Tenants Become Investors As Abu Dhabi Engineers Property Rebound

For years, Abu Dhabi’s real estate market has paled next to its more dynamic, glamorous rival in neighbouring Dubai. But that may be changing as Abu Dhabi engineers a market recovery that could attract billions of dollars of fresh foreign investment.

Real estate prices in Dubai jumped over 20 percent last year, analysts estimate, as the emirate rebounded from a crash in 2008-2010 which slashed prices by more than 50 per cent from their peaks.

Equally dramatic, though less well publicised, was last year’s rebound in Abu Dhabi’s property market, which suffered similar damage during the global financial crisis.

Prime residential sale prices in Abu Dhabi jumped 25 per cent and rentals climbed 17 per cent in 2013, real estate advisory firm Jones Lang LaSalle estimated. Real estate services firm Asteco said apartment sales prices rose 29 per cent in the fourth quarter of last year over the same period of 2012.

Much of Dubai’s recovery has been due to an influx of foreign money as the emirate’s trade and tourism industries boom. By contrast, Abu Dhabi’s rebound appears to have been triggered by clever government intervention in the market.

By altering the dynamics of its property market, the emirate’s government may succeed in making Abu Dhabi real estate more competitive with Dubai and lure some of the money pouring into the United Arab Emirates from the Gulf, India, China and elsewhere.

“A cross section of investors are focused on Abu Dhabi – people from Dubai with cash are coming here because yields are stronger,” Gurjit Singh, chief development officer at Aldar Properties, Abu Dhabi’s largest real estate developer, said last week.

POPULATION

Abu Dhabi and Dubai have similar populations of just over two million, but Dubai has traditionally had a much more active and open real estate market.

This is partly because Abu Dhabi developers have focused on villas for rich locals, limiting supply of high-end apartments favoured by foreign investors. The shortage may explain why, according to Jones Lang LaSalle, average apartment prices are Dhs1,190 ($325) per square foot in Abu Dhabi, only marginally below Dhs1,220 in Dubai.

Regulation and bureaucratic red tape have also put off some investors in Abu Dhabi, as has the emirate’s conservative cultural environment compared to freewheeling Dubai.

While there are no comprehensive, reliable figures for foreign investment in the UAE’s property sector, real estate firms and bankers estimate billions of dollars have poured into Dubai over the past decade, while Abu Dhabi may have attracted less than half its neighbour’s total.

But a series of steps taken by Abu Dhabi authorities over the past 18 months appear to be changing the picture. Firstly, the government gave Abu Dhabi public sector employees living outside its borders until September 2013 to relocate within the emirate or face losing their housing allowances.

This took aim at thousands of people living in Dubai and commuting to work in Abu Dhabi. Although concrete figures for how many families moved in response to the policy are not available, property agents say there was a surge in demand for Abu Dhabi housing, driving rents up; some people are still in the process of relocating, government officials say.

Last November, Abu Dhabi scrapped a five per cent cap on annual rent increases. This made investment in property more attractive; since then, some landlords have hiked rents by as much as 50 per cent.

“When rents go up, you find tenants change to investors and that is happening in Abu Dhabi,” said Masood al Awar, chief executive of Tasweek, an Abu Dhabi-based property developer, adding that enquires from investors in zones of Abu Dhabi where foreigners are allowed to buy property were increasing.

Last month, Abu Dhabi Municipality announced that residential units in those zones would be registered under Abu Dhabi’s freehold law, with property ownership deeds issued to investors.

Officials have still not explained exactly how the registration system will work and it appears that Abu Dhabi’s definition of “freehold” is narrower than the comprehensive, permanent ownership meant by the term elsewhere in the world.

However, the announcement was viewed as an effort by the emirate to make its property market more welcoming to foreign investors. Previously, most investment in Abu Dhabi has involved legally less definitive sales-purchase agreements rather than title deeds, experts said.

In the last few years, Aldar and some other real estate developers operating in Abu Dhabi, such as Tamouh and Manazel, have announced more of the kind of high-end apartment projects which could appeal to foreign investors, suggesting they are alert to this source of demand.

BUBBLE

Abu Dhabi must still meet several conditions to become a top destination for international property investment, analysts say. One is for the emirate to show that its real estate developers can manage supply and demand to avoid a repeat of the kind of imbalances which contributed to the crash several years ago.

Supply began to rise rapidly last quarter; around 10,000 housing units were delivered last year and twice that number will be delivered in 2014, according to estimates by property consultants Cluttons. The total housing stock in locations monitored by Jones Lang LaSalle is around 218,000 units.

To absorb the new supply, Abu Dhabi will need to keep expanding its population. Its huge oil sector creates wealth but does not lure many of the foreign professionals who can be expected to buy homes in the emirate; so it will need to create more private sector jobs in areas such as banking and tourism.

“The next development boom will be led by construction. If a glut of supply comes, we need to see a big change in demand. After that what we need is a long-term job generation,” said David Dudley, regional director for Jones Lang LaSalle.

Abu Dhabi is in a strong growth phase, with the economy officially forecast to grow 6.7 per cent this year after 7.4 per cent in 2013, so for now, job creation may not be a problem.

But more steps to clarify and flesh out the regulatory environment will also be needed, lawyers and property developers said.

“We need additional decrees to clarify the law” on freehold registration, said Fouad Barbar, partner at Bin Shabib & Associates & Legal Consultants.

“Call it leasehold or freehold, what is needed is a registration process with a registrar, a strata law and a mortgage law. Having these will boost the market.”

Government officials and executives at real estate companies say authorities plan further steps to oversee the rental market, to prevent the recent lifting of rent caps from causing excessive volatitily that could drive away tenants.

Abu Dhabi Municipality declined to comment, but one such initiative is the imminent launch of a residential property rental index that would create zones for rent levels in the emirate, local daily Al Itihad reported.

“It is early days but this was expected to follow after the rent cap removal. It will protect landlords and tenants and ensure uniformity in rents,” said William Neill, head of Cluttons Abu Dhabi.

“As market regulations improve, Abu Dhabi will see more foreign investment in the residential property market.”