Dubai: Developers of all those residential high-rise projects on Shaikh Zayed Road hurtling towards completion have an eye out for potential tenants in Dubai and Sharjah… and from Abu Dhabi.

The lifeline provided to Dubai’s rental market by those working in the capital yet preferring to live here is still very much there. And the great migration continues.

“People are moving around the emirates, particularly those from Sharjah to Dubai and out of Abu Dhabi to Dubai Marina,” said Jonathan Fothergill at Cluttons Middle East. Apart from Dubai Marina, the JLT cluster is another out to attract white-collar workers from Abu Dhabi.

Given Dubai’s looming residential oversupply, landlords are not going to be very concerned about where their tenants are coming from. As long as they keep coming, they are out to make the best of what they can deal with.

In fact, Abu Dhabi developers may be aiding the cause of their counterparts in Dubai. The projected supply of new stock that was expected to come out during 2010 in the capital did not materialise.

“The slowing down and cancellation of projects have [affected] the timing of new stock additions,” Fothergill added.

Overall supply

According to Chesterton International estimates, the overall supply in Abu Dhabi will be between 3,000 to 4,000 units, which are inclusive of the non-freehold locations in the city.

“This is way below the demand levels which are estimated to be circa 30,000 per annum,” said Simon Gray, the regional head at the firm.

Going forward, the Reem Island development will be central to Abu Dhabi’s residential market playing catch up on supply.

The Marina Square with its 4,500 units will be ready as will some of the other high-rises on the Island. Together, these will add around 10,000 units, according to Chesterton International.

According to Chesterton International, of the original eight elements in Al Raha Beach, only Al Bandar has been handed over so far. Al Zeina has been delayed, but is expected to be ready shortly. So will the Al Khubeira and Al Munenra elements of Khor Al Raha.

“We are unaware of the current position of the remainder of Al Raha Beach although there may be plans to re-strategise this in line with current market conditions,” Gray said.

“The major constraint in the pace of development relate to available finance, as many schemes have slowed as available cashflow dries up. This will indeed constitute a sizeable component of the deliveries in 2011,” he said.

“There is a dearth of project finance available from banks to assist in the construction phase. We have also noted that some delays have been caused by issues relating to connection of services, receipt of completion certificates and municipality approval for handover.”

Costly transition

Meanwhile, rentals in Abu Dhabi city are likely to take another hit this year, confirming the market’s transition to a tenant-driven one. But the fact that not enough supplies are flowing out of the completed pipeline is slowing down such a transition.

“We would expect to see further declines for the residential market in 2011. However this is likely to be tempered by a lack of supply in the market as a whole,” Gray said.

“The market cannot sustain the current rental levels, with many occupiers looking at options further away from the city centre to satisfy their budget.”

Even if rentals are down from the peaks, there are newer costs crimping an Abu Dhabi residents’ budget. For one, there are the fairly high parking charges which have been in effect for some months now. With residents looking to alternatives this has set alarm bells ringing at the older buildings. Their owners have reacted by slashing rentals. The writing on the wall should be clear for Abu Dhabi’s landlords — drop their rents to what’s realistic. Yet there are still the holdouts.

“Most landlords still have 2008-09 expectations in terms of pricing, and in most the property built exceeds market affordability,” said a Better Homes spokesperson, who added the firm has seen an increase in leasing activity in the city in the last quarter.

“Tenants are still looking to upgrade their lifestyles by moving into the newer developments with more facilities at better rental rates. However, the challenge is that we do not have suitable property matches for them with affordable rates.”

The mismatch between demand and expectations looks set to continue for a while.

Abu Dhabi In Abu Dhabi’s commercial space too, there seems to be a disconnect between tenant expectations and what developers are putting out.

“There is a lot of office space with large floor plates. However, current demand is for smaller office spaces as companies restructure and are more hesitant to take larger spaces,” said Simon Gray of Chesterton International. Which is why “commercial office space is as affected as there is more supply than demand,” he added.

“Landlords are reluctant to divide the spaces up as they prefer to cater to single clients on whole floors. We would say that as with most things in 2011, the key has been the budget, with many companies having to reduce their current office space requirement,” he added.

