Abu Dhabi developers now realise that they are not immune to the global credit crisis, a topic that dominated the real estate agenda at the Abu Dhabi conference.
“Projects we have announced will be completed; some that are not announced will be slowed down,” Lee Tabler, CEO of the Tourism Development & Investment Company (TDIC), told delegates.
“This is due to limitations in staff and the fact that debt markets are now more limited than in the past.”
TDIC’s decision to reprioritise is a timely reminder that although Abu Dhabi may have vast wealth from its oil reserves, its real estate market still depends on the same funding principles as projects in Dubai – namely, access to debt and buoyant sales volumes fuelled by cheap mortgages and excess liquidity.
Banks in Abu Dhabi, in common with financial institutions all over the world, have been hit by the global credit crisis, and developers are finding it difficult to raise debt. Similarly, for potential property buyers, it has become more difficult to secure mortgages. On the positive side, liquidity remains in the market, although it has been diminished by sharp falls in the region’s stock markets.
The credit crunch has already affected property prices in Abu Dhabi, where anecdotal evidence suggests properties under construction are being offered at 10 per cent below their peak value. Other property owners report that it is now difficult to sell properties at a premium to their purchase price.
“The market where everything sells is over,” Adel Ahmed al-Zarouni, managing director of Burooj Properties, told the conference.
The worst-affected properties are off-plan developments that are still under construction. The problem for Abu Dhabi is that its freehold property market consists almost exclusively of off-plan developments such as Reem island, Saadiyat island, Al-Raha Beach and Yas island.
“Since the credit crunch hit, selling is driving the market down, or at least making it stand still,” said Al-Zarooni.
However, developers say that pent-up demand, resulting from a moratorium on projects in the late 1990s, will help the market weather the storm.
It is notoriously difficult for new expatriate workers in Abu Dhabi to secure housing. Estimates range from a shortfall in supply of 28,000 to 70,000 units in Abu Dhabi, which will not be met until 2011.
Since Abu Dhabi’s real estate boom began in 2005, it has been a sellers’ market, as severe capacity constraints have meant that contractors and suppliers have been able to call the shots. To secure resources, Abu Dhabi-based developers have pioneered new methods of procurement to ensure their projects are delivered.
Local developer Aldar Properties has formed joint ventures with the UK’s Laing O’Rourke and Belgium’s Besix for Al-Raha Beach and elements of Yas island, and TDIC has formed a similar joint venture with Australia’s Gulf Leighton for its projects across the emirate.
For its Tameer Towers project, Dubai-based Tameer Holding has also formed an alliance with the local Al-Habtoor Engineering Enterprises, South Africa’s Murray & Roberts Contractors (Middle East) and Saudi Arabia-based Al-Rajhi Contracting.
But partnering, joint ventures and alliances now appear to be a thing of the past. Talks between TDIC and local engineering firm Alec to form a new joint venture have stopped, and projects that were being negotiated are now being tendered.
Local firm Arabtec Construction was the front-runner for the contract to build a resort on the north beach of Saadiyat island, but TDIC has now decided to tender the project as it expects contractors to have more spare capacity as the slowdown in activity takes hold.
Clients hope this will allow them to build more quickly. “The shortage of construction projects means we can now build faster,” said Salah al-Shamsi, chairman of the Abu Dhabi Chamber of Commerce & Industry (ADCCI).
Falling commodity prices are another factor in clients rethinking their procurement techniques. Since July, rebar (steel reinforcement bar) prices have fallen below $550 from a peak of about $1,600, and as activity slows in Abu Dhabi and Dubai, cement and concrete prices are expected to follow.
“You will see a decline in the cost of building materials; steel is down and that was pushing up costs; cement we don’t know yet, it depends on supply, but we might see a decrease,” said Fatima al-Jaber, chief operating officer of Al-Jaber Group.
For clients, this means that awarding contracts is much cheaper than it was before the summer. “The slowdown benefits us [as clients] as global demand for materials like steel allows us to speed up,” said Denis O’Connor, managing director of Abu Dhabi Commercial Properties.
To offset the declining real estate market, contractors hope they willbe able to find work on infrastructure and energy projects to supplement building projects.
“There will be infrastructure, oil and gas and certain real estate developments that will go on,” said Al-Jaber.
Developers are also keen to move ahead with infrastructure. “We need to make sure that infrastructure moves ahead in the hard times because it will produce a huge multiplier effect in the future,” said Gurjit Singh, chief property development officer at Sorouh Real Estate.
The combination of already announced real estate projects, infrastructure and oil and gas schemes should mean that although business in Abu Dhabi will be more difficult in 2009, it will still be more buoyant than its neighbours, and markets further afield.
Blair Hagkull, managing director, Jones Lang LaSalle Mena
Fatima al-Jaber, chief operating officer, Al-Jaber Group
Denis O’Connor, managing director, Abu Dhabi Commercial Properties
Gurjit Singh, chief property development officer, Sorouh Real Estate
Lee Tabler, CEO, Tourism Development & Investment Company
Adel Ahmed al-Zarouni, managing director, Burooj Properties