abu dhabi-residential - nov 09

Kuwait Financial Centre “Markaz” REAL ESTATE RESEARCH

Abu Dhabi-Residential Develop high end residential units

Executive Summary

The causal factor behind the attractiveness of residential real estate in Abu Dhabi is the pent-up demand which remains

undersupplied till 2011 even in case of a no expat growth scenario. However, real estate prices contracted 47% from the

peak on an average, in extent similar to that of Dubai and more

than the regional average of 30% while rentals contracted by 13-15% as well, unsupportive of this undersupply argument.

The expectation of contraction in the UAE non-oil GDP growth

during 2009 impacted income growth and expectations and

halted real estate demand. This demand contraction along with financing constraints and lowered risk appetite lead to price and

rental contractions. Release of supply amidst such uncertainty aggravated the rental contraction in certain property types, like

3 BR apartments (-15%) and 4 BR Villas (-22%). Expansion in the Abu Dhabi – Dubai rental multiple from 0.7 to 1.6 on an

average in a span of 4 quarters due to rental contraction in

Dubai lead to an increase in mid-income commuters leading to marginal increase in demand diversion as well.

The 2.4% real economic growth predicted for the UAE economy

in 2010 hinges more on the oil-economy than the recent past

thus portraying the extent of recovery in Abu Dhabi. Overall project spending in Abu Dhabi which is at 14% of GDP 2009

expands to 19% in 2010, driven mainly by government projects. We expect these expansions in activity levels to reinvigorate the

pent-up demand for residential real estate. The forthcoming supply in Dubai during 2009-11, estimated at 30-112k units

would influence the prices and rentals in Abu Dhabi to tend

downwards impacted positively by the demand resurface.

Near term developments targeting the middle income group may have to face the uncertainties caused by price and rental

contraction in Dubai as well as from supply off the main island.

However, the demand from high income segment can be catered by providing quality and amenities while their

willingness to pay a premium for non commuting would soften any negative impact providing investors with attractive

opportunities. The seeming oversupply in the high end segment from our forecast of 20,000 units during 2009-12 is clouded by

delays due to the financing constraints faced by the developers.

The longer term trends would be determined by economic

diversification, supply side controls, improvements in infrastructure and regulatory architecture and in garnering the

ability to compete and integrate with Dubai.

November 2009 Research Highlights:

An outlook on the Residential Real Estate Sector of Abu Dhabi

and suggesting development strategies

Markaz Research is available

on: Bloomberg - Type “MRKZ” <Go>

Thomson Research, Reuters Knowledge

Nooz Zawya Investor

ISI Emerging markets

Bassam N. Al-Othman Senior Vice President

+965 2224 8011 [email protected]

M.R. Raghu CFA, FRM Head of Research

+965 2224 8280 [email protected]

Venkateshwaran Ramadoss Senior Research Analyst

+965 2224 8000 ext 1144 [email protected]

Kuwait Financial Centre

“Markaz”

P.O. Box 23444, Safat 13095, Kuwait

Tel: +965 2224 8000 Fax: +965 2242 5828

markaz.com

REAL ESTATE RESEARCH

November 2009

Kuwait Financial Centre “Markaz” 2

Market overview

The causal factor behind the attractiveness of residential real estate in Abu Dhabi is the pent-up demand which is highlighted

by the medium term supply shortage as depicted in Exhibit-1. Abu Dhabi is no exception to the regional characteristics of

volatile expat growth which could change any market from

undersupplied to oversupplied in a short time frame. However, it is not vulnerable to negative expat growth in the near term as

its economy is less reliant on sectors that are currently under trouble. This puts the lower limit of expat growth at 0% along

with the historical 3% Emiratis’ natural growth rate while our estimates of expats growth rate ranges between 2.0% to 3.5%

in the coming two years.

This estimated undersupply comes out of the standard demand supply forecasting models and similar forecasts can be found in

any report on Abu Dhabi and are assumptive in nature. These assumptive estimates were corroborated by the rental and price

growth during the boom, which outgrew Dubai both in absolute

and relative terms.

