|30 August, 2016

Building on sand?

New laws in Abu Dhabi will facilitate property investment

Buildings are pictured at Abu Dhabi commercial center, implemented by Aldar, in Abu Dhabi October 27, 2013. Image used for illustrative purpose.

Buildings are pictured at Abu Dhabi commercial center, implemented by Aldar, in Abu Dhabi October 27, 2013. Image used for illustrative purpose.

REUTERS/Stringer .

New laws in Abu Dhabi will make property investment in the emirate easier for investors: Is there demand?
Construction is a key sector for the UAE economy. Developments in recent years have completely transformed the skylines of several of its emirates and made it home to some of the grandest buildings around the world.

Yet, recently enacted laws in Abu Dhabi could facilitate international investment and help fuel a raft of new building projects for the oil-rich emirate, which has perhaps lagged behind its northern neighbour Dubai.

With several large scale investments in Abu Dhabi - such as Al Maryam Island - in the pipeline, the emirate could become a centre of interest for many international firms.

New investment coming?

With markets continuing to feel the effects of low oil prices and market volatility, investors are increasingly turning to alternative asset classes, such as real estate for yield and capital growth.

The oil-rich state is home to some of the biggest banks and sovereign wealth funds in the region, as well as the recently launched financial free zone, ADGM.

"Looking to the future, the introduction of the new laws is undoubtedly a key part of the process of repositioning the Abu Dhabi real estate sector so that it is more attractive and more marketable to institutional investors," notes international law firm White & Case.

"This is not to say that levels of institutional investment are going to increase overnight, as this is of course also dependent on market forces and other external factors."

The firm noted that over time the laws should help facilitate an increase in institutional investment into the market and take some of the money destined to sister emirate Dubai.

It may be an opportune time for investors to start looking at the emirate. The Construction Cost Index - which monitors building materials and construction services costs - fell by -1.8% during the first quarter of the year compared with both the previous quarter and the prior-year period, according to the Statistics Centre - Abu Dhabi.

Is there the demand for it?

While investors may be attracted to the emirate, the timing of investment is highly likely to be impacted by market conditions.

The low oil price environment has prompted governments throughout the GCC to review finances. As the UAE's largest producer, Abu Dhabi has in the past reaped the benefits of its huge reserves.

However, the new market environment could scale back government spending and deter some international investors from Abu Dhabi's property sector.

"The office market has been negatively affected by the decline in oil prices and government spending," noted property adviser JLL.

"Oil revenues are a key driver of the economy and office market - with the sector comprising over half of Abu Dhabi's GDP. Indirectly, low oil prices have led to spending cuts in the government sector."

It added: "It is increasingly evident that reduced government spending will remain for a while - leading to a slowdown in the pace of demand growth."

International property firm Knight Frank also highlighted weaker demand for retail, industrial and hospitality properties as a result of the slowdown in the economy.

Whether the new rules lead to increased international investment in Abu Dhabi's property sector in the long term remains to be seen; while investors have the ability, the desire may yet follow.

© MENA Fund Manager 2016