The unprecedented construction boom in the United Arab Emirates (UAE) in the past few years had been largely limited to the emirate of Dubai. But rapid urban development is fast spreading to neighbouring emirates, including Abu Dhabi, which has set its sights on becoming the UAE’s leading business and commercial centre.
Although Abu Dhabi is home to about 95% of the UAE’s oil reserves, the emirate’s leadership is determined to avoid the pitfalls of oil dependency through business diversification and an ambitious urban development plan, Plan Abu Dhabi 2030. The development will see the capital city of the UAE transformed into a truly international business centre, according chamber of commerce president Salah Salem Bin Omeir Al Shamsi. “The government’s vision is for the private sector to lead the development of Abu Dhabi to create a true global capital,” he says.
As the capital city of the UAE, Abu Dhabi’s leadership sees the city’s role as a showcase city for the rest of the world; the emirate’s redevelopment includes prestigious projects such as the Guggenheim and Louvre Abu Dhabi museums and a Formula One race track. And the importance of the emirate as a property investment destination is driven by the increasing number of multinationals seeking to base regional operations in the city. Property agents and consultants are flocking to the growing market.
Bruce Mosler, president of global property consultants Cushman and Wakefield, says that investment opportunities in the Middle East are rife. “The Middle East is a significant player, not just in terms of export and capital but also the consumer base which is developing there,” says Mr Mosler. Which is why Cushman and Wakefield will be opening its first UAE office in Dubai imminently.
As is the case with Cushman and Wakefield, property agents, investors and speculators alike are attracted to the sheer wealth of the nation, which has enabled large-scale development to take place. Abu Dhabi has a number of government investment vehicles, including the Gulf region’s largest sovereign wealth fund: the Abu Dhabi Investment Authority. Mubadala is a $10bn national investment fund established in 2002 with the aim of developing new businesses in Abu Dhabi. Government-backed development organisations such as Mubdala have been instrumental in attracting international businesses to the capital with mixed-use portfolios covering everything from healthcare to education and energy.
But to attract companies to the region, Abu Dhabi’s commercial and residential real estate development will have to keep pace. The urban planning authority that launched Plan Abu Dhabi 2030 could never have predicted the sheer pace of growth, and rising shortages of residential and commercial property are the end result. Contributing factors include construction costs, which are rising about 25% a year, and a shortage of skilled labour and contractors as the number of development projects breaking ground soars throughout the Gulf.
The development of Abu Dhabi hinges upon luring foreign workers to the city. The challenge for the Abu Dhabi planning authority is to provide residential housing stock for the predicted influx of people. Abu Dhabi’s population stands at about 1.6 million and is expected to grow by 6.8% a year during the next decade to a projected 3.4 million by 2015. The city’s population growth rates well ahead of the 2% growth rates experienced in other emerging cities across the world.
Backbone for growth
Providing the backbone to this growth are the numerous masterplanned developments under construction in the emirate. Most of Abu Dhabi’s mega construction projects are mixed use by nature and will serve both residential and business purposes. The creation of a $15bn carbon-free, renewable energy city called Masdar will provide commercial space for up to 1500 companies.
Another project, the $27bn Sadiyat Island development, is a commercial, residential and cultural development that will not only include the Guggenheim and Louvre museums but will also house more than 170,000 residents when 43,500 residential units are delivered upon completion. The 2700-hectare natural island is by far the largest of the 200 islands which lie off Abu Dhabi’s coast.
Other island developments include the 68-million-square-foot (sq ft) Al Reem Island development being built by Tamouh Investments, Sorouh and Al Reem Investments. The island will accommodate 280,000 residents and will include schools, medical clinics, shopping malls, restaurants, a 27-hole golf course, hotels, resorts, spas, gardens and beaches. But whether these projects are going to solve the acute shortage of residential and commercial property when they come on stream is yet to be determined.
The lack of available high-end housing is causing rents to skyrocket and may have an adverse effect on businesses and workers locating to the emirate if they continue to rise. Rent increases account for about 50% of Abu Dhabi’s inflation, which was already high at 10.7% last year.
