Reduced government spending irks Abu Dhabi’s real estate markets: study
Abu Dhabi’s real estate markets have generally been stable during the first quarter of 2016 despite the knock-on effects of low oil prices and a reduction in domestic government spending, a new report reveals. However, it has warned that job cuts and reduced investment will slow demand growth.
In its latest Abu Dhabi Real Estate Overview report, leading advisory firm JLL says that signs of caution will remain in the emirate’s markets, with a significant reduction in government domestic spending.
While demand has reduced, supply completions have also reduced compared with previous years, leading to relatively stable market conditions. But the extent to which market stability is maintained depends very much on the return of domestic government spending, in spite of a reduction in oil revenues, the reports states.
“Supply completions are at a ten-year low – due to developers remaining cautious, tightened liquidity and more extensive regulation – leading to smaller-scale releases and developments being phased over time,” says David Dudley, International Director and Head of the Abu Dhabi office of JLL MENA.
During the first three months of this year, only 719 units were delivered in Abu Dhabi, bringing the total residential stock to nearly 246,000 units.
However, the report says, roughly 4,000 units are expected to enter the market by the end of 2016, mainly within Danet Abu Dhabi, Reem Island and Saadiyat Island.
“For the residential rental market, while demand growth has reduced, this is offset by a major reduction in annual supply completions, leading to relatively limited vacancy in high-quality schemes. Annual supply completions historically averaged 10,000 units per annum – however, current supply completions are at a fraction of that,“ states Dudley.
Prime rents have remained stable during the quarter – averaging AED163,000 annually for two-bedroom apartments within investment areas – due to relatively low vacancy in quality schemes.
Sales prices have also remained stable, but JLL warned that the reduction in transaction volumes may put further pressure on prices this year.
The advisory firm expects residential rents to remain relatively stable in some sub-sectors, with a modest decline in others. Prime rents are less likely to witness a dramatic fall given the relatively tight vacancy rates in quality schemes and limited supply completions. However, it cautions that if the current pause in government spending remains for a while longer, one could see more significant downward movement of rents.
Meanwhile, demand for office space has reduced due to the decline in oil prices directly impacting the oil-related sector and indirectly impacting other sectors due to a slowdown in government spending. Large-scale requirements continue to be driven by the government sector and state-owned enterprises, with the bulk of private sector demand focused on smaller office suites.
“The office market has been the most affected by the decline in oil prices and government spending. There are signs of oil companies and government entities reducing headcounts and office space requirements. However, this is mitigated by minimal increases to new speculative supply – the majority of new office buildings are either pre-committed to end users or are in secondary locations,” Dudley adds.