In Abu Dhabi, smaller the flat, bigger the returns
It’s common knowledge that close to 50 per cent of Abu Dhabi’s gross domestic product (GDP) is reliant on the oil and gas sector, making it susceptible to movements in oil prices. According to a recent GCPReidin report, the oil price crash of 2014 had a detrimental impact on the capital city’s economy, causing GDP growth to nearly half a couple of years later (2015 — 4.9 per cent vs 2016 — 2.8 per cent).
The rebound in oil prices has not yet translated into GDP growth rates, with the resilience of the Abu Dhabi economy coming through because of diversification efforts.
However, housing starts, which is a good indicator of the economy’s health, reveals that in 2016 new building permits have increased by 50 per cent year on year, the report adds. “This is an indicator used by economists to predict the direction of the economy over the next 12 to 18 months, indicating that there appears to be a gradual move higher in growth rates in the coming years.”
Apartment prices in Abu Dhabi have not rebounded to the levels seen in early 2009. From a return perspective, investors who have held on have achieved a return of 31 per cent in seven years, with rental returns accounting for bulk of the gains, says the report.
The GCP-Reidin report, however, claims that the total returns for villas in Abu Dhabi have been double that of apartments since 2009. Unlike apartments, city-wide villas remain above their 2009 highs.
“The villa segment has been relatively buoyant, especially considering the anticipated pipeline that is
apartment yields in the capital range between six to 7.5 per cent versus circa four per cent for villas Matt Green, head of research and consulting, CBRE Middle East
Luxury property tends to appreciate faster and is often a capital gains play over income Ben Crompton, managing partner, Crompton Partners Estate Agents
continuing to be dominated by vertical developments. Consequently, investors in the villa space have fetched far better with a cumulative return of 63 per cent during the same time frame,” adds the report.
The performance gap between villas and apartments is expected to narrow as economic diversification efforts lead to a push in mid-market housing (already underway).
However, other market experts insist that villas in Abu Dhabi typically provide lower yields than apartments. This is in line with trends across global property markets. Buy-to-let investors predominantly focus on smaller units which offer higher returns on a per square foot basis, and are also generally easier and quicker to lease.
“This situation is no different in Abu Dhabi, whereby rental yields are normally highest for small and affordable units and lowest for larger expensive units. Typically, apartment yields in the capital range between six to 7.5 per cent versus circa four per cent for villas situated in upper-mid to high-end residential developments,” says Matt Green, head of research and consulting, CBRE Middle East.
Smaller apartments tend to offer investors better yields in Abu Dhabi. Studios can often fetch nine to 10 per cent gross yield. “However, this needs to be offset against the fact that they are more difficult to manage on a cost basis [i.e. they require almost as much management as a three-bedroom but for less than half the income],” says Ben Crompton, managing partner, Crompton Partners Estate Agents.
Average current yields in Abu Dhabi are around 7.5 per cent if you take the city as a whole, with lower yields on more luxury property. “Luxury property tends to appreciate faster and is often a capital gains play over income,” observes Crompton.
Average house rents and sales prices in Abu Dhabi are likely to experience further declines in the short to medium term.
“We expect affordable housing options and good quality community-based developments to outperform the wider market average. We do not expect to see a return to growth during 2018 and the performance of the market is ultimately linked to the performance of oil prices and the wider economy,” adds CBRE’s Green.
“We think sales and rents will be pretty flat for the rest of 2017 as supply is eaten up in the market. We would expect acceleration to the upside in early to mid 2018,” reckons Crompton.
Prime residences on Saadiyat Island, Al Raha Beach and Reem Island remain primary choices for high-income residents and blue-chip corporate housing accommodations. “More affordable investment locations such as Al Reef Downtown and Al Ghadeer continue to generate demand from cost-sensitive occupiers, as well as giving investors relatively higher yields,” adds Green.
End-users are very active in the more affordable markets as owning a home has come back into the reach of many. “Al Reef and Reem Island have been particularly busy,” says Crompton.