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Developments in Abu Dhabi need to be competitively priced
November 18, 2009
Mid- and low-end developments in Abu Dhabi need to be competitive in price to that of Dubai, said Markaz.
“Developments in Dubai will continue to influence this segment, posing huge uncertainties in terms of take-up, vacancies and price levels. Developments targeting income generation should compete with the offering in the non-freehold areas, which should be cheaper compared to the freehold areas,” Bassam Al Othman, Senior Vice-President, Markaz, said in a report on Abu Dhabi market.
According to Al Othman, development targeting these segments will not be attractive until the “oversupply conditions” are corrected in Dubai. “This cannot be expected to happen in the near term given the supply forecasts. We recommend restraint despite the short-supply forecasts.”
On the other hand, higher quality developments with associated amenities will cater to the incremental high-income demand and lure back the demand so far diverted to Dubai.
“The extent of Dubai’s impact and the resultant uncertainties will be softer, thus providing lower risk,” he added.
Apart from catering to the unserved demand of Abu Dhabi, the oversupply would continue to act as a bargain enabler because excess supply impacts the rentals and prices in Dubai. Rentals and prices for the developments in the capital would be benchmarked and compared to the levels in Dubai with a premium to compensate the need to commute.
This will again be appropriately discounted for the relatively lower-quality developments and the lack of other amenities.
Hence, in the near term, rentals and price trends in Abu Dhabi would be heavily determined by the trends in Dubai finding new lower equilibrium after trending down following the release of fresh supply.
“Given the market estimates of forthcoming supply in Dubai which ranges from 30,400 units [Colliers] to 112,000 units [Landmark Advisory] during 2009-2011, we can estimate the new equilibrium prices and rentals to be found at a lower level in the near term in Abu Dhabi as well,” he said.
The extent of such price and rental contraction would be controlled by the creation of fresh demand from increased economic activity, which will improve income levels and expectations. Improvements in financing conditions would lower the impact as well. The lower price and rental levels will contribute to demand growth, as the lower rentals would cause income growth and lower price levels would lure the potential buyers.
Markaz forecasts a high-end supply of close to 20,000 units during 2009-2012, which will result in a oversupply scenario by 2012 given the current scenario.
However, the materialisation of these forecasts is highly uncertain as these developments will overcome delays and cancellations due to the financing constraints faced by the developers in the current market conditions.
This would provide with attractive development opportunities for investors provided the projects match the equivalent developments in Dubai in terms of building quality and other amenities, said Al Othman.
According to Markaz, real estate prices contracted 47 per cent from the peak on an average similar to that of Dubai and more than the regional average of 30 per cent, while rentals contracted by 13 to 15 per cent.
Apartment prices contracted by 25 per cent cumulatively from peak and rentals contracted by 10 per cent while villa prices contracted by 57 per cent and rentals contracted by 14 per cent on an average.
“Although the asking prices have stabilised of late, the contraction experienced is counter intuitive to a pent-up demand driven undersupply argument,” he said.
Dubai leads Abu Dhabi in terms of supply of properties and close to 60 per cent of the properties offered are ready for occupation as against 15 per cent in case of Abu Dhabi.
Unless the demand drivers in Dubai bounces back with dramatic strength, which is highly unlikely, high vacancy levels, which currently stands at 25 per cent as per Colliers International’s estimates, will prevail for the near term, the report said.
This indicates Dubai’s ability to cater to the pent-up demand of Abu Dhabi in the near term among other locational demographic movements within Dubai and from Sharjah, said Al Othman.
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