The housing shortage has seen rental rates for quality apartments rise by 49% in the second quarter of 2008, compared with the same quarter last year, according to research by UAE-based property consultancy Asteco Properties. And with more sought-after types of accommodation, such as two-bedroom apartments, rentals have grown by 66% from last year. There is no shortage of villas in Abu Dhabi, yet the rental costs are so high that they have become unaffordable to most families relocating to the area – a quality three-bedroom villa in Abu Dhabi costs between $41,000 and $76,000 a year. The situation is likely to change when more affordable villa projects come online in Khalifa City, Mohammed Bin Zayad, Al Raha, Sas Al Nakhell and Seashore, according to Asteco.
The shortage of high-quality, affordable housing in Abu Dhabi has reached crisis point in the past six months, according to Asteco. It is a challenge for Abu Dhabi but the situation has meant that neighbouring emirates, such as Al Ain, have benefited from companies looking for an alternative location to house their employees. Traffic from Abu Dhabi to Al Ain is still relatively congestion-free and with new projects coming on stream in Al Ain, construction companies are renting units in bulk to house their employees.
Rents on the rise
Yet just as Al Ain becomes an alternative investment destination for residential property, the rental rates are showing a corresponding increase. Three-bedroom villas, which were rented out at $16,700 in the last quarter, have jumped by 20% to almost $20,000. A lack of commercial property in Abu Dhabi has also prompted investors to look towards Al Ain as an alternative. Office rental rates rose by 19% in the second quarter of 2008, according to Asteco, attracting businesses across all industry sectors, particularly in consultancy and information technology-related companies.
There is a general agreement that it will take several years to resolve the property supply gap and Abu Dhabi’s construction boom is happening at a time of huge region-wide development – which is causing shortages of manpower and equipment – combined with rising cement and steel prices.
Chief executive of Abu Dhabi developer Aldar, Ron Barrott, says that demand for both residential and commercial property is outstripping supply by a long way. “It is simply a fact that it is going to take us about four or five years to catch up, which means, at the moment, there are artificially high rentals on property, both in residential and office space,” he says.
But the shortfall of available property will balance out in time, according to Mr Barrott, because of what he describes as Abu Dhabi’s visionary leadership in the development of the city. More specifically, Mr Barrott is referring to Abu Dhabi’s planning authority, which ensures that all developments are rigorously checked, just as any planning authority does in mature markets, to restrict and control the number of buildings in each asset class. “The process will make sure we balance up supply and demand in the long term because, after all, a healthy market is all about getting that balance right,” he says.
Mr Barrott says that the UAE is the only country in the Middle East with such a rigorous planning regime that works in much the same way as in mature markets around the world. And this kind of development, carried out in a structured and controlled manner, is attractive to foreign investors, says Mr Barrott, who predicts the Abu Dhabi real estate sector is and will become a major market for foreign investors going forward. “We’re seeing a lot of international corporations moving into the capital city because of the development – where we can now offer class-A office space, which we are building at the moment,” he says.
However, available office space is still a promise waiting to be delivered for many firms wanting to base themselves in the region. “There is a lot of interest in locating offices in Abu Dhabi and the greater MENA [Middle East and north Africa] region as Abu Dhabi is increasingly becoming an international hub, with plans for a an upgrade to the international airport and strong national airline, ETIHAD,” says Mr Barrott.
Aldar is involved on many of the high-profile projects set to transform Abu Dhabi in the coming years. These include Al Raha Beach, an entirely new waterfront city being built on seven miles of reclaimed land and encompassing 11 separate precincts, each with its own distinctive use. The 22.3 million sq ft development will house a whole new community with residential buildings for up to 120,000 people, with the delivery of 41,800 residential units. One of the precincts has a business district, which will be the equivalent of London’s West End, featuring Abu Dhabi’s new 26-floor World Trade Centre designed by Sir Norman Foster, providing 64,600 sq ft of shops and restaurants and 344,400 sq ft of class-A office space when it is completed.
Retail and leisure space will be delivered through Aldar’s entertainment development, Yas Island, which will be located on one of the emirates’ largest natural islands and will serve as Abu Dhabi’s main entertainment and retail hub.
