Abu Dhabi office market set for oversupply: study

Abu Dhabi is still experiencing a housing undersupply, but the emirate’s office market will enter into an oversupply situation by the end of 2010, a recent research said.
The study conducted by Tasweek Real Estate Development and Marketing, an advisor and solutions provider serving the Middle East real estate markets, predicts further pressure on property prices in Dubai.
For the Abu Dhabi market, Tasweek study reveals a very low demand for off-plan properties and expects future activities to be initiated by private equity groups and large institutional investors seeking conservative but higher-than-usual yields.
A focus on the new CBD area of Sowwah Island that will allow financial structures comparable to those of Europe and the USA with guaranteed yields/returns is also expected, it said.
The consultancy notes though that new developments from Reem Island to Al Raha could influence an asset value stabilization with new supply entering the market.  The average rents are around 30 per cent above Dubai rates, and that between 12,000 to 15,000 apartments will be completed within the year.
The Tasweek study forecasts Abu Dhabi’s office market to enter into over-supply by the end of 2010 and record an additional 1.2 million sqm of supply before the end of 2012, 50 per cent of which will be part of large-scale mixed-use projects and tower buildings.
The market will continue to be pressured by Dubai’s developed urban infrastructure, lower rental rates and abundant supply.
“The property markets of Abu Dhabi and Dubai remain closely linked and so both will have to be closely watched as we prepare to enter 2011. While Dubai’s appeal lies in its reduced prices, Abu Dhabi offers new developments and stable financing. Our  comparative study of market conditions in two other major Asian states during the crisis of 1997 shows that property recovery took over two years, so hopefully we will witness significant market improvements next year,” said Masood Al Awar, CEO, Tasweek Real Estate Marketing and Development.
Al Awar added that the only solution to sustain the current rental rates is to reduce the property yields and improve added-value services for the tenants.
Tasweek foresees more price pressure for Dubai’s residential and office markets. A total of 26,000 housing units are expected to go online in 2010, followed by around 25,000 in 2011.
The report sees no major delays or cancellations in the residential sector, and adds that although the value of transactions picked up 50 per cent quarter-on-quarter (QoQ) during the second quarter of 2010 it was still slightly below 2009’s Dh3 billion. It also notes a 4 to 8 per cent QoQ drop in average prices.
More office space delivery delays and cancellations are expected in the coming 18 to 24 months, with current vacancy rates on average above 35 per cent. The figure is estimated to increase to over 50 per cent as more supply enters the market. The whole commercial market currently comprises 48 million sq ft with an additional 20 million sq ft set to be introduced within the year.
Tasweek also evaluated the GDP contributions of construction and real estate in the two emirates. The sectors were found to account for 9 per cent of Abu Dhabi’s GDP compared to 27 per cent of Dubai’s.