“This has been suppressed to some extent by incoming SMEs to Abu Dhabi which is now seeing an increase. The government at present [is] looking to target SMEs and encourage them to locate in Abu Dhabi. This would be the key cornerstones for diversification of the economy within the city,” Gray said. “There is unlikely to [be] major government moves due to the future plans for the Capital City District which will house all federal and emirate’s government offices. It is unlikely that any of the government departments will move although some may relocate to increase efficiency.”

Arif Usman’s family loves the expansive landscaping, play areas and the community camaraderie in Discovery Gardens. Appalled at having to shell out Dh140,000 for a sub-standard two-bedroom apartment in Mussaffah in Abu Dhabi during the heady days of the property boom, Usman moved to this leafy residential enclave on Dubai’s fringes, willing to risk the daily commute for a reasonably priced, quality abode. He represents thousands of other Abu Dhabi professionals who took haven in Dubai’s cheaper home options.

But with new capacity coming online in Abu Dhabi, a change in attitude is becoming increasingly apparent, which means that Abu Dhabi is regaining acceptance from professionals such as Usman. “With Abu Dhabi creating a lot of jobs, peak hour traffic on the highway is severe now and the commute is rendered risky. I am now looking to relocate to off-island communities in Abu Dhabi such as Khalifa City, Mohammad Bin Zayed City or even Mussaffah which offer new apartments at competitive rentals. Though not comparable with Dubai, Abu Dhabi is catching up with retail facilities and good road networks to the main island. My family will miss the community bonhomie here, but generally speaking, the standard of maintenance has declined in Discovery Gardens,” Arif observes.

Off-island communities

Given the complex relationship between the two real estate markets, stakeholders have been closely observing the secondary market stirrings and tenant enquiries for units in off-island communities such as Al Bandar, Khalifa City, Al Raha Gardens, Mohammad Bin Zayed City and Al Reef. While most Abu Dhabi professionals opt for the commute after being priced out of the capital’s prohibitively expensive rental market, the decision is also linked to construction quality, lifestyle offerings and easy access to schools, hospitals and other amenities in Dubai. With the average rents for one- and two-bedroom apartments in Abu Dhabi still 45 per cent more expensive than Dubai, most feel the commute is a small price to pay.

“The threshold rental differential/premium that most tenants would be prepared to pay for the same standard of housing in Abu Dhabi to avoid the daily commute to Dubai would be no more than 10 to 15 per cent,” explains Paul Maisfield, general manager and head of professional services, Asteco, Abu Dhabi.

While it is widely believed that the quality of apartments at Al Raha Beach and Al Reem Island will equal that of product offerings available in Dubai Marina and Jumeirah Beach Residence (JBR), it will, however, take some time before these developments transform into full-fledged communities.

“The Dubai Marina and JBR are not only popular because of their functional product attributes; they are renowned for being sought-after destinations that offer an excellent dynamic lifestyle. The mix of diverse retail and community facilities that these two projects offer are among the top reasons that attract tenants and buyers to these projects,” suggests Mohanad Alwadiya, managing director, Harbor Real Estate.

Phased completion

Among the new communities that have been delivered, Al Bandar is the most high-end so far, offering marinas, shops, cafes and a restaurant. The opening of Abu Dhabi’s biggest shopping centre, Dalma Mall, in Mussaffah will add to the lure of communities in its catchment area.

“The first phases of these projects are just completing, with a good mix of facilities and connectivity. Naturally, as further phases come onstream, larger parts of the infrastructure will link together, for example the waterways and water taxis of Al Raha Beach. Much the same happened in Dubai Marina which was built on a phased basis. Plus, many are questioning the balance of lifestyle with a gruelling commute thrown in,” contends Andrew Covill, head of investment sales, LLJ Property. The creation of these new residential clusters is also attracting demand and tenant migration from poor quality accommodation in mainland Abu Dhabi. The ‘flight to quality’ is likely to drive up vacancy rates and reduce rents for unrealistically priced units on the island. “City centre residents living in poor quality units are always on the look-out for new property, either on or off the island; most families would like to upgrade into villas or more spacious modern apartments,” Loshini Lawrence, operations manager, Better Homes, Abu Dhabi, points out.