The leisure destination will include a Formula One race track, which will be ready for its first race in 2009, a Ferrari Experience theme park, as well as a 3.23 million-sq-ft retail development, including villas and apartments. Aldar’s Central Market project, a redevelopment of the city’s traditional Arabian Souk district, is a mixed-use office, residential and retail development featuring three towers, including a 52-storey hotel, a 58-storey office tower and an 88-storey residential tower.
Rental yields in the Abu Dhabi office market are among the world’s highest and the market is significantly undersupplied with retail property space, in spite of an increase of 220% in total retail space in the emirate since 2000. Projects such as the World Trade Centre and Aldar’s Al Mamoura Building, which will deliver a further 645,840 sq ft of class-A office space, will help to ease the balance of supply and demand, says Mr Barrott.
According to John Davis, chief executive officer of Colliers International in the UAE, there is a clear shift in office space rentals towards longer lease terms of five to 10 years, implying more competitive rents for primary-grade office space scheduled for completion in the next three years, as developers seek to lock in blue-chip tenants.
“More competitive lease terms and shorter advance payments for residential products are yet to manifest themselves due to continued market undersupply,” he says. The imposition of a government-enforced 5% rent cap at the beginning of 2008 will temper passing rent inflation, although this has had the adverse effect of driving up asking rents in an already tight market, according to Mr Davis.
Although the volume of office space sales transactions remains limited, sales prices average $935 per sq ft, according to Colliers. “We believe that a current shortage of primary grade space in the market will offset the risks associated with a global economic downturn,” says Mr Davis, who sees demand from multinational clients already seeking to expand into Abu Dhabi unsatisfied, evidenced by cases of class-A office space pre-lets being negotiated three years prior to completion.
Abu Dhabi’s housing stock totalled about 282,000 units at the end of last year, having grown by close to 10% from the 2005 census estimate of 242,000 units. This compares to the 14% witnessed in Dubai during the same period, says Robin Williamson, Middle East managing director at property consultant DTZ. He expects the residential unit growth to be in excess of 16% a year, going forward, overtaking Dubai in terms of residential unit growth, reaching 460,000 units by 2010 and growing by an average of 14% a year. And according to estimates released by the Urban Planning Council as part of their 2030 plan, cumulative totals of an incredible 411,000 and 686,000 units will come to the market in 2020 and 2030, respectively.
So the construction of mega-projects with residential components will continue to deliver new supplies of high-end housing and is expected to create a distinct shift in favour of tenants, with the inflated rents of today expected to subside, potentially allowing the government to lift the rental cap restrictions, according to DTZ. And in the commercial sector, Abu Dhabi has seen tremendous growth in the past 12 months, despite Dubai’s ‘first mover’ advantage, seeing office rents already rising in excess of those being achieved in Dubai, says Mr Williamson.
While the commercial property sectors in more mature markets across the globe are feeling the effects of the credit crunch and subsequent economic downturn, the UAE’s commercial property market, specifically Abu Dhabi’s, is yet to experience the fallout, says Mr Williamson. “Although the UAE real estate market is not completely immune or shielded from the financial turbulence which appears to be affecting the rest of the world, real estate looks to be a relative safe haven compared to the world markets which have been plagued by the recent market volatility,” he says.
Withstanding the fallout
Mr Williamson considers Gulf Co-operation Council (GCC) economies well-equipped to withstand the fallout from the ensuing global credit crunch as Middle Eastern banking systems and regional banks are well-capitalised and have large domestic asset bases reducing their exposure to global credit markets, in particular to risky assets such as structured investment vehicles. “Across GCC countries, such as the UAE, strong levels of domestic and crossborder demand from both occupiers and investors have led to double-digit rental growth and demand outstripping supply across residential, commercial office, retail and hospitality space,” says Mr Williamson.
According to Asteco Property, office rental rates have increased by 14% during the second quarter of 2008 but in some areas are showing rises of up to 31%. A lack of available class-A space continues to drive up rental rates to between $32.67 and $81.67 per sq ft, reaching $95.28 in some areas, such as Khalidiyah, depending on the quality of the building and its facilities. According to Asteco, landlords in the commercial sector are doing exactly what their counterparts in the residential sector are doing, by pushing up prices to take advantage of the lack of supply, regardless of the standard of offices.
