Abu Dhabi rental correction to continue into 2018

But higher investment spending to boost demand in medium term, says Cluttons

Rents continued on a downward trajectory for apartments, villas and townhouses in Abu Dhabi. Ravindranath K / The National

Abu Dhabi residential and office rents will continue to slide into 2018 as prolonged economic headwinds take their toll, according to real estate consultancy Cluttons.  Higher investment levels in the capital, though, are likely to boost the market in the medium term.

“Given the range of complex factors hindering the market’s ability to turn around, rents are now expected to end the year 10-12 per cent lower than the end of 2016,” said Faisal Durrani, head of research at Cluttons. The consultancy had previously forecast an 8-10 per cent fall in rents for 2017.

“2018 is likely to see rents slipping further in the region of 5-7 per cent unless there is a notable rebounding in economic growth.”

Residential rents and sale prices in the capital have been impacted by reductions in housing allowances, the removal of various subsidies, and the impending introduction of value-added tax in January, Cluttons said in its Winter 2017/18 Abu Dhabi Property Market Outlook.

Consequently, demand has been driven by households relocating to make savings and take advantage of incentives being offered by landlords, including multiple rent cheques and a willingness to pay agency fees.

Residential rents declined by 11.8 per cent year-on-year during the third quarter, Cluttons data showed. However the quarter-on-quarter rate of decline slowed to 1.8 per cent from 3.6 per cent in the second quarter.

Residential sales prices dropped 4.1 per cent year-on-year in the third quarter, and are down by 0.4 per cent compared with the second quarter of the year.

“Weaker economic growth has taken a toll on the hydrocarbon sector in particular, which has been a key driver of demand in the residential and commercial markets in the emirate historically,” said Mr Durrani.

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However, he said “some positives” had emerged that may help to boost economic growth and lift the real estate market, most notably, state oil giant Abu Dhabi National Oil Company (Adnoc)’s decision to invest US$109 billion in its gas downstream growth strategy over the next five years.

“This will likely filter through to the UAE capital’s real estate market in the form of fresh demand for residential and commercial property."

Abu Dhabi's economy is forecast to grow 3.2 per cent in 2018, compared with 0.3 per cent in 2017, according to the IMF, thanks to a rise in oil revenues and higher infrastructure spending.

“However, in the short term we anticipate that both tenants and buyers will continue to err on the side of caution,” Mr Durrani said.

Office rents in the capital are expected to end the year 5-10 per cent lower than at the end of 2016, Cluttons forecast. Even top-tier Grade A buildings saw rents weaken in the third quarter. The Aldar HQ building saw rents fall 2.8 per cent during the quarter, with rents in International Tower declining by ,3 per cent.

But the prime office sector, which has declined by just 5.4 per cent in the past five years, is still performing better than the secondary market, in which rents plummeted 39.3 per cent over the same period.

Overall, office rents are expected to remain under pressure across Abu Dhabi during 2018, Mr Durrani said.

“The key to unlocking the current stalemate will be a turnaround in oil price growth and perhaps an easing of the cost containment measures introduced by the government in the wake of the oil price collapse in 2014,” he said.