With property off the main island tending to be more spacious in comparison to cramped units in mainland Abu Dhabi, real estate agents expect the number of client enquiries to increase significantly once the precincts get closer to completion. This could even drive landlords on the main island to refurbish old buildings, become more flexible about pricing and payment terms and consider investing in better maintenance and property management solutions.

While the presence of international schools, good nightlife, a variety of restaurants and a cosmopolitan crowd are factors that tilt the scales in Dubai’s favour, it enjoys the advantage of opening its real estate market four years before Abu Dhabi did.

Playing catch up, the Abu Dhabi Government too is investing significant resources to improve infrastructure across numerous sectors, including education, health, transport and tourism. While there are some communities on Abu Dhabi mainland that match the lifestyle convenience of Dubai, such properties are limited and priced two to three times higher than their counterparts in Dubai.

On a more optimistic note, Andrea Menown, leasing manager, LLJ Property, says, “Those commuters who have made the move have seen dramatic changes in Abu Dhabi in terms of social activities. They also see the immediate benefits in the quality of their life by no longer having to make the tiresome and hazardous commute.”

Dubai’s declining rents

While market parity between the two emirates is some way off, the swelling of residential inventory in Dubai and the bottoming out of prices are likely to sustain the influx of Abu Dhabi residents and widen the rental variance. There has also been a noticeable trend of commuters reluctant to move back to Abu Dhabi for fear of compromising lifestyle options.

“Dubai’s current value proposition is its much reduced prices, while Abu Dhabi’s appeal lies in its new developments and financing. This forms a complementary relationship, as those with tight budgets will go to Dubai while those looking for higher quality will stay in Abu Dhabi,” says Masood Al Awar, CEO of Tasweek.

This continued exodus is likely to put sustained pressure on Abu Dhabi landlords. “They must lock tenants into contracts with attractive benefits such as efficient maintenance, multiple rent payments, competitive rates, completed interiors [cupboards in bedrooms, appliances in kitchens, landscaped gardens, and so on],” suggests Lawrence of Better Homes.

Though market observers eschew predicting a rental levelling-off between the two cities, many believe a drop of 15-20 per cent would see a more dramatic uptake for Abu Dhabi units among commuters. “I don’t think the prices in Abu Dhabi will ever decline to the level of prices in Dubai. The property market in Abu Dhabi is benefiting from a favourable demand and supply equation. The new supply that is emerging daily in Abu Dhabi will push prices down as there is room for a slight, but definitely not major, correction in pricing. For commuters to move back to the capital, a few variables must also be realised, including ample supply of quality properties, reasonable prices, enhanced property management and a diverse F&B and specialty retail mix, coupled with quality facilities and amenities,” Alwadiya reckons.

The Tasweek CEO further suggests that the projects being undertaken between Abu Dhabi and Dubai could see some level of price convergence, although this would depend on completion dates. Despite being as different as chalk and cheese in the supply-demand equation, the two emirates are bound together by certain common challenges, viz liquidity constraints, developers’ cash flow concerns, falling rents and falling yields. Another common factor across all asset types within the markets is that both are moving in favour of tenants. While LLJ Property claims to have received an increased number of enquiries from commuters seeking apartment living in Abu Dhabi, other real estate agencies did not record any evidence suggesting a reversal in trends of professionals looking to ditch the Dubai commute.

Every month we invite you to have your property questions answered by an expert. This month Jane Irvine tackles the task.

Q I’ve purchased an apartment on Al Reem Island and am awaiting handover shortly. What should I do to prepare for the handover process?

Ensure that you understand the costs involved so that you can prepare financially – for example, do you have to pay some of the service charges and utilities upfront? Are there any deposits to be paid? How much will it cost to have a property inspected for snags? Are you a landlord planning to use property management services and considering furnishing the apartment for rental?

If you are going to become a landlord and rent the property to a tenant, then contact a professional licensed real estate agency to discuss leasing and property management services and fees. If you are going to move into the property, ensure that you have given the required notice to vacate if you are leaving a current rental property.

