Abu Dhabi office space undersupplied

Abu Dhabi office space is "significantly under supplied", according to a report by HSBC's Middle East Equity Research team.

Only 1% of Abu Dhabi office space is currently vacant despite an increase of 220% in total retail space in the emirate since 2000.

The UAE government is expected to change the property laws in the capital city in 2008 opening up the market for foreigners to purchase freehold properties.

The research found that Abu Dhabi housing prices, when compared to per capita GDP, are among the lowest in the world and that rental yields in the office property market in Abu Dhabi were among the world's highest at 8%, however it also has one of the world's tightest office markets, with only 1% of office space lying vacant.

In the same report, the bank focused on Sorouh Real Estate, Abu Dhabi's second biggest real estate company after Aldar, and found that its current share price of AED 4.44 was significantly undervalued and that it should be 35% higher at a price of AED 5.90. It rated the company as "overweight", meaning that the proportion of Sorouh stock held by investors within their portfolios should be much higher than it currently stands.

In a statement it said that the reasons for the positive view were the "strength and potential" of the Abu Dhabi real estate market, and the "relatively low-risk" in Sorouh's business model.

The report explicitly compared Sorouh to Aldar, and pointed out to investors that Sorouh's business model is fundamentally different from Aldar's based on plot sales, as opposed to development and investment, and therefore provides investors with a lower risk profile.

"It is not a matter of which strategy is right or wrong," said Walid Khalfallah, head of equity research at HSBC Middle East, "but where the company chooses to lie on the risk curve. Aldar provides greater risk, but also greater potential upside in the share price.

"We are recommending that investors are overweight in Sorouh, and suggest a potential 35% potential upside in the share price. This is in spite of the fact that Sorouh has out-performed Aldar by 33% this year, suggesting that the market is still hesitant about the outlook for the Abu Dhabi real estate market, rewarding the lower-risk land sales model. Even taking this into account, we calculate that the stock is undervalued," he added.

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