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Abu Dhabi rents hit affordability ceiling

|By TAP Staff| Residential rents in Abu Dhabi may be reaching an affordability ceiling, particularly at the higher end of the market, the latest Abu Dhabi Real Estate Market Overview report by Abu Dhabi Islamic Bank (ADIB) and its real estate advisory subsidiary MPM Properties said.

But given year on year growth, tenants in this segment are still seeing sizeable rental increases at lease renewal, the report added.

Rents at the top end of the market grew a modest 1 percent in Q3, despite a lack of vacancies and new supply in the high-end/luxury sectors, finds the report. Despite the slowdown, developments in the high-end segment have seen year-on-year rental growth of 7-10%, meaning many tenants will still face sizeable increases at lease renewal.

Just over 1,250 new apartments entered the rental market in the third quarter, including 900 apartments in Gate Towers that have just been released by the Abu Dhabi government. MPM continues to see demand from both individual and corporate tenants outstripping supply in affordable areas such as Mussafah, which presents potentially attractive development opportunities for landowners.

Property values in the residential market have in overall terms remained stable in Q3, reflecting low transaction volumes in the secondary market.  The only exception has been Al Reef Downtown where values have risen by up to 5% for some unit types, highlighting that investor demand is weighed towards the affordable end of the market driven by attractive rental yields.

Depressed volumes can, in part, be attributed to the summer holiday period, as well as many owners continuing to enjoy healthy rental yields and showing little inclination to sell in the current market. Falling prices in Dubai have also had an impact on investor sentiment, and recent moves by banks to reduce interest rates are a further indicator of weakening demand.  Moreover the increase in off-plan investment opportunities offering attractive payment plan terms is also diverting some liquidity into this segment of the market.

“In the current market environment, demand for new off-plan product is driven primarily by developers’ reputations and payment plans, followed by price, quality and location,” says Paul Maisfield, CEO of MPM Properties. “Demand has virtually dried up for developments being sold off-plan by lesser-known developers.

In the office segment, more subdued activity has been balanced by a lack of new supply entering the market, resulting in marginal rent increases of 1-3%. The shortage of Grade A space is driving up rents in prime buildings, and having a positive trickle-down effect on some Grade B buildings, though this growth is unlikely to be sustained given the new supply set to come online over the next six months. Business park space with ample parking, which continues to be sought after by SMEs, represents a compelling opportunity for developers and investors.

In the retail sector, rents at malls have remained stable, though some tenants have started to request reductions due to declining revenues. High street retailers, on the other hand, have generally accepted increases as rents catch up with those in malls. Retail supply is set to grow rapidly over the next few years, which is likely to increase competition and boost the number of options available to residents.

Abu Dhabi hotels saw rising occupancy rates throughout the third quarter, driven by growth in tourist arrivals from markets like China and the United States. Overall hotels have witnessed a 14% increase in total revenue on the back of a 20% increase in guests year to date. The third quarter also saw an increase in all major indicators for hotel apartments, with average guest spending at deluxe hotel apartments even outstripping that at five-star hotels, highlighting the strength of this segment.