When you receive your notice from the developer, ensure your viewing appointment gives you adequate time to thoroughly inspect the property for snags so that any necessary work can be recorded and agreed.

If you are using a mortgage, check with the financial institution whether it is ready to make the final payments to the developer and that all agreements are in place.

Ensure the dates you have been given are for the actual handover and not ‘pre-handover snagging’ (i.e. defect inspection) so that you know when to expect the keys and that both the building owner and the master developer have a coordinated handover process – that is, one approved by both parties.

Q My husband and I have bought a unit in one of Abu Dhabi’s investment zones, but we’re now living overseas. Is it easy to have leasing handled by a property management company? What should we watch out for when choosinga property management provider?

Overseas property investors should have no problem. Choose an experienced, established and reputable company and assess the company as if you were a prospective tenant as well as a landlord. By doing this you will be more comfortable with the kind of tenants that they are likely to attract and introduce to your property.

Ensure that the company is easily contactable and has systems in place to enable you to view the status of your unit online – in this way you will feel less removed from your investment.

Q As a unit owner, am I entitled to do a snagging/inspection report upon handover of a new property? What should I look out for? What are the advantages of using a professional surveyor to do this?

A proper inspection for snags is highly recommended, as this is your chance to ensure that your property is delivered to you as it should be. It will also help to determine that you are making the final payment on a property that matches your sales and purchase agreement, that it is clean and defect-free and that you are receiving the number of square feet that you have paid for.

Most of us would only be able to inspect a property visually, so employing a professional company will ensure that your unit is professionally measured and that plumbing, electrical and mechanical areas are also inspected. A professional snagging company will also provide you with a well-prepared document, including photographs of snags, to submit to your developer, while some will also handle the communication with your developer until snags are resolved.

Q I’m an expatriate based in Abu Dhabi and I’m thinking of purchasing an apartment at Al Raha Beach or Al Reem Island on the resale market in the next 18 months or so. Is it advisable to buy now, or should I wait?

Oh, to have that elusive crystal ball! Professional consensus on the matter is that prices are at a low right now as potential buyers are waiting for the first handovers on these projects to begin, and investors who are having difficulty making the final payment(s) are listing their properties for sale.

A common trend when an off-plan development is completed is that prices begin to stabilise and creep up as occupiers move in and the community becomes more established. This normally corresponds with the initial launch of retail and restaurant facilities in and around the project which adds obvious benefits.

However, we are in very uncommon times so this pattern may take longer. I believe we will also see a ‘move to quality’ from existing residents who will choose to live in new homes, either to take advantage of the benefits of homeownership or simply to remain as tenants but with access to superior facilities and parking. My advice would always be to do the sums and if the investment works for you and saves you rental moneys or gives you a good yield which is higher than your current investments then it is worth looking at today. The potential for capital growth is then the icing on the cake.

QI’ve read that rental yields are likely to be better in Abu Dhabi’s upcoming communities than those in Dubai. Is this true? What about capital appreciation?

It is virtually impossible to compare all the communities across the two emirates. However, the fundamentals of investing in property in Abu Dhabi are still strong – the bottom line is that more quality real estate is needed to provide accommodation to real people in real jobs. Many companies are expanding and/or basing themselves for the first time in the capital and the demand for suitable housing is growing. Put those basic economic foundations together with Abu Dhabi’s commitment to cultural, sporting and retail ‘firsts’ and I believe that in the mid to longer term, strong rental yields and steady capital growth from current prices is likely.

Abu Dhabi real estate was supposed to offer a no-brainer investment opportunity. For after a long building moratorium from the late 1990s, arguably the world’s wealthiest city was short of real estate. And when the emirate decided to follow Dubai and open up sales to foreigners, albeit only on long-term leases and not freehold, then the buying opportunity seemed only too obvious.

Yet the global financial crisis of autumn 2008 that ditched the Dubai real estate boom also brought Abu Dhabi’s belated boom to a close. Prices fell. Sales have been difficult to achieve and impossible for off-plan. Work slowed on many sites and development of others froze.

For the UAE, 2009 proved a tough year with a modest contraction in economic growth after many years of expansion. Only a sharp recovery in oil prices prevented something worse.

