Rental value growth across Abu Dhabi, although having recently returned to positive territory, lags the strong gains being recorded by its northern neighbour – Dubai.

Abu Dhabi’s rental cap removal changes dynamics!

Rental value growth across Abu Dhabi, although having recently returned to positive territory, lags the strong gains being recorded by its northern neighbour – Dubai. Average rents rose by 1 per cent during Q3 across the capital city’s freehold areas, following an increase of 4.5 per cent during Q2.

This does, however, mask the fact that apartments (4.1 per cent) continued to experience stronger uplifts than villas (0.7 per cent) in the third quarter.

We have continued to record strong tenant demand, in addition to registering high levels of corporate lettings activity. This is helping to sustain the current rental value growth rates across Abu Dhabi’s freehold market, which still forms a small segment of the broader residential landscape.

The volume of corporate lettings demand is placing additional upwards pressure on rents of large requirements, often resulting in the letting of entire buildings prior to market release. These bulk residential requirements, most notably from the hospitality sector, continue to dominate the rental market and we have recorded demand for close to 2,500 apartments last year from this sector alone.

Despite the hospitality, education and healthcare sectors contributing to overall tenant requirements, the market absorption rates for the projected residential delivery pipeline will be critical in helping to hold rents steady.

The onset of the financial crisis saw residential schemes stall across Abu Dhabi and the rest of the UAE and some of these developments have only recently begun to see resumption in construction activity, with a slow trickle of units starting to gather pace. Al Rayanna community’s 1,500 units in Khalifa City A are among some of the city’s most recent completions.

In addition, Aldar commenced the phased handover of 3,500 units at the Gate Towers on Reem Island last month, marking the start of the delivery of 7,000 units by the developer across Abu Dhabi’s freehold areas. This increased pace of handovers is expected to put downward pressure on rental value growth in the short term.

During the boom years, Abu Dhabi introduced a 5 per cent cap on rental value uplifts that could be applied to contracts each year in an effort to curb rampant rental growth, following in the footsteps of Dubai. Authorities were also in part driven by the fact that housing costs were a significant contributor to the emirate’s inflation rate.

 

Abolition of the rent cap

This year however, the rental cap law was ended. The removal of the cap on November 10 comes in the face of looming residential completions and will certainly test the market’s supply-demand dynamics. The fear that the abolishing of the rent cap would lead to run-away rental value growth is perhaps an over reaction as it is still too early to assess the ability of the market to absorb the magnitude of supply now waiting in the wings.

To an extent, the sharp rent rises across the border in Dubai are continuing to contribute to the overall tenant demand as former Abu Dhabi residents make a return to the Emirati capital, driven by rents that are now more affordable than comparable areas in Dubai. These former residents are adding to the public sector workforce who were legally required to relocate to Abu Dhabi under the ‘live-local’ law that came into effect on September 1.

We expect there to be further clarity in the coming weeks on the rules surrounding the enforcement of the abolishment of the rent cap law, while new rules to protect both landlords and tenants are anticipated imminently. The impact may be particularly noticeable in the older parts of the city, where rents have been weak and in decline, in some cases.

These areas, which are primarily confined to Abu Dhabi Island have operated a two-tiered market for many years, with older buildings being outperformed by more modern developments. The increased supply of newly built schemes is expected to give tenants a greater choice and may in fact turn Abu Dhabi into a renters’ market; however, it is still too early to assess this.

In the short term, the removal of the rent cap is expected to create a more competitive environment for tenants, with rents stabilising across most parts of the city. The removal is, however, likely to cause some initial confusion, especially amongst landlords accustomed to raising rents by 5 per cent each year.

This will create the need for rental valuations to be carried out not only to aid landlords’ decision making, but also to help with the establishment of real “market rates”. This is expected to help Abu Dhabi begin its journey towards becoming a more transparent and mature market, bringing it line with global markets.

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