The past 12 months have seen average commercial and residential property prices steadily decline in Abu Dhabi and Dubai. Prices for both office and residential space are less than half those seen in the third quarter of 2008. For owners, the positive news is that the rate of decrease has slowed with only minor decreases between quarters in 2011, compared with drops of up to 20 per cent in 2009.

Rents in prime schemes are expected to remain robust. Secondary office rates are set to fall at a much faster rate

Martin Cooper, DTZ

Last year was a more challenging year for the Abu Dhabi real estate market than it was for Dubai. Government spending that had bolstered the UAE capital through the tough times in 2009-10 began to dry up in 2011. Figures from regional projects tracker MEED Projects show that just $8.6bn of construction and infrastructure contracts were awarded in Abu Dhabi in 2011, compared with $15.8bn in 2010.

Delayed reaction in Abu Dhabi property market

“There was a delayed reaction in Abu Dhabi, in terms of the slowdown in Dubai,” says Martin Cooper, UAE-based director and head of consulting Middle East for international property consultant DTZ. “This was partly sentiment-based, the government kept spending beyond Dubai’s correction and that held up the market quite well. But the story in 2011 is that things did slow in Abu Dhabi on the back of a slowdown in government spending.”

The changed outlook in the emirate has already resulted in a wave of job losses in Abu Dhabi, easing the pressure on demand for real estate.

At the same time, new stock is entering the market in the UAE capital, putting further downward pressure on prices, but as usual, average price assessments do not tell the whole story. Abu Dhabi’s office sector continues to be dominated by lower-grade stock, including villas and other non-commercial facilities, and it is here that price drops are steepest.

I can see additional stock coming to the market over the next year … demand for [it] should also appear

Tom Bunker, Better Homes

Research by property consultant Cluttons shows that the most severe falls in rental rates have been for secondary market office stock, where common complaints include poor quality finishes, limited natural light, a lack of IT services and restricted car parking. Inferior-quality office property has been unable to compete with Grade A space and annual rents have dropped below AED1,000 a square metre.

Prices and occupancy levels for scarce Grade A space are holding up well in Abu Dhabi at AED1,700-2,000 a sq m a year and new projects are witnessing strong demand. “There have been one or two success stories, such as Sowwah Square by Mubadala,” says Cooper. “This is some of the first truly international Grade A office space to come to market in Abu Dhabi, along with the Aldar headquarters building.”

Sowwah Square houses the new Abu Dhabi Securities Exchange along with four major office towers, two of which are complete, with the remainder to be completed in 2012 and 2013. Tenants already signed up include several international firms such as Booz & Company and Latham & Watson. Annual rents are about AED1,700-1,800 a sq m excluding service charges. “Rents in prime schemes like this are expected to remain robust, softening slightly. Secondary office rates are set to fall at a much faster rate,” says Cooper.

Part of the reason for the softening in secondary-rate properties is the government’s push to get businesses into commercial buildings and out of the villas that have traditionally been used. This will be further encouraged by the new Tawtheeq system, which came into force in mid-2011. The system is a registration process for short-term tenancies to regulate the rental market.

Landlords must register their property and their agreements with Tawtheeq, which will verify the data submitted for the property against the details recorded in the Land Register. If the permitted use of a building in the Land Register is residential, the landlord cannot register the property as a commercial building.

Property market regulation

This is not the only reason for implementing the system. Most property consultants would agree regulation in the market, which will also ensure landlords adhere to the state rent caps, is much needed and has arrived just when new residential properties are coming online from schemes such as Al-Raha Beach and Al-Reem Island.

The new stock is expected to see interest from commuters in Dubai looking to relocate to Abu Dhabi. Yet, the overall consensus is that pressure on residential prices will continue in 2012 as more new properties are completed in advance of demand. Cooper says DTZ expects relatively low transaction volumes in 2012 with demand continuing to soften.

Another trend influencing prices in both Abu Dhabi and Dubai is that of developer preference. Many property consultants report that tenants and prospective investors are increasingly selective when it comes to which developments they chose. “It very much matters, especially if you are buying or renting residential products. Varying degrees of build quality make some developers much more highly regarded than others. If you look at Dubai Marina, you get people asking for Emaar and other specific schemes, which are considered better than some of the other towers on offer,” says Cooper.

‘Better’ can also include how well facilities are managed following completion. Online forums are full of tenants complaining about a lack of basic facilities for buildings, particularly in Dubai, where annual rents have been paid in advance including service charges of anywhere between 20 and 40 per cent. This gives rise to another area where rental prices in Dubai and Abu Dhabi have held.

“In the more successful better-managed schemes, rents have not softened much,” says Cooper. “Although the overall market is quite subdued, pockets of quality in the right location with the right infrastructure are near full occupancy.”

Critical infrastructure

This is characterised by Dubai’s office market where data from Cluttons shows that annual rental prices have held throughout 2011 at AED2.700 a sq m in DIFC and AED1,950 a sq m in Emaar Square, both of which are strategically located in the central business area and are high quality. Areas in less popular areas, such as the new business districts of Dubai Silicon Oasis and Business Bay are finding that rents are continuing to fall.

On the residential side, having the right infrastructure has proven critical in today’s competitive market, where only the best properties are holding their prices and tenants. Real estate firms say key demands for residential property include proximity to major road networks and shops, and community infrastructure such as restaurants and cinemas. On the commercial side, location appears to be most important, with quality of space close behind.

Overall, property firms say the rates of decline in Dubai have slowed and in some cases have reached a floor. “More than three years since the property market crisis, people are now believing that for some stock, prices are now as low as they are going to get and in many cases, prices on good stock are now beginning to rise,” says Tom Bunker, investment sales consultant at UAE real estate company Better Homes.

Good stock includes high-end luxury properties and, according to Better Homes, prices in this bracket, for sprawling villas for example, were back to 2008 levels last year. Bunker says generally demand for property in Dubai’s residential market was higher in 2011 than in 2010.

Mixed outlook for property market

This trend for price recovery will be tested in 2012-13, as more property reaches completion in both Abu Dhabi and Dubai. Developers are phasing their properties to limit the impact, but new stock is arriving and how this will be absorbed remains to be seen.

“I can see additional stock coming to the market over the next year or so in Jumeirah Park, Downtown and Dubai Marina and I suspect as these projects get nearer to completion, demand for this stock should also appear,” says Bunker.

Just as the picture across the relative real estate markets is mixed, so are forecasts for 2012. The most bullish companies predict rising activity levels and increasing demand as a result of political instability in neighbouring countries. Others, concerned about the implications of Europe’s continuing financial difficulties and the UAE’s increasing stock, are predicting that the downward trend will prevail.

What is certain is that the better-quality, well-managed properties will maintain their competitive edge and as the market matures, the gulf between the best and the rest will continue to widen.