As Abu Dhabi follows Dubai’s rapid urban development, other emirates are also set to do the same. The emirate of Ras Al Khaimah is rich in minerals, such as limestone and clay, which has proved highly profitable in the construction boom that is ensuring the emirate’s five cement factories stay in full production. And just as other emirate leaders have rolled out their visions for development, Ras Al Khaimah ruler Sheikh Saud Bin Saqr Al Qassimi set out his own vision in 2003, following Dubai and Abu Dhabi on the road to diversification and property development.
Ras Al Khaimah’s urban development projects include Al Hamra Village, which was the first development in the emirate available to foreign investors. The 53.8-million-sq-ft Al Hamra Village has three phases, with phases one and two comprising spacious studios, one-, two- and three-bedroom apartments, three-bedroom townhouses and four-bedroom duplexes. The development also includes five- and six-bedroom luxury villas and a marina equipped with 200 berths. More recently, Gateway City has been developed at the entrance to Ras Al Khaimah, which is located in the far eastern part of the United Arab Emirates.
Rakeen is the masterplanner and developer responsible for Ras Al Khaimah’s future property development. The organisation has already succeeded in attracting local and international investors and developers on projects such as Ras Al Khaimah Financial City, which it hopes will become the new hub for the offshore financial operations of the regional business community.
The 73-million-sq-ft, $8bn project will include mixed-use towers ranging from 25 to 65 floors, which will contain offices, residential apartments, hotels commercial areas and related services.
Ras Al Khaimah is following Dubai and Abu Dhabi in the development of offshore projects with Al Marjan Island, the emirate’s first man-made island. The $1.8bn project comprises a cluster of coral-shaped islands extending across 29 million sq ft. Land reclamation of the island, which lies 16.7 miles south-west of the city centre, was finished in December 2007 and project completion is expected by June next year. The development includes waterfront homes, floating villas, hotels, sporting facilities and commercial areas.
Other developments include the Jebel Jais Mountain Resort, built on one of the highest points of Ras Al Khaimah’s Al Hajjar mountains. The project will include a five-star hotel and conference centre, a cable car linking the resort to sea level, luxury residential apartment units and villas, an outdoor skiing slope, a climbing, paragliding and abseiling centre and a falconry centre as well as recording facilities.
Mina Al Arab is another residential project set on a virgin eight-mile coastal strip. It will include numerous resort hotels, an Arabian Adventures theme park, a Thalasso therapy centre, a marina and an eco-friendly hotel in the middle of a nature conservation area.
Call for workers
But with a population of just 250,000 people, Ras Al Khaimah must attract more workers if it is to effectively develop the projects under construction. Added to the shortage of workers, the emirate relies on the federal electricity and water authorities.
The amount of power needed to develop the region means that the authorities are planning to build a coal-fired power station and import hydrocarbon resources into one of the most oil-rich regions of the world. A moratorium on development in Qatar’s north field, from which Ras Al Khaimah’s gas is supplied, means other power sources such as coal need to be explored.
In a joint venture with the UK’s Independent Power Corporation, Ras Al Khaimah is planning to build the region’s first coal-fired power station which will supply 600 megawatts (MW) with plans to expand capacity to 3000MW four or five years after completion.
Foreigners can own property in specific investment projects, provided that they establish a company in the Ras Al Khaimah Free Zone or the Al Hamra Free Zone and purchase the property in the name of the company, because foreign nationals cannot buy in their individual capacity.
Other emirates, such as Ajman, are starting to create interest among international investors because there has been significant activity in masterplanned projects, such as Emirates City, a community project expected to be completed in 2010. Umm Al Quwain is establishing itself as the UAE’s least expensive property investment market.
There was a steep increase in studio rentals of 24% in the second quarter of this year, according to Asteco’s research. Ownership laws mean that foreigners can own property on a 99-year lease structure in designated investment areas, so sales opportunities are still limited compared to Dubai or Abu Dhabi.
For now, Dubai has held firm its development leader status in the UAE but as regulatory frameworks for foreign ownership of property change within other emirates and more masterplanned projects get under way, the same level of development could spread throughout the principality.