Dubai, 6 November 2016 — Office rentals continued to slide amidst weakening demand levels, according to the Q3 2016 Abu Dhabi MarketView by global real estate consultancy firm CBRE. This is due to a growing number of businesses considering actions to streamline business operations, including staff reductions, office downsizing, and sub-leasing of excess accommodation.
Secondary office rentals continue to slide with a drop of around 2% observed during Q3 2016, which translates into a 9% decline from the same period last year. This trend has been accentuated by a development pipeline that is heavily orientated towards inferior quality products and locations. Shell and Core office units within Grade A accommodations remain priced at an average of AED 1,850/m2/annum. While these rates have been stable in recent quarters, there are signs that market pressures may soon result in deflation of Grade A rentals, although the lack of available high quality office product for lease is helping to insulate performance far better than in the overexposed secondary market.
Mat Green, Head of Research & Consulting UAE, CBRE Middle East, said, “Landlords are now showing greater flexibility and a willingness to negotiate with major tenants, underlining a sustained shift towards becoming a tenant-friendly market.”
According to the Q3 Abu Dhabi MarketView, average housing rentals have continued to decline amidst the prevailing weak employment market and softening economy. During Q3 2016, average market rentals fell by around 2% quarter-on-quarter, taking the year-on-year decline to 5%.
Luxury residences within master planned communities, which are highly favoured by blue chip corporate tenants and high-income expatriate residents, have experienced an average rental drop of 3-5% over the last quarter. This has translated into declining rentals for larger unit types, but solid fundamentals for smaller and more affordable units.
On average, annual rentals for studio and one-bedroom units in key mainland locations range between AED25,000-AED45,000 /unit/ annum and AED35,000-AED60,000/unit/ annum respectively. This translates into a minimum 35% gap in rentals as compared to rental levels for low to mid-end properties in the city centre which range from AED40,000 -AED72,000/unit/ annum for studios and AED55,000 -AED120,000 /unit/ annum for one bedroom units.
“Despite the drop in overall rents, more affordable community housing products have still managed to demonstrate modest rental growth, or have remained flat. This underlines a general market shift towards cost sensitivity. With expatriate residents most susceptible to deflationary risks and company downsizing, we anticipate further migration of tenants to locations such as Al Reef Downtown, and affordable mainland locations.
The CBRE report states that it is a challenging period for Abu Dhabi’s hospitality market, with declining revenue performance brought about by sustained deflation of room rates.
In addition to the typically quiet summer period, macroeconomic challenges have added further pressure to the tourism and hospitality sector, resulting in weaker corporate demand, a key component of the Emirate’s visitation profile.
According to data from STR Global, Abu Dhabi’s year to date occupancy rate to September 2016 was recorded at 70.2%, down by around 3.0% from the same period last year.
The year-on-year average daily rate (ADR) also dipped, falling from AED488/room/night in September 2015 to AED440/room/night in September 2016. Lower occupancy rates and the continued softening of ADR’s, has subsequently pushed down revenue per available room (RevPAR) by close to 12%, as rates fell from AED352/room/night in September 2015 to AED310/room/night in 2016.
Despite ongoing initiatives to diversify and boost Abu Dhabi’s tourism and hospitality markets, the Emirate’s room demand is still heavily driven by corporate requirements.
Between 2017 and 2018, close to 2,500 new hotel and hotel apartment keys are scheduled to be completed, raising competition and adding further pressure to hoteliers and hotel owners. The majority of the new rooms will be of 5-Star quality which could lead to a sustained period of lower rates for the upscale and luxury segments.