Property prices: Abu Dhabi to drop 20%

Residential property prices in Abu Dhabi are likely to drop by another 20 per cent, while Dubai will see a decline of 10 per cent by end-2012, says a new report.

“We forecast another drop of 10 per cent to take place through to the end of 2012 in Dubai and a 15-20 per cent decline in Abu Dhabi,” Global Investment House said in a new report.

Dubai residential selling prices have dropped almost 56 per cent from their peak in fourth quarter 2008 until first quarter 2011, while those of Abu Dhabi lost 45 per cent over the same period. The current vacancy rate in Dubai and Abu Dhabi stand at 30 per cent and three per cent, respectively. The capital, however, is subject to “significant” increase in the coming 2.5 years given the influx of 65,000 units in the residential market. 

Dubai residential market currently has an estimated 93,000 vacant units out of a total of 309,000 stock with an additional 60,000 units expected to come in the market through to 2013. The total existing stock in Abu Dhabi stands at 185,000 units at the end of 2010. It is expected to see an influx of a new 65,000 units through 2013, representing an addition of 35 per cent over the existing stock. 

Earlier this month, the Dubai Land Department told Emirates 24/7 that Dubai is expected to receive only 10,000 new residential and commercial units this year.

In addition, Dubai residential rents will also come under pressure, as Abu Dhabi ex-tenants shift back to the capital, thanks to the availability and affordability of new stock.

“We expect the gap to narrow down gradually over the next two years as Dubai rentals bottom out while those of Abu Dhabi continue declining on increasing vacancy rates. The key risk we see to this assumption is the pace of re-mobilization of Abu Dhabi ex-tenants who moved to Dubai, mostly during 2010, to benefit from lower rents. We expect this shift to gradually take place smoothing out the decline process in the capital,” the investment bank said. 

Average blended apartment rent fell 59 per cent and 48 per cent in Dubai and Abu Dhabi, respectively from their peak in 2008. The estimated current blended average rent of one, two and three bedroom apartments in Dubai stand at Dh65,000 compared to Dh97,000 in Abu Dhabi, placing the capital at a 49 per cent premium. 

“The premium is temporarily justified with the supply surplus/deficit situation that has been in place in both markets since 2009. We expect the gap to narrow down gradually over the next two years as Dubai rentals bottom out while those of Abu Dhabi continue declining on increasing vacancy rates,” the report said.

Residential yields in Abu Dhabi have recorded an 18 per cent average premium over those of Dubai between fourth quarter 2007 and fourth quarter 2010. 
 
Office sector under “pressure”

In the office sector, there will be persistent pressure on selling prices over the short to medium term in Dubai, as vacancy rates remain high at 40 per cent and new supply of 19 million square feet, equivalent to 33 per cent of existing supply, enters the market by 2013. 

“We believe asset prices need to adjust further downwards to generate investor interest in the oversupplied market. We expect a further 10-12 per cent decline in Dubai office prices from current levels.” 

The vacancy rate is expected to increase significantly as a new 13 million sq ft, a 54 per cent addition to existent supply, enters the market between 2011 and 2013. Most of the new supply entering the market is of grade A, which runs the largest shortage in Abu Dhabi office market as opposed to abundance in lower grades stock. 

Average office rents in Dubai stand at Dh64 square feet per annum with Dubai International Financial Centre (DIFC) charging higher rates of Dh120-175 square feet per annum . The current Dubai office market rental yield hovers at 6.9 per cent with DIFC experiencing the highest yield of 7.4 per cent while offices located in Business Bay, Tecom and Jumeirah Lake Towers rent for a 6.7 per cent yield. 

Going forward, Global expects prime office rents in areas like DIFC and Downtown Burj to diverge downwards closing the gap with other ex-CBD areas, which should be nearing a long term bottom. 

Abu Dhabi commercial units are currently renting at a 76 per cent premium to that of Dubai.

“We expect the decline in Abu Dhabi rents to speed up in the coming two years as the new grade A supply enters the market accelerating the vacancy rates of grades B and C and eventually pressuring grade A rents downwards,” the report stated.

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