Real Estate & Construction

On the ladder

The Developing Market

The need for affordable housing in Abu Dhabi is becoming a more urgent issue as rent prices begin to overtake incomes. Developers are being pressed to increase the supply of affordable housing before the situation becomes a problem.

The real estate sector in Abu Dhabi has seen a decline in the number of new properties entering the market, and now there is a genuine concern about affordable housing for first-time buyers. Only 6,000 new properties are scheduled for construction by the end of 2015, which creates an issue as the market continues to expand 12% YoY. CBRE’s Global Living Report marked Abu Dhabi’s annual house price growth at 12%, with rental growth also reaching 12%, placing Abu Dhabi 10th and second in the world, respectively.

The issue that such rapid inflation has caused is that, as rent rises, more tenants start looking to move onto the property ladder. As housing prices increase, in line with rent, these potential buyers find themselves priced out of the property market, and the market then stagnates. This is problematic, especially when liquidity is low across the economy. The market is experiencing headwinds now as the chronically low oil prices have affected government spending, the first time in 13 years, and is set to fall 4.2%, with investors also seeing greater returns elsewhere across the globe.

Lead by the Urban Planning Council (UPC), a new policy has been introduced for developers to achieve a quota of 20% affordable housing within new housing schemes. Currently, 18 developers have signed the agreement in total including Masdar, Abu Dhabi Ports, ZonesCorp, and major real estate companies Tamouh, Aldar, and Mubadala Real Estate.

This will go toward satisfying the increase in end-user demand and stop the market continuing its skewed production of luxury properties. Buyer eligibility will have to be vetted to ensure that this simply does not become an attractive proposition for would-be landlords. Over the past five years, the arrival of new housing was as high as 11,000 per annum; now the expectation is that 8,500 new housing units will be delivered, per annum, for the next three years.

This quota, coupled with the rental index that came into law on January 1 2016, should cool the current situation. It is assumed, although not confirmed, that areas of the city will be indexed and rent adjusted accordingly, ensuring that hikes are restricted. This will return the market toward being tenant-friendly, reducing the demand on housing.

UPC has also drawn up a data sharing agreement that has been signed by 19 developers; the increased transparency will cover the number of units that have been built, are under construction, and being planned. Using these details UPC will compile a Real Estate Data Management database on Abu Dhabi’s supply and demand for residential, commercial, retail, and hospitality sectors.

The rental market has experienced a 1% contraction in 3Q2015, the slowdown has come due to a curtailing of government spending, a reduction in transaction volumes, and a weakening in investor sentiment, while increases in utilities through the removal of fuel subsidies may weaken end-user demand.

The average expat household aiming at purchasing has an average annual rent of $55,500 and an average income of $54,000, proving the need for more affordable housing for middle-income tenants. The depressed volumes of sales can also be attributed to the fact that many property owners are enjoying healthy rental yields, diminishing the tendency to sell.

Regulating the market also ensures that tenants stay within the city, rather than finding cheaper property on the outskirts, maintaining the value on those city properties. Banks have moved to reduce interest rates to make them more attractive for the end-user, while the increase in off-plan investment opportunities, through attractive payment plans, is generating much-needed liquidity. Developers are attracting investors through staggered payment plans, which require a predetermined amount of the value to be paid on handover, reducing risk for the investor. This will increase the housing stock, and make housing prices competitive for the end user.