Exhibit-1 : Undersupply of housing units in Abu Dhabi

2460200

5500 4300

19400

10250

20600

15000

8950

1100

9500

3200

0

5000

10000

15000

20000

25000

2009E 2010E 2009E 2010E

0% expats growth Expat growth as per our

estimates

Low end Mid end High end

Source: Markaz Real Estate Research estimate

Contraction in prices and rentals counterintuitive

The intriguing fact in Exhibit-1 is that, even in the worst case of

no expat growth scenario, the market remains undersupplied till 2011. This suggests a robust market protected from demand

and supply side shocks with stable to rising price and rental trends.

However, real estate prices contracted 47% from the peak on

an average, in extent similar to that of Dubai and more than the regional average of 30% while rentals contracted by 13-

15% as well. Apartment prices contracted by 25% cumulatively from peak and rentals contracted by 10% while villa prices

contracted by 57% and rentals contracted by 14% on an

average.

Although the asking prices have stabilized of late as shown in

Exhibit-2, the contraction experienced is counter intuitive to a pent-up demand driven undersupply argument and hence, is

worth investigating.

Existence of pent-up

demand in Abu Dhabi due to its non

vulnerability for an exodus of expats

Pent-up demand the

causal factor behind the attractiveness of

Abu Dhabi residential real estate

Undersupply exists

even in case of no expats growth scenario

47% contraction in prices and 15%

contraction in rentals counterintuitive to an

undersupplied market


November 2009


Exhibit-2 : Q-o-Q trends in prices and rentals

-3%

-17%

12% 11%

-13%

-46%

5%

-12%-11%

-5%-9%

-2%

8% 10%

-1%

1%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Apartments Villas Apartments Villas

Prices Rentals

Q-o

-Q C

ha

ng

eQ4-08 Q1-09 Q2-09 Q3-09

Source: Landmark Advisory, Markaz analysis

Demand contraction due to income level changes

The above demand-supply estimates indicate the underlying

potential assuming stable income levels and clear future growth expectations. However, income levels and expectations could

scale down as a result of a contraction in economic activity as

measured by non-oil GDP. IMF expectations of UAE’s Real Non-oil GDP growth rate for 2009 declined from 7.1% in Oct-08 to

4.4% in Apr-09 and to a mere 1.1% in Oct-09 denoting contraction in real income growth and expectations which

negatively impacted the real estate demand. However, as the

precise impact and the extent of such demand contraction is hard to measure quantitatively, considerable uncertainty was

assigned to the undersupply numbers given in Exhibit-1.

Lack of financing, the wait and watch approach adopted by

developers in the wake of the uncertainty and changes in risk appetite as a byproduct of the crisis exacerbated the extent of

fall in prices which we can attribute to the uncertainty regarding

the prospects of the future demand. This came out evident in land prices which contracted 70% from the peak to AED 250 per

sq.ft on an average. Improvement in the financing conditions, which will follow the macro economic recovery, would cause

land prices to rise during 2010-11.

Exhibit-3 : Rental contraction varies across types

-8% -8%

-15%

-22%

-10%

-25%

-20%

-15%

-10%

-5%

0%

1 BR 2 BR 3 BR 4 BR 5+ BR

Apartments Villas

Rental Contraction

Source: Landmark Advisory, Markaz Real Estate Research Estimates

IMF’s forecasts of

economic activity levels

indicates contraction in expectations over the

past year

Contraction in

economic activity implies contraction in

income growth levels

and expectations resulting in contraction

in pent-up demand

Inability to measure

the demand contraction introduced

uncertainty

Lack of financing, changes in developers

attitude and enhanced risk aversion

exacerbated price and

rental fall due to demand change


November 2009


Release of supply amidst the above said uncertainties explains the heavier contraction in few segments compared to others

(Exhibit-3). Rentals contracted heavily in 3 BR apartments

(15%) and 4 BR Villas (22%) due to release of supply during Q2-09 when uncertainty in economic outlook and contraction in

expected income levels halted demand altogether. Supply of Villas that got released in Khalifa City A impacted the average

mainly due to its location, as it is situated outside the main Abu

Dhabi island, thus fetching lower rentals. Supply of 3 BR villas in Al Raha Gardens and Golf Gardens also contributed to the

contraction which we expect to be marginal.

