Despite a strong economic outlook, Abu Dhabi’s real estate sector faces downside risks with the imminent delivery of a significant volume of new developments, says a report.

With supply forecast to outstrip demand over the next 12 months, a further drop in rental rates is inevitable, although with the market highly fragmented, the impact will vary dependent on the quality and location of individual products, said the CBRE Abu Dhabi market view.

City centre locations will likely remain popular for both residential and commercial uses, particularly as Abu Dhabi awaits completion of Sowwah Square and further delivery of developments in Marina Square, Reem Island, it said.

The report said there had been a steady decline in office lease rates in 2011, although prime headline rents remained unchanged during the final quarter, starting from Dh1,900/sq m/pa. Average office rents experienced a marginal fall during the quarter, ending the year at Dh1,400/sq m/pa – 3 per cent lower than Q3.

Further deflationary pressures should be anticipated over the next 12 months as significant new supply enters the market causing vacancy rates to rise, the CBRE report said.

“Landlords are becoming increasingly flexible and realistic in their approach to leasing, with rent free periods offered as standard market practice. For occupiers with strong covenants, extended rent free periods of up to 8 months per five years of term can be secured as landlords try to limit their risk exposure by avoiding extended rental voids,” it said.

Residential sector

While the residential sector continues to see modest rental declines, the market appears a little steadier than at this time last year, the report said. However, delivery delays during 2011 have arguably helped to alleviate the onset of more aggressive deflationary pressures, and with this in mind the outlook for the year is for further downside, it said.

“With a considerable development pipeline looming for handover during 2012, we anticipate that rents will continue to fall, although the rate of decline is likely to be more moderate than in previous years,” the report said.

On the main island, average residential rents fell by around 4 per cent over the previous quarter and 16 per cent year on year. For Abu Dhabi mainland, the decline was more pronounced with a quarterly decline of 5 per cent against a 30 per cent drop year on year.

The severe lack of villa supply on island should help to underpin villa rents within prime locations in the short term, it said.

The sales market remains subdued with prices largely unchanged during the quarter. Investors remain focused on completed projects that offer tangible assets, although overall investment appetite is quite weak. Rates now typically range from Dh11,300 – Dh13,500/sq m in freehold locations such as Reem Island and Raha Beach. – TradeArabia News Service