It’s all about demand and supply
It’s all about demand and supply Mohanad Alwadiya
It’s all about demand and supply
Mohanad Alwadiya
Whether we like it or not, this global economic crisis is a big one. While its duration will vary for each country, a typical one usually lasts between 14 and 18 months.
The global crisis provided the catalyst for the real estate correction and resulted in prices tumbling to incredible lows and at pace which has left many short-term investors breathless and cashless. Depending on the area and type of property, prices have dropped by as much as 60 percent in Dubai and 35 percent in Abu Dhabi, by our reckoning.
Demand dried up overnight, both from domestic buyers who disappeared, adopting a wait and see approach, and from foreign investors. The latter, aside from experiencing devaluing of existing asset portfolios, suddenly found their domestic currencies losing significant purchasing power due to rapid worldwide currency devaluations versus the UD dollar. Many speculators trying to sell could not get relief from their overleveraged positions.
Over the past few years, Abu Dhabi has emerged as a success story, capturing the imagination and admiration of countries worldwide. However, 2009 has been a challenging year for Abu Dhabi’s property market and indications are that any discerning recovery will not commence before the second half of 2010 and early 2011.
Downturn and After
The effect of the downturn on Abu Dhabi’s property market has manifested itself in a wide range of symptoms. Credit tightened for end-users and investors alike, demand for off-plan property dropped as did prices despite a relatively low supply across the residential categories.
Abu Dhabi’s residents started opting for more affordable living options that emerged in Dubai, people lost their jobs due to major restructuring by some of the leading development companies in Abu Dhabi, construction project were delayed and the list goes on. Unfortunately, escaping the effects of a global economic crisis has proven impossible for any economy no matter how strong its fundamentals.
Residential leasing values in Abu Dhabi continued to slip during the last quarter of 2009 and early 2010, at an estimated average of 6 percent. Currently, quality one-bedroom apartments average Dh105,000 a year, while two-bedrooms average Dh145,000, and three-bedrooms command Dh175,000. When it comes to villas, three-bedroom residences average Dh255,000, four-bedrooms are Dh280,000 and five-bedrooms go for a hefty Dh385,000.
It is worth mentioning in this context that on the main island, west and east districts are demanding a steep premium of 27 percent for apartment compared with similar sized units in the off-island districts.
When it comes to residential sales in Abu Dhabi, recent months were marked by a slowdown in activity and rumors about a short-term dip in prices during the first quarter of 2010.
Pressure build-up
Through the first half of 2010, we believe the current challenges the property market is facing along with the overall low corporate and investor confidence levels will put more pressure on both commercial and residential rental and capital values in Abu Dhabi.
As the market transitions from an undersupply to an oversupply situation, the bargaining positions of existing landlords will become weaker as they will be faced with high quality supply.
They will have to become more flexible when it comes to price points and payment terms. We expect this trend to continue during 2010 as the flow of people relocating from Abu Dhabi to a more affordable Dubai continues in the short and medium term. A stabilization of prices will only become evident when demand closely approximates supply.
For this to occur, the buying population must expand, either as a result of an upturn in economic activity, a slowdown in the relocation rate of individuals to Dubai, or by restoring the availability of credit to those individuals who’re aspiring to invest.
Realistically, this cannot be expected to happen before the second half of 2010. It is only then we can envisage an increase in demand.
Overall, let it be said that Abu Dhabi is building an excellent investment infrastructure and adopting lessons gained from observing the Dubai property implosions. As the long awaited economic recovery is realized in the second half of 2010 and early 2011, Abu Dhabi will be well-placed to continue delivering on its future development plan in a sustainable manner.