Is Abu Dhabi heading for property crash?
As government spending continues to decline, Abu Dhabi’s real estate market is slowly falling into the hands of a slowdown, a new report says.
Real estate consultancy JLL in its latest Abu Dhabi Real Estate Overview, released on Monday (July 25), reported that after 18 months of relatively stable conditions with the lack of demand growth being matched by minimal growth in supply, the market is now starting to show initial signs of declining performance.
“During Q2 2016, we have started to see the first signs of a downward trend as the decline in the oil sector, reduced government spending and weak sentiment continues. While supply remains stable, the reduction in demand has now started to cause vacancy rates to nudge upwards, indicating we have now reached a tipping point with rents declining for the first time in 3 years,” says David Dudley, International Director and Head of Abu Dhabi Office at JLL MENA.
Dudley argues that demand has been weak since the decline in oil prices at the end of 2014 – impacting the oil sector, government spending and general sentiment. “However, while demand took a big hit, annual supply completions have been at an all-time low, leading to relatively stable market conditions over the last 18 months – characterised by low vacancy rates in high quality stock and prime rents generally remaining stable across each asset class.”
JLL states that the oil sector comprises half of Abu Dhabi’s GDP therefore, the reduced oil price and the announcement by ADNOC that it plans to cut 5,000 jobs by year-end, has had a major impact on GDP and employment growth. The reduced oil price has also resulted in a continued pause in government spending on economic diversification and infrastructure and job cuts in the government sector, impacting the other half of the economy.
The consultancy also believes that the recent announcements of mergers between National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) and Abu Dhabi’s Mubadala and International Petroleum Investment Company (IPIC) may lead to further rationalisation.
JLL says that it expects the impact of these job cuts and reduced incomes to become more pronounced over the summer, as some people look to either leave or downsize. “This will push vacancy rates up further and cause rents to decline at a time-lag but given the numbers we are talking about relative to the overall size of the market, this is expected to be a soft correction rather than a sharp decline.”
Dudley further says: “While we commend the government’s prudent approach to re-prioritising spending in the current period of low oil prices, we hope that the tap is not turned off for too long or Abu Dhabi will lose the momentum it has built and we could enter a more damaging downward spiral. The extent to which a down turn can be mitigated depends on the return of domestic government spending in spite of a reduction in oil revenues.”
However, he says, the good news is that government remains committed to the 2030 Vision and has recently announced its priority projects to 2020. “While we are going through a period of weaker demand, demand growth continues from projects commenced while oil prices were high, new projects are in the pipeline and supply growth remains suppressed. However job cuts and reduced investment is expected to result in further rental decline in the second half of 2016.”