ABU DHABI - MENA Herald: JLL, the world's leading real estate investment and advisory firm, today released its first quarter (Q1 2017) Abu Dhabi Real Estate Overview report that assesses the latest trends in the office, residential, retail and hospitality sectors.
JLL reported that prudent moves by government to reduce spending and consolidate government entities in reaction to lower oil prices and tougher economic conditions continues to impact market performance.
Mergers and job cuts, combined with reduced government spending, have impacted the growth of employment, population and disposable incomes, leading to increased vacancy, downsizing and a short-term decline in residential rents and prices and retail spending. Office demand has also been affected by the consolidation of oil and gas, financial services and government sectors.
Within the hospitality market, while occupancy levels have remained stable, ADRs have increased marginally compared to the same period last year as the growth in tourism offsets the decline in corporate demand.
David Dudley, International Director and Head of Abu Dhabi Office at JLL MENA, commented: “Many of Abu Dhabi’s government entities are going through a period of re-structuring in response to tougher economic conditions and prudent moves by government to reduce spending due to lower oil prices.”
He added: “We expect some further decline in certain sub-sectors over the short term due to the current decline in demand growth and sentiment. However, on the positive side, annual supply completions remain much lower than previous years, mitigating the extent of rental decline, with rental rates and sales prices expected to remain above the levels that existed in 2012, prior to the 2013-2014 upswing.”
“The recovery of Abu Dhabi’s real estate market is heavily dependent on the return of government spending to drive economic growth and sentiment. We are hopeful of some positive announcements on the return of selective government spending coming through this year and the current consolidation efforts will help improve efficiency going forward.
“Medium to long term growth prospects remain highly positive as the government remains committed to the 2030 Vision – to establish a world class city offering, supported by major economic development initiatives to diversify the economy, improve transparency and attract new demand. Investment opportunities remain, particularly for existing income producing assets , and we continue to see keen interest from investors taking a longer term view on the future growth potential.”
SECTOR SUMMARY HIGHLIGHTS – ABU DHABI:
Office:
• No major completions took place during Q1, with total office stock remaining at approximately 3.5 million sq m GLA. Approximately 170,000 sq m of office GLA is expected to enter the market by the end of 2017 with the delivery of ADIB HQ on Airport Road and Leaf and Omega Towers on Reem Island.
• Grade A and B office rents remained stable at AED 1,760 / sq m and AED 1,030 / sq m respectively over Q1, in spite of the reduction in demand across various sectors. Rents have fallen by 5% (Grade A) and 8% (Grade B) over the past year.
• The delivery of further office space over the rest of the year at a time of weak demand, is expected to push up vacancy rates and increase downward pressure on rentals, but Grade A rents are expected to remain largely unchanged.
• The decline in oil prices has led to a reduction in demand for office space from the oil and gas sector.
Indirectly, lower oil prices have also led to prudent moves by government to reduce spending and consolidate government entities, which has impacted demand in other sectors such as government and financial services. There is increasing evidence of companies and government entities reducing headcount and office space requirements.
• David Dudley commented: “With job cuts in various sectors, combined with mergers, we expect 2017 to be a year of consolidation, which will ultimately lead to increased office vacancy rates. However, as the future supply of Grade A office space remains limited, we expect the impact on Grade A rents to be limited.”
• He added: “Medium term growth prospects for Abu Dhabi’s office sector remain dependent on the government’s continued initiatives to leverage Abu Dhabi’s major strengths, to diversify the economy and drive new demand. The freezones continue to build momentum and will contribute to this demand growth.”
Residential:
• Approximately 600 units were delivered during Q1, bringing the total residential stock to approximately 249,000 units. Deliveries included The Wave Tower on the Corniche and Najmat C21 Tower and Yasmina Residences on Reem Island.
• A further 5,000 residential units are currently scheduled to enter the market by the end of 2017, mainly within Reem Island, Saraya and on the Corniche. However, based on previous trends a significant proportion of this supply is likely to be delayed at the final stages of approvals and handover.
• Average prime rents for 2 bedroom apartments decreased by 5% over Q1 to reach approximately 146,300 p.a. mainly due to the continued increase in vacancy rates particularly within larger units. Apartment rents have now declined by around 10% on a YOY basis.
• Average prices for prime apartments declined by 3% over Q1 (-13% YOY) to reach approximately AED 13,900 sq m, affected by job losses, the decline in sentiment and reduced transaction volumes.
• David Dudley said: “The combination of job cuts and downsizing has caused vacancy rates to nudge upwards, particularly within mid to high-end developments and larger residential units. This continues to place downward pressure on residential rentals – with many landlords now more amenable to offer minor reductions to rents to maintain occupancy.”
• He added: “Further declines in residential rents and prices are expected in certain sub-sectors over the short term, due to lower demand and in some cases increased supply. However, we expect the level of decline to be limited, with rental rates and sales prices remaining above the levels that existed prior to the 2013-2014 upswing.
• “Reduced supply completions have helped mitigate the extent of rent and price decline. While we expect to see up to 5,000 residential units completed this year, some of this could be delayed and the completion rate remains much lower than long-term averages.
• “Market recovery is to a large extent dependent on the return of government spending to drive demand growth and improve sentiment.”
Retail:
• No major completions took place during Q1, with total retail stock remaining at approximately 2.6 million sq m. Approximately 57,000 sq m of retail GLA is expected to be delivered by the end of 2017, primarily within mixed used schemes.
• Supply is expected to increase significantly in the medium term with the delivery of Al Maryah Central Mall in 2018, followed by Reem Mall and others, and the expansion of existing malls over subsequent years.
• Average line store rents within well-located malls on Abu Dhabi Island remained stable at AED 3,000 sq m p.a. Average line store rents within malls off Abu Dhabi Island also remained stable at AED 1,860 sq m p.a. While rents have generally remained stable this quarter, mall operators have been offering increased tenant incentives to attract and retain retailers given the current reduction in retail spending.
• David Dudley commented: “Retail spending declined during Q1 given the reduction in population growth, disposable incomes and corporate hospitality as well as increased caution amongst consumers. Medium term prospects for the retail sector remain positive. As employment growth returns and Abu Dhabi’s improved leisure offering continues to drive increased tourism volumes, this will continue to increase retail demand in Abu Dhabi.”
Hospitality:
• The principal opening during Q1 was the five-star Marriott Al Forsan with 400 rooms. An additional 1,300 rooms are expected to be delivered during the remainder of 2017. Major openings over the coming months include Fairmont Marina City Corniche, Grand Hyatt Abu Dhabi Hotel & Residences Emirates Pearl and Rotana Saadiyat Resort, all falling within the 5-star segment.
• The first quarter of 2017 experienced flat occupancy levels and a slight increase to ADRs compared to the same period last year. The upcoming supply in 2017 is expected to add some pressure on ADRs and occupancy levels during the rest of the year.
• Q1 occupancy rates remained similar to 2016 at approximately 75%. During January 2017, ADRs were 10% down on the previous year but recovered during February to average AED 569 (Year to Feb). The improvement to ADRs in February was partly due to a boost in the MICE segment from a number of major events. As a result, RevPar increased by 17% in February 2017 compared to the same month in 2016.
• The first two months of 2017 witnessed a 5.5% growth in hotel guests according to the Abu Dhabi Tourism & Culture Authority. Abu Dhabi Tourism & Culture Authority is targeting approximately 4.9 million hotel guests in 2017, with particular emphasis on growing the tourism sector through marketing Abu Dhabi globally, hosting major events and conferences.
• David Dudley commented: “Abu Dhabi’s medium term hospitality demand trends are very promising, as the government's various large-scale initiatives to grow tourism continue. These include the major new airport terminal, further expansion to Etihad Airways, the delivery of world-class attractions on Saadiyat Island and Yas Island, and the hosting of high profile international events.”
Abu Dhabi Prime Rental Clock
This diagram illustrates where JLL estimates each prime market is within its individual rental cycle at the end of the relevant quarter