Demand diversion to Dubai

While part of the pent-up demand got contracted due to

changes in income level and expectations, part got diverted to Dubai. Dubai outweighs Abu Dhabi in terms of building quality,

infrastructural and regulatory architecture and a considerable portion of the pent-up demand consisting of high income – high

quality accommodation seekers were commuting to Abu Dhabi for quite some time. This segment has a household income

more than AED 25000 per month and account for 30% of the

total demand. Better quality is the key decision driver for this segment and there has been no developments to impact the

trends in this segment.

However, there has been a marked increase in commuters to

Abu Dhabi from Dubai for work which has been anecdotally

verified by many observers. A study of the carpooling statistics showed a sudden rise in the number of trip arrangements from

Dubai to Abu Dhabi from Q2-09 (Exhibit-4). This is mainly due to the rental contraction in Dubai that expanded the Abu Dhabi

– Dubai rental multiple from 0.7 to 1.6 on an average in a span of 4 quarters. The middle income group with household income

between AED 15000-25000 per month accounts for 22% of the

total demand. The expanding rental multiple lured this segment to commute thus contributing to additional contraction in pent-

up demand. Better quality and cheaper rentals both constitutes the key decision drivers for this segment and it is the marginal

effect of the trend change in this segment that caused the

demand diversion to Dubai.

Exhibit-4: Rental multiples and carpool agreements

0.7 0.70.8

1.51.7

1.5

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1 BR 2 BR 3 BR

Q1-08 Q2-08 Q3-08 Q4-08

Q1-09 Q2-09 Q3-09

1 1

6 5 6

21

44

Car pools

Source: carpoolworld.com, asteco

Ab

u D

ha

bi –

Du

ba

i R

en

tal m

ult

iple

Release of supply

amidst uncertainty the

reason for heavy contraction in 3 BR

apartments and 4 BR Villas.

Rental multiples

between Abu Dhabi

and Dubai doubled in a span of 4 quarters

Mid income group contributed to the

marginal increase in

commuting who were lured to Dubai by the

cheaper and better quality properties


November 2009


Estimating the near term future trends

Demand resurface

IMF forecasts the real economic activity in UAE to expand by 2.4% in 2010 while other economists predict it to be at 3-5%

range. This expansion is expected to occur after a marginal contraction of 0.2% in 2009 which is mainly due to reduced oil

production and exports and due to contraction in the non-oil economy due to external linkages and fall in real estate prices.

The expansion is driven mainly by stability in oil prices and

government spending which makes the economy of UAE more dependent on Abu Dhabi in the near term.

Consequently, we expect Abu Dhabi’s share of UAE’s real GDP to increase from its current level of 55% by 2-3% during 2009-

11. The sheer size of the undersupply as specified in Exhibit-1

warrants that as the economy expands again, the demand which contracted along with the economy should resurface as

well.

The short term risk to this outlook arises from a possibility of

non sustenance of the global recovery which would cause the oil prices to fall from the current comfortable levels and would

place the ailing financing industry in deeper troubles.

Exhibit 5: Project spending in Abu Dhabi

26.9

41.9

55.0

0

10

20

30

40

50

60

2009 2010 2011

Pro

ject

sp

en

din

g (

US

D B

n)

Govt Govt JV Private

Source: meedprojects, Markaz Real Estate Research analysis

Exhibit-5 portrays the project spending that we expect to be incurred in the short term future in Abu Dhabi. Overall project

spending in Abu Dhabi stands at 14% of the nominal GDP of

UAE in 2009 and expands up to 19% in 2010, mainly driven by the marked expansion of government projects from 26% of

total projects in 2009 to 41% in 2010.

Hence in the near term, we can expect the activity levels to

generate both income and population growth, quintessential for

residential real estate demand growth.

Dynamics of demand diversion – market level trends

We need to briefly study the current state of Dubai residential market and estimate the possible near term developments in

order to be able to judge the possibility of a recapture or further diversion of the residential demand of Abu Dhabi.

Expansion of economic activity in UAE more

dependent on oil and

government spending resulting in increased

contribution from Abu Dhabi

Project spending in Abu

Dhabi grows from 14% of nominal GDP in 2009

to 19% in 2010 driven

mainly by government projects

Expansion in these

activity levels to generate population

and income growth,

the quintessentials for real estate demand

resurface and growth


November 2009


Dubai dwarfs Abu Dhabi in terms of supply of properties (Exhibit-6) and close to 60% of the properties offered are ready

for occupation as against 15% in case of Abu Dhabi. Unless the

demand drivers in Dubai bounces back with dramatic strength, which is highly unlikely, high vacancy levels, which currently

stands at 25% as per Colliers International’s estimates, will prevail for the near term.

