Affordable off-plan developments are showing signs of potential amid a wider downturn in Abu Dhabi’s residential market.
Off-plan projects that offer residential buyers attractive incentives and greater affordability could help offset soft demand in Abu Dhabi’s broader real estate market, which is still recovering from a slowdown in economic growth in 2017.
While returns on rental properties and sales both posted negative growth last year, there was stronger uptake of off-plan developments—a segment analysts predict will continue to gain momentum this year.
For example, while property developer Aldar saw its 2017 profits dip from $762.2 million to$544.4 million—albeit largely due to a one-time re-evaluation charge of $134.7 million, according to a statement issued mid-February—strong results from its off-plan projects moderated the effect of slower activity in other segments.
The company recorded $952.7 million worth of property sales in 2017, ahead of expectations. Significantly, two mid-market, off-plan developments launched in April and September sold out within weeks, signaling what could be in store for the sector in the coming year.
More developers are expected to try to attract investors with off-plan projects that offer stronger buyer incentives to shore up sales and maintain revenue flows, according to a recent report by property consultancy Cluttons. These incentives include extended and more favorable payment plans, with the developer offering to carry some of the transaction costs in certain cases. “Newly launched off-plan projects with attractive payment plans and discounts will continue to benefit from good levels of demand,” the Dubai-based real estate firm Asteco said in a January report.
Increased competition in the marketplace and more cost-aware buyers prepared to shop around for deals may prompt developers to shave margins to make more sales, market analysts at Cluttons and JLL say. It is also likely there will be a shift towards more affordable offerings this year—a concession to constraints on buyers’ pocketbooks.
Rental Rates and Residential Sales Prices Dip
While off-plan projects are expected to do well in 2018, growth in the segment may not be enough to fuel a wider recovery in the market.
Although the rental market saw pockets of growth last year, with apartments in affordable, non-freehold communities such as Saadiyat Island and Al Khalidiyah seeing double-digit growth in the second and third quarters, these gains were offset by declines in other districts like Al Reem Island, Corniche and Al Raha Gardens.
Overall, rental rates fell by almost 12 percent in the 12 months to September 2017, according to the Cluttons report, while property sales registered a decline of 4.1 percent. By the end of the third quarter of 2017 residential sale prices were on par with 2014 levels.
Prices in most segments of the residential market continued to ease at the end of 2017, with the average sales price for a villa dipping by 1 percent quarter-on-quarter and apartment sale prices falling by 2 percent. However, some districts, such as Saadiyat Island and Khalifa City, saw 5-6 percent increases in returns, according to industry data issued mid-February. Rental rates followed the same patterns as sales heading into 2018, falling at an average of 1 percent for villas and 2 percent for apartments.
With new projects nearing completion, residential stock is set to increase in 2018. Additionally, many off-plan sales to date are understood to have been to buyers aiming to rent the units out, which could put further downward pressure on rental rates in an already crowded market this year and beyond.
Muted Economic Growth Influences Demand
According to analysts, among the factors keeping sales prices and rental rates subdued are muted economic growth and increasing living expenses on the back of reductions in company housing allowances and scaled-back subsidies for multiple items.
In mid-January the UAE Minister of Energy and Industry Suhail Mohamed Faraj al Mazrouei, flagged the possibility of removing all subsidies on gas and electricity, bringing prices up to market levels. The move could potentially narrow consumer spending power further, which could put greater pressure on affordable off-plan sales margins.
Another variable in the marketplace is the recent introduction of value-added tax in the UAE, which came into force on January 1. While expected to only have a modest effect on projects—with developers able to claim back input costs—a recent study by JLL forecast returns to real estate investors would shrink by 0.5 percent due to the introduction of the tax.
This Abu Dhabi economic update was produced by Oxford Business Group.