spreads are extremely wide with average mortgage rates standing at between seven and eight per cent. As shown in the table, in 2006, Abu Dhabi accounted for only three per cent of total mortgage lending in the UAE despite accounting for a 34 per cent share of bank deposits.
HSBC believes Abu Dhabi’s share of the UAE mortgage market will grow steadily, reaching a very healthy 40 per cent within five years. At the same time, confidence in the emirate’s property boom is growing as developments are gaining momentum and the first of the mega projects are starting to take shape.