Going forward, investors are bound to look again at Abu Dhabi, the capital of the desert oasis of wealth and security in the region that is the modern UAE. A new and comprehensive report from Investment Boutique, a regional real estate advisory and research firm, is therefore welcome in this still under-researched market.

It provides a sober and realistic assessment of the Abu Dhabi property market, and any serious investor should read the full document. Completely absent is the old sales talk and bullish comments about the government’s vision of the future, and indeed that might be considered an error, as this commitment has not gone.

Residential undersupply

To focus on residential prospects first, the report puts market weakness in 2009 largely down to the problems in Dubai and price competition from the neighbouring emirate for long-distance commuter homes.

Some 10,000 to 15,000 commuters a day make the rather perilous high-speed journey from the south side of Dubai to Abu Dhabi. This year, the report says the UAE capital will continue to be plagued by project delays and housing rents and prices still fall. Next year, a recovery in housing demand is expected with rents and prices stabilising. From 2012, rents and prices will rise slightly as a rising supply of property will fail to keep up with renewed demand. Residential property supply is forecast to rise by 17 per cent by 2012 with the 2009 shortfall in supply of 45,000 units falling to a shortfall of 33,000 units by 2012, but still falling short of demand. New laws and regulations expected in 2010 are also expected to make an impact on the market.

As Investment Boutique comments: “In order to attract a healthy international institutional investor base… there will need to be a considerable investment in a framework to provide clarity in terms of property and ownership rights, particularly in strata owned buildings. Further, there will need to be greater comfort over zoning and centralised supply control as well as clear procedures, accountability and enforceability of investor and landlords’ rights, irrespective of the counterparty.”

Commercial outlook

For the office market, a shortage of Grade A property is already being felt and here the market will be stable in 2010 and improve thereafter. Lower grade office space rents and prices will fall until 2012. The new study notes: “New Grade A office spaces such as the Aldar HQ Building in Al Raha Beach continue to command annual rents in excess of Dh325/ft² as there is a genuine shortage of Grade A office space in the city.”

But then: “The majority of the new office supply under construction is in the Corniche and in new master-planned communities with around 70 per cent of it being Grade A space. The new supply is expected to increase office stock by around 50 per cent between now and 2012.” Retail space is a different story. Poor retail revenues this year will meet a rising supply of shop units in 2011 and rents continue to fall in 2012. Remarkably, the additional retail supply from 2010 to 2012 is projected to double the gross leasing area in the city.

The Investment Boutique report also considers hotels as a separate class of commercial property for investors. For both 2010 and 2011, a substantial rise in the supply of hotel rooms is going to result in lower occupancy and room rates in the sector. The forecast has hotel occupancy and revenues stabilising by 2012.

Tight supply, an opportunity?

What lessons can investors draw from this lengthy and careful piece of investment research? The simplest conclusion would appear to be that the Abu Dhabi commercial real estate market is becoming saturated with overbuilding in the office, retail and hotel sectors, but that the residential market shows no sign of shifting out of its chronic undersupply position. Does that make buying residential property in Abu Dhabi a good idea? Well, granted the knock-on impact of the Dubai real estate crash last year – and with prices down 50 per cent and the worst global performance among major markets, ‘crash’ is the only appropriate description – then investors will be bound to look at neighbouring Dubai for a cue.

The immediate omens from Dubai are not good. There is a huge upcoming oversupply in all market segments while the well-documented debt problems of the city are weighing on the local economy. If Dubai property rentals and prices weaken further this year, then that will exert a similar depressing impact on Abu Dhabi as seen in 2009.

On the other hand, observant investors might take any sign of a recovery in Dubai as the signal to invest in Abu Dhabi property, particularly in the residential market where the supply position is still very tight and likely to remain so for a considerable period. The oil price outlook is the other big factor to consider. A double-dip recession in the global economy could pull oil prices back down again. But in the medium-term, oil supply constraints and ongoing investment in new capacity suggest Abu Dhabi is likely to become even richer thanks to rising hydrocarbon revenues.

Owning property in one of the world’s great energy capitals has to be a good investment in the long run and any short-term real estate price weakness is an opportunity.