Abu Dhabi Property Sector: Calm amid the Storm

Abu Dhabi Property Sector: Calm amid the Storm

In this week's issue, we will discuss the current scenario of Abu Dhabi's real estate sector. Until recently, the Abu Dhabi property sector was confident and appeared better poised to ride out the storm, even as the market in Dubai slows down. According to a research report published in December 2008 by Citigroup, the cash rich Abu Dhabi is in a position to fund all of its current development projects and is expected to see yet more growth.

In a December 2008 report, Moody's said that, though crude oil prices had collapsed since the summer, the economic fundamentals of Abu Dhabi are sound.

It added: "The government is working to diversify the domestic economy away from hydrocarbons by encouraging the development of the private sector and slimming the size of the public sector." The non-oil sector of Abu Dhabi's economy expanded about 8% in real terms in 2007, but this can be expected to slow in 2009 given the adverse effects of the global financial crisis. The rest of the UAE led by the previously booming metropolis of Dubai - may be harder hit by the credit crunch. To support economic growth and diversification, Abu Dhabi plans to adopt both a fiscal policy responsive to economic cycles and a safe monetary and financial system with manageable levels of inflation.

Meanwhile in the UAE banking sector, loans have exceeded deposit growth. Total deposits at the UAE banks fell to AED 905.7 billion ($246.6 billion) from AED 922.5 billion in December 2008, according to UAE Central Bank data. During the period, loans and advances climbed to AED 1.022 trillion versus 1.019 trillion. The UAE is planning to implement higher interest rates for short term deposits in a bid to replenish deposit reserves. The largest among GCC states in terms of banking assets in absolute terms, the UAE banking sector's total asset size stood at $335.6 billion (about Dh1,232.6 billion) in 2007. But in today's global market, no one is immune to the financial tsunami as tightening credit and negative population growth rattle markets throughout the world. And the world's richest city in terms of per capita income is no different. 

But Abu Dhabi has sufficient cash reserves in the form of Sovereign Wealth Funds that should help the country tide over the crisis.  Abu Dhabi has more than US$1 trillion (Dh3.67trn) as funds, which have not only been a stabilizing influence on regional financial markets and helped the Western state's ailing institutions, but also are reducing the inflation in the emirate by pumping excess liquidity out of the market. The Abu Dhabi Investment Authority is currently the largest fund among oil exporters and has accumulated assets worth between US$ 650 billion and US$ 1 trillion.

Meager mortgage funding, negative population growth, declining occupancy rates coupled with cancellation of projects have added up to a tough outlook for the UAE property market. Even though all these factors have impacted demand growth in general, the outlook for Abu Dhabi real estate remains positive. Abu Dhabi's major developers, together with the leading banks, are taking initiatives to nourish the availability of property finance to boost buyer appetite. A 15 - 52 per cent correction of property prices in Abu Dhabi after 2 years of rapid increase is forcing out short-term speculators. This is a positive effect and it will help stabilize the real estate market. As speculators exit the market, inflated prices are touching realistic levels.

Till date, projects outlined in the Abu Dhabi - Plan 2030 have not been stalled. However, the timing of their delivery will now be under review. The real estate laws will provide the basis for an increasingly regulated approach to sales and construction once the projects outlined in the plan are released for sale. Starting from first quarter of 2009, the prices could start to stablise until early 2010. There are almost 80,000 units are expected to be delivered in the next 2 years but a declining population manly due to the loss of jobs in the construction industry would affect demand.

Compared to international property markets, what Abu Dhabi is experiencing is only the ripples of the problems happening elsewhere. The economy of the UAE capital is still very strong and it is expected to register steady population growth, however, at a slower pace than in the past. Consequently development will not grind to a halt. It is interesting that there has not been the level of defaults and attempts to avoid contracts in Abu Dhabi as has been seen in other emirates.

Abu Dhabi's Department of Municipal Affairs has recently drafted several new property laws for the emirate. The new regulations, which include an escrow law and provision for a new regulatory authority, are awaiting approval of the Executive Council. It is expected they will enhance the certainty and confidence that purchasers, whether as occupiers or investors, are looking for in today's marketplace. These protections for purchasers of property in Abu Dhabi are likely to increase consumer confidence, and therefore sales.

New Property Laws for Abu Dhabi – Abu Dhabi is soon going to implement a series of real estate laws in the emirate to strengthen the sector. These laws along with uniform freehold residence law will boost the stagnant property market of Abu Dhabi. Strata Law – It will cover the management of common areas and facilities in multi-unit buildings, as well as the collection of service charges. Escrow Law – This law will hold payments made by purchasers towards units in escrow to ensure that they are used for construction costs rather than for the acquisition of land for new projects Mortgage Law – This law will regulate the granting and registration of mortgages, the exercise of rights by financiers and the priority of payments between competing financiers. Development Law – It will clarify the permits required by developers prior to launching sales on projects. Regulatory Body Law – It will establish a property regulatory body, similar to the Real Estate Regulatory Authority (RERA) in Dubai.