Tensions were high among real estate investors at the start of Abu Dhabi’s Cityscape property exhibition in early May. Local developer Aldar Properties had invited prospective buyers to visit the show to reserve properties at its Al-Raha beach development. As a result, a large queue had formed before the exhibition opened its doors, but trouble began when people desperate to invest began to jump the line.
Tempers were lost and arguments broke out, leading to scenes of chaos. But rather than deter interest, it had the opposite effect. Visitors assessed the scene and concluded that they must be missing out on something and promptly joined the queue of people.
Aldar was not the only company aiming to capitalise on the surging demand demonstrated at the event. Another developer reportedly managed to sell all of the units in an office building it was promoting and quickly began selling space in another tower using the same floor plans as the first. However, the company had not yet secured a plot or commissioned a design for the building.
The scenes were reminiscent of Dubai’s real estate market five years ago when projects like the Palm Jumeirah sold out in hours and property hype was at its peak. “It did remind me of Dubai,” says one Dubai-based contractor. “But I don’t think that is a good thing. I thought they would have learned from their experiences. Most serious companies want to deal with serious, mature clients, not projects backed by speculation.”
The government has been keen to avoid such scenes. Mindful of the consequences of rushing development, in 2007 it launched the Plan Abu Dhabi 2030 urban masterplan and the Urban Planning Council to oversee and regulate the planning process in the emirate. But although new projects are now pursued in a co-ordinated manner, it has not been as successful in controlling the sales process and dealing with speculation.
Nevertheless, it is easy to see why speculation exists. According to recent research by real estate firm Colliers International, the sales price of residential houses and apartments has risen by 53 per cent over the past year, compared with an 18 per cent rise in the previous 12 months.
But the Abu Dhabi real estate market is based on more solid fundamentals than speculation alone. With a strong economic forecast, the eagerness to invest in Abu Dhabi should not be a surprise. The government is planning for a tripling of gross domestic product to $300bn by 2005. But perhaps more importantly, with 95 per cent of the federation’s oil reserves and 92 per cent of its gas, the emirate is oil rich, and as prices reach $130 a barrel, there is excess liquidity in the economy looking for high-return investments.
“Inflation is high and interest rates are low, so investors are looking to higher return investments like real estate,” says Gurjit Singh, chief property development officer of the local Sorouh Real Estate. “The economy is also expanding, jobs are being created for people and those people and their families will need homes, so there is also a certain amount of investor speculation. This is a healthy position for the real estate sector.”
The real estate market also benefits from existing demand in Abu Dhabi. Until 2004, there was little new development in the emirate, as low oil prices forced it to reign in investment and it prepared for the change in political leadership that followed the death of former ruler Sheikh Zayed bin Sultan al-Nahyan. As a result, occupancy rates on Abu Dhabi island reached a record high, and remain high today.
According to the Colliers report: “The impact of a two-year moratorium imposed between 1999 and 2001 is still evident in Abu Dhabi. Current demand for all types of residential property in Abu Dhabi has outstripped available supply, with occupancy levels of approximately 97-98 per cent reported across the city.”
So real estate is the investment of choice for many investors in the emirate. “Generally, Abu Dhabi is seen as a spin-off of what Dubai has been for the past seven years,” says Singh. “Investors look at Abu Dhabi to leverage slightly lower levels of prices in terms of upside. A like-for-like property is still 25-30 per cent lower than in Dubai. We are seeing investment decant from Dubai to Abu Dhabi because there is a greater potential for returns.”
Like Dubai, Abu Dhabi is keen to attract outside investment. The Gulf is now benefiting from its location just a few hours by plane from markets such as India, South Asia, Iran, the former Soviet republics and North Africa. Together, these have a population of up to 3 billion people, and growing middle classes looking for offshore investment opportunities.
European investment is also expected. Investors from countries such as the UK have bought second homes on projects in Dubai, and Abu Dhabi hopes to do the same. “Investment comes from right across the region: the GCC primarily, some subcontinent, and local demand as more jobs are created and company housing allowances are invested in property,” says Singh. “European demand is quite specific and the age profile is normally older people looking for investment. They are generally more prudent, but often look for more expensive properties.”
One area where Abu Dhabi appears to be overtaking its neighbour is in attracting investment from international real estate developers. In Dubai, the government has relied on home-grown developers such as Emaar Properties, Nakheel and Dubai Properties to deliver its megaprojects, and then used this experience to develop projects overseas through sister companies such as Limitless and Sama Dubai.
Abu Dhabi is keen to bring in outside expertise, and over the past year government-backed developers have formed a string of joint ventures with foreign companies to develop projects in the emirate.
Last year, Aldar joined forces with Singapore’s Keppel Corporation to develop land at Al-Raha beach, and this year, the real estate arm of government-controlled Mubadala Development Company has formed joint ventures with The John Buck Company of Chicago to develop Suwwa island between Abu Dhabi island and Reem island, with US-based MGM Mirage Hospitality to build an MGM Grand hotel and entertainment complex in the Mina Zayed area of Abu Dhabi island, and with Singapore’s Capitaland for the Arzanah project next to Zayed Sports City.
Similar deals are expected in the future. US-based Hines is understood to be in discussions with the Tourism Development & Investment Company about investing in its projects.
According to Bambang Sugeng bin Kajairi, managing director of CapitaLand Amanah, Abu Dhabi was a natural choice for the company to invest. “We have been looking at the GCC for over a year now,” says Bin Kajairi. “We had gone to China, Australia and obviously Singapore. We looked where the development was and Abu Dhabi has the fundamentals we look for. It is going to grow, spend on infrastructure and increase the supply of accommodation and other buildings.”
Abu Dhabi, like any foreign market, is an unknown quantity for overseas developers. “As an international player, we have to understand the local market and appreciate that there are different ways to do things,” says Bin Kajairi. “So I would say the main challenge is we have to adapt.”
Despite the advances that Abu Dhabi’s real estate market has made over the past three years, challenges still lie ahead. In the short to medium term, the primary challenge facing developers is delivery. As a nascent market, Abu Dhabi does not have enough contractors, manpower or materials to build all the projects it is planning. Like Dubai, it has experienced dramatic cost escalations throughout almost every link in the supply chain.
“The main challenge is delivering on our promises,” says Singh. “Selling is easy. The essence of a good developer anywhere in the world is the ability to deliver.”
Realising the shortcomings of the construction industry, developers in the capital have been far more open to new ways of securing resources through partnerships, joint ventures and acquisitions. Aldar Properties was the first when it formed a joint venture with the UK’s Laing O’Rourke, and several other joint ventures have since been established. More recently, developers have begun to look at acquiring companies to give them control over much-needed resources. Sorouh Real Estate was the first to move when it recently acquired a 60 per cent stake in the local Pivot Engineering & General Contracting Company, and more developers will consider following suit as the capacity crunch in the construction industry continues.
“The supply of contractors has not gone up by as much as the supply of projects,” says Singh. “The same contractors have more jobs to do, so resources are stretched. For developers, the thing to do is to establish strategic partnerships for the pipeline of projects.”
Although capacity and rising costs are a major issue for Abu Dhabi, the situation is far from unique, and the issue has been managed in other markets around the world. “We have seen rising costs all over, not just in the Middle East,” says Bin Kajairi. “Of course, here it is an issue because of the boom, but it is not something we have not seen before.”
Assuming that all the projects currently under development are delivered, the long-term concern is oversupply. Colliers report found that although an additional 100,000 units are required by 2010 to absorb excess demand, between 2011 and 2013, up to 140,000 additional units are expected to be delivered.
Again, economic fundamentals are the key. If the economy continues to diversify, new jobs will be created and more people will come to the emirate, and they will require housing. The Plan Abu Dhabi 2030 urban masterplan, which was launched last year, predicts the population will grow to 3.1 million in the Abu Dhabi metro-politan area over the next two decades, and some observers even predict a population of 5 million by 2030. If these expectations are met, concerns about oversupply will prove to have been misplaced.