Looking at Abu Dhabi Real Estate 2011 and Beyond

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(ABU DHABI, UAE) -- This week some of the people who follow real estate in Abu Dhabi got together for breakfast and conversation to talk about what's going on and where it's going as the end of the year approaches. At a Cityscape Connect Business Breakfast at the Rotana Hotel on Yas Island, about 60 people interacted with a panel of experts from a property services organization, a master developer, and a law firm.

David Dudley who heads Jones Lang LaSalle MENA in Abu Dhabi kicked it off with an overview of the current market. He found that commercial demand today comes from "domestic sources," many of them "owner occupiers who are upgrading to better space." He said that "most companies in Abu Dhabi have poor quality space" and will be moving to better space at the same cost as prices come down. They are looking for 300 square meters on average.

Investors from outside the UAE and the Middle East who would like to get into Abu Dhabi are "lined up," but "we have little product available and the pricing is too high." These investors require bigger spaces of 5 - 8,000 square meters. Dudley explained that while major companies are looking for Grade A office space, at present there is only one Grade A building available, Aldar Properties' circular HQ. Others are due to come on line next year and later as Reem Island and Sowwah Island construction projects are completed.

The residential market right now is oversupplied at the high end and vastly undersupplied at midlevel. Many people in Abu Dhabi live in shared villas and are looking for individual units. Because rentals prices are still too high, some commute daily from Dubai to Abu Dhabi, at least 90 minutes each way if there are no tie-ups. Dudley said as many as 20,000 cars make that trip every day because it's cost effective to get better and cheaper living space in Dubai while working in Abu Dhabi.

On the retail side, limited quality space is available, and Dudley predicts continued expansion of new malls and refurbishing of some of the older shopping areas. Finally, the hotel and hospitality sector is continuing to expand although the supply has grown in 2010. Dudley said that is "driven by the corporate sector" while tourism remains "weak."  For Dudley 2011 "will be a year like 2010" but after that, he expects "the market will bounce back very quickly."

Gurjit Singh, COO of Sorouh Real Estate, is one of the most articulate spokesmen for the real estate industry here. Ever since the downturn two years ago, he has been talking about the need to consolidate. "Today," he said, "you have to be sure you have demand in hand." No more off plan sales. No more flipping.

Another problem for developers, he explained, has been the changing regulatory environment which has required "nimbleness" in order to cope. Developers who had calculated costs and earnings on a project several years ago find themselves having to accommodate 20 percent of their space for schools, hospitals, and so on which are non profit. "This has tended to slow down supply" which is positive in terms of increasing demand.

The key challenges for developers today are related to financing. Singh said he was encouraged by the recent creation of the first real estate investment trust (REIT) in the UAE. Announced a week ago, Emirates REIT comes from Dubai Islamic Bank and Eiffel Management from France. It will invest in commercial and residential property and is based in the Dubai International Financial Centre.

"If an asset's yields are put into a REIT," Singh said, "the funds have a multiplier effect." He added that any government or semi government organization occupying a building is a possible candidate for a REIT because "a long lease is security." During the 1990s in Asia, REITs were used "to restore liquidity."

For 2011 Singh suggested looking at "logistics-related real estate," call centers, data storage, transport facilities during what he believes will be "another year of consolidation." Developers will be focused on "creation of cash flow" and on "delivery" of projects, in other words asset management.

From the lawyer's point of view, Nick Turner, Partner - Real Estate, Herbert  Smith, said that the legal documentation affecting real estate has changed and is still changing. For example, a "clear" mortgage law that details the role of banks has been under discussion in the government for the past 18 months or more.

The registration of land in Abu Dhabi isn't yet organized for foreigners. The plots on Abu Dhabi island that were given to Emiratis are accounted for, but non citizens cannot buy that land. Off the island, on the mainland, and on the newly developed islands like Reem and Sowwah, foreign ownership is possible but a system of title registration is not yet a reality.

Turner said that 2011 is a year for "stabilization." He remarked on the "heightened sense of reality in the market" which means that everyone will "have to work very hard" to provide a "quality product" at each level. But he sees reasons for some optimism because there is pent up external demand for top commercial properties.

At the end, the moderator asked the guests how they felt about the coming year. Who is optimistic? A few hands went up, mine among them. Who thinks 2011 will be more or less like 2010? Most hands went up. Who is pessimistic about 2011? One hand only. It sounds as if most people are cautious, no irrational exuberance, no more go go years.

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