Residential Pipeline to Test Abu Dhabi Market Dynamics

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In the wake of the financial crisis, which caused residential schemes to stall across Abu Dhabi and the rest of the UAE, some developments have recently resumed construction activity, with a slow trickle of units starting to gather pace. 

Aldar for instance, commenced the phased handover of the 3,500 units at the Gate Towers on Reem Island last month, marking the start of the delivery of 7,000 units by the developer across Abu Dhabi's freehold areas. This increased pace of handovers is expected to put downward pressure on rental value growth in the short term. 

During the "boom years," Abu Dhabi introduced a five percent cap on rental value uplifts that could be applied to contracts each year in an effort to curb rampant rental growth, following in the footsteps of Dubai. Authorities were also in part driven by the fact that housing costs were a significant contributor to the emirate's inflation rate. 

This year however, the rental cap law was ended. The removal of the cap on November 10 comes in the face of looming residential completions and will certainly test the market's supply-demand dynamics. The fear that the abolishing of the rent cap would lead to run-away rental value growth is perhaps an over reaction as it is still too early to assess the ability of the market to absorb the magnitude of supply now waiting in the wings.  

To an extent, the sharp rent rises across the border in Dubai are continuing to contribute to the overall tenant demand as former Abu Dhabi residents make a return to the Emirati capital, driven by rents that are now more affordable than comparable areas in Dubai. These former residents are adding to the public sector work force who were legally required to relocate to Abu Dhabi under the 'live-local' law that came into effect on September 1. 

We expect there to be further clarity in the coming weeks on the rules surrounding the enforcement of the abolishment of the rent cap law, while new rules to protect both landlords and tenants are anticipated imminently. The impact may be particularly noticeable in the older parts of the city, where rents have been weak and in decline, in some cases. These areas, which are primarily confined to Abu Dhabi Island have operated a two-tiered market for many years, with older buildings being outperformed by more modern developments.

The increased supply of newly built schemes is expected to give tenants a greater choice and may in fact turn Abu Dhabi into a renters market; however it is still too early to assess this. In the short term, the removal of the rent cap is expected to create a more competitive environment for tenants, with rents stabilizing across most parts of the city. 

However, the removal of the rent cap is likely to cause some initial confusion, especially amongst landlords accustomed to raising rents by five percent each year. This will create the need for rental valuations to be carried out not only to aid landlords' decision making, but also to help with the establishment of real "market rates." This is expected to help Abu Dhabi begin its journey towards becoming a more transparent and mature market, bringing it line with global markets. 

Steve Morgan is head of the Middle East for Cluttons, the international property consultancy.