21 August 2017

Abu Dhabi's residential property market continued to witness steep declines in the year to June, but may soon hit a price floor that most developers "will not be able to go below", according to Core Savills' chief executive David Godchaux.

The company this week released an Abu Dhabi Mid-Year Snapshot report, which argued that prices have fallen more sharply than it had previously expected as a result of workforce redundancies and shrinking household incomes both in the public and private sectors, as well as the rising cost of living.

It said that residential property prices have declined by between 4-15 percent over the first six months of 2017, depending on the community.

The price falls have been steeper for more expensive properties, with apartment prices at Al Bandar falling by 13 percent and Saadiyat Sea View villas dropping by 11 percent, but more affordable apartment communities on Reem Island witnessing much shallower declines.

Godchaux said that property values have been dropping at a similar pace over the course of the past year, with year-on-year prices falling by between 8-22 percent.

"The market is not there. You have a lot of supply that is going to come in outer areas such as Reem, for instance, and the demand is not back yet because the sentiment is not back yet."

However, he argued that he expected price declines to slow during the second half of the year and then to bottom out as values hit a floor of about 1,150-1,250 UAE dirhams ($313-$340) per square foot.

“Bringing stock below 1,150-1,250 (dirhams) per sq ft is not going to be possible for developers,” he said, arguing that the cost of financing projects below this level does not stack up for many firms.

Instead, he said, most developers would prefer to delay future launches, meaning projects could remain on hold for longer until prices recover. Core Savills is predicting that after another six months or so of shallower declines, prices could plateau for a further 12-18 months.

“I don't see them [developers] cancelling projects,” said Godchaux. “I see them just phasing out to meet the market, and instead of dropping the price, keeping the price at a floor level and rebuilding buyers' confidence that prices are not dropping.”

Apartment prices bottom out

Rents for mid-range apartments in the capital have also faced a steep decline, dropping by 14-17 percent during the first half of the year, but Core Savills said that it expects that rental levels for apartments would also bottom out later this year at a floor of about 70-75 UAE dirhams per sq ft.

The report argued that there are now signs that measures taken during the past few years to restructure Abu Dhabi’s economy were beginning to bear fruit. And although it said that a short-term recovery either in residential or commercial property values was “unlikely”, the recent downward trend should slow as market fundamentals improve.

Godchaux did warn, however, that demand for smaller, grade B office space could weaken further due to the introduction of VAT early next year.

“I don't think that for big businesses it is going to change anything, but for small and medium enterprises that are already in a relatively competitive environment with shrinking margins and economic headwinds, certainly the administrative burdens - putting things in place - cost money and time. And that is going to shrink a little bit further their market in the short-term.”

Earlier this month, real estate consultancy firm CBRE reported that residential property values had dropped by 4 percent during the second quarter of 2017, also citing economic uncertainty and higher costs of living.

 It said that “the delivery of new residential units over the next 12 months is likely to further dampen an already weak sales market”.

© Zawya 2017