This indicates Dubai’s ability to cater to the pent-up demand of

Abu Dhabi in the near term among other locational demographic movements within Dubai and from Sharjah.

Exhibit-6 : Residential units under offer currently

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Abu Dhabi Dubai Abu Dhabi Dubai

For sale For Rent

No

. o

f h

ou

sin

g u

nit

s

Apartments Villas Others

Source: Markaz Real Estate Research

Apart from catering to the un-served demand of Abu Dhabi, the

oversupply would continue to act as a bargain enabler as the

excess supply impacts the rentals and prices in Dubai. Rentals and prices for the developments in Abu Dhabi would be

benchmarked and compared with the levels in Dubai with a premium to compensate the need to commute. This will again

be appropriately discounted for the relatively lower quality

developments and for the lack of other amenities.

Hence, in the near term, rentals and price trends in Abu Dhabi

would be heavily determined by the trends in Dubai finding new lower equilibrium after trending down following the release of

fresh supply. Given the market estimates of forthcoming supply in Dubai which ranges from 30,400 units (Colliers) to 112,000

units (Landmark Advisory) during 2009-11, we can estimate the

new equilibrium prices and rentals to be found at a lower level in the near term in Abu Dhabi as well.

The extent of such price and rental contraction would be controlled by the creation of fresh demand from increased

economic activity which will improve income levels and

expectations. Improvements in financing conditions would lower the impact as well. The lowered price and rental levels by itself

would tend to contribute to demand growth as the lower rentals would cause income growth and lower price levels lures the

potential buyers. Exhibit-7 illustrates these dynamics pictorially.

Dubai outweighs Abu Dhabi both in terms of

quantity and quality of supply

Demand diversion from Abu Dhabi to Dubai

would continue except in case of dramatic

demand bounce back in Dubai

Dubai would act as a

bargain enabler for Abu Dhabi properties due to

its lower prices and rentals

Rentals and price in

Abu Dhabi to remain impacted by trends in

Dubai trending

downwards

Extent of demand

resurface and improvements in

financing conditions would limit downside


November 2009


Exhibit-7 : Prices and rental trends in the near term

Source: Markaz Real Estate Research

Dynamics of demand diversion – income categories

The drivers for housing decision varies depending on the

household income levels. The high income category (earning more than AED 25k per month) would evaluate the tradeoff

between quality and proximity for both buying and renting transaction and would be biased towards quality. Thus, they

would be willing to pay a premium to the equivalent properties

in Dubai for getting equivalent quality in Abu Dhabi. The current premium levels range from 10% to 40% (Exhibit-8) and we can

expect the future price and rental levels to remain stable and contraction levels muted.

The mid income category (AED15-25k per month) would evaluate the tradeoff between the cost savings as well along

with the quality and proximity considerations. Thus, to serve the

demand from this segment, rentals and prices should track that of Dubai more closely as falling rentals and prices in Dubai will

increase the attractiveness of the commuting option. The release of supply off the main island which commands lower

rents would contract the rental multiple from the current 1.8

levels to 1.2 levels. The low income category would be served by these supply as well which will be occupied by shared

accommodations. Thus we expect the average prices and rentals to contract more in line with Dubai in this segment.

Exhibit-8 : Rental multiples - categorized

1.4 1.3 1.11.8 1.7 1.7

2.1

1.71.4

1.2 1.1 1.11.5 1.5 1.6 1.5 1.4

1.3

1 BR 2 BR 3 BR 1 BR 2 BR 3 BR 1 BR 2 BR 3 BR

High end Middle end Low end

ADH-DBX rental multiple

Min Max

Source: KT-Asteco Monthly Rental Monitor-Sep-09

High income category

biased towards quality

and would be willing to pay a premium over

Dubai for equivalent properties

Mid income category to evaluate based on cost,

quality and proximity and will be lured more

by bargains in Dubai

Rental premium for

high end properties

lower than mid-end and low end properties


November 2009


Development strategies for the near term

Given the above scenario and market level forecasts we need to study the source of demand which we try to cater and the types

of developments which are forthcoming in order to frame strategