While there has been evidence of rents in the richest emirate being far higher than Dubai, experts say the difference is narrowing
"I was not able to take it anymore. Spending three hours every day travelling to my office from Dubai to Abu Dhabi and back is too much,” says Egyptian Ibrahim S, a 38-year-old office manager.
After living in Dubai’s Discovery Gardens for three years, the father-of-one decided to move to the UAE capital three months ago, even though he now pays 15 percent more in rent.
The biggest difference, however, is that he has almost two more hours a day to spend with his family.
“When I moved to the UAE in 2013, my first priority was to save money on rent. Commuting wasn’t the issue. After my son was born, I had to spend time with him and so I have now moved into a one-bedroom in central Abu Dhabi where I pay AED80,000 [$21,798] per annum,” he says. In Dubai, Ibrahim lived in a large two-bedroom apartment and paid AED70,000 [$19,073] a year.
Anant Kumar (not his real name), an Indian chartered accountant, has accepted a job with a quasi-government entity and must live in the capital if he wants his housing allowance, according to a decree handed down by the authorities four years ago.
In 2013, the Abu Dhabi government made it mandatory for all employees in the public sector to reside in the emirate to receive their housing allowance.
“My job contract clearly mentions that I will get my housing allowance only if I live in Abu Dhabi. So I have decided to stay here though I would have preferred Dubai,” Kumar says.
“Giving up the housing allowance does not make financial sense as I have to shell out the entire rent in Dubai,” he says, explaining that he pays AED3,700 ($1,000) above his annual housing allowance to rent a one-bedroom apartment.
But the housing allowance regulation does affect private sector employees, many of whom prefer living in Dubai over Abu Dhabi. Statistics are not available, but based on the commuter traffic from one emirate to the other, it is obviously significant.
In the past, while there has been evidence of Abu Dhabi rents being far higher than Dubai, experts say the difference is narrowing.
Global Capital Partners managing director Sameer Lakhani says the situation is expected to change as Abu Dhabi offers a greater variety of options in its housing projects over the next two to three years.
“The ramp up of such supply districts will take time for gestation, but it is equally clear that… this phenomena is expected to subside,” he says.
Historically, construction in Abu Dhabi has been significantly low, not matching the corresponding demand levels, says Arlene Jimenea, senior research analyst, CBRE Middle East.
“The shortage resulted in higher rents and limited residential choices with the situation prompting a number of residents to expand housing options by deciding to reside in Dubai whilst working in Abu Dhabi,” she says.
Nevertheless, Jimenea says the situation started to change when the capital experienced notable improvements in the supply inventory, starting with the completion of residential projects on Reem Island and Al Raha Beach in 2011.
“This changing landscape is now providing end-users with a wider range of options based on individual preferences and budget considerations,” she says.Ahmet Kayhan, CEO of property analyst website Reidin.com, feels many have switched between the two emirates due to regulations on government employees who are required to live in the capital.
“Although several of them stayed just because of the lifestyle, the rental difference has narrowed in the last few years,” he says.
In fact, the real estate market of the richest emirate in the UAE isn’t faring well compared to its neighbour. Property analysts are expecting a recovery in the Dubai real estate market, with the Dubai Land Department (DLD) announcing this month real estate transactions worth $20.9bn in the first quarter of 2017 compared to $14.89bn in January to March 2016.
DLD director-general Sultan Butti Bin Mejren believes the numbers indicate that the real estate market in Dubai is preparing for a new phase of momentum.
Realty experts say the market in Abu Dhabi will remain slow this year and market recovery will depend heavily on the return of government spending.
“Rental rates are expected to remain sluggish. This is unsurprising given the consolidation that has been ongoing on account of the oil price disruption and the resultant budget consolidation taking place in the government sector. This has had an impact both on job creation and rental rates,” Lakhani says.
Khalifa Bin Salem Al Mansouri, acting under-secretary of the Department of Economic Development — Abu Dhabi, says that while the economic outlook has brightened this year, (he expects a growth rate of between 3.5 and 3.7 percent in 2017), the pace of consolidation implies that the adjustment period for rental rates is expected to continue for most of the year.
In fact, Abu Dhabi’s property market experienced a major upswing from 2013 to 2014, led by recovery in the residential sector. Prime residential prices jumped 25 percent per annum, while prime residential rents averaged 14 percent growth over the same period.
“This level of growth was unsustainable and growth rates subsequently declined following the drop in oil prices,” says David Dudley, the international director. of JLL MENA. “The impact on government spending also led to a softening in the market.”
Many of Abu Dhabi’s government entities are going through a period of restructuring in response to tougher economic conditions, he says, adding various mergers and job cuts have led to a decline in property demands and a drop in rents.
In 2015, Abu Dhabi witnessed the completion of 2,699 units compared to 3,725 in 2016, according to Global Capital, which expects to see the completion of 7,191 units this year and another 7,000 in 2018.
Reidin.com says 3,725 units were delivered in 2016 even though 5,000 units were scheduled to be delivered. It says nearly 12,000 units are due to enter the market this year.
JLL, however, says only 3,100 residential units were completed in 2016, mainly projects on Reem Island, Saraya, Danet and Rawdhat, where 5,000 new units are scheduled to be ready this year. CBRE puts the annual average supply between 2010 and 2016 at close to 9,500 units per annum and expects more than 24,000 units to be delivered between 2017 and 2020 — almost 6,000 units per annum.
All the consultancies do warn of delays, which they say will impact the actual supply into the market.
JLL’s Dudley says annual supply completions will remain much lower than previous years, mitigating the extent of rental decline.
“Hence, rentals and prices are expected to remain above the levels that existed in 2012, prior to the 2013-2014 upswing. The recovery of the market is heavily dependent on the return of government spending which will drive economic growth and sentiment. We are hopeful of some positive announcements on the return of selective government spending coming through this year,” he says.
Lakhani, however, believes housing units will remain in short supply, given the expected increase in population.
“Abu Dhabi is in the embryonic stages of developing its freehold market, and as this [happens] the supply pipeline will bulge to account for the anticipated demand that the city needs. Developer supply pipelines will also get more flexible to account for the real estate cycle, and this sensitivity will increase as private sector participation ramps up,” he says.
So how will the property prices fare?
Reidin’s Kayhan says prices climbed by 86 percent in Dubai, whereas in Abu Dhabi prices rose less than half of that in the second bull cycle (2013-2014). Currently, prices in Dubai are down 13 percent, whereas in Abu Dhabi prices have fallen by 9 percent.
A month-on-month price change, however, signals a bottoming out of the Dubai price curve, whereas Abu Dhabi continues to decline, he says, with a similar pattern witnessed in the rental space of both emirates.
Global Capital’s Lakhani admits prices in Abu Dhabi’s freehold market will remain weak, driven by such factors as consolidation of budgets at the government levels. Nevertheless, he says capital appreciation for apartments in Abu Dhabi have been higher than Dubai during a period from January 2013 until March 2017. Apartments in Abu Dhabi have gained16 percent compared with Dubai’s 13 percent.
“There is convergence of price performance between the two cities in the area of apartments. This convergence is due to factors which include rental convergence as well as investors perceiving similar value given the economic symbiosis between the two cities. Going forward, the price performance will remain highly intertwined, especially as the breadth of offerings in Abu Dhabi starts to accelerate,” Lakhani says.
Real estate investment opportunities remain in the current phase of the cycle as Abu Dhabi and the wider UAE remain a safe haven for investment compared to other parts of the region, says JLL’s Dudley.
Residential developers have been adapting their product to adjust to current market conditions, including delivering a higher proportion of smaller units at a reduced construction cost to offer more affordable options to the market.
“Opportunities still remain in the luxury segment, particularly for well-planned products within integrated communities, but with a reduction in transaction volumes at the current time.”
Kayhan says the emirate will soon see a rise in the number of affordable projects, referring to Abu Dhabi-listed Aldar Properties’ announcement and its intention to enter the mid-income market.
In February, Talal Al Dhiyebi, Aldar’s chief development officer, said the company plans to bring about 1,500 new units into the market this year, and is looking at entering the affordable housing segment where it sees strong demand.
Experts believe this month’s Cityscape Abu Dhabi will see some announcements on affordable housing.
Despite the government curtailing spending in the current period of low oil prices, JLL expects significant activity to take place at Yas Island through Aldar and Miral (the company is building Warner Bros World Abu Dhabi, an indoor theme park) to create new leisure and entertainment attractions.
Similarly, Saadiyat Island continues to develop with the Louvre inching close to opening this year with other high quality residential and hospitality projects in the pipeline.
Al Maryah Island, Abu Dhabi’s new financial free zone and central business district, continues to progress, and Al Maryah Central Mall is set to open next year; while Masdar City moves closer to a range of high-quality residential and commercial projects that are currently under way, according to JLL.
Though property developers have previously dismissed the notion of the two emirate’s competing with each other, Dudley feels the recovery of the Dubai market will revive the capital’s real estate fortunes.
“As Dubai’s market recovers, we expect this to have a positive impact on sentiment in Abu Dhabi. Medium- to long-term growth prospects remain highly positive as the government remains committed to the [Abu Dhabi Economic] Vision 2030, which is to establish a world-class city offering, supported by major economic development initiatives to diversify the economy, improve transparency and attract new demand,” he says.
But is “Brand Abu Dhabi” lagging behind “Brand Dubai”?
Despite its healthy financial position, Jimenea says, Abu Dhabi government chose to promote the controlled expansion of the emirate, reflected in its Vision 2030, which aims to create a sustainable metropolitan expansion template.
“So it is not the case of Abu Dhabi falling behind Dubai,” Jimenea says, “but rather choosing a different development path and focussing on its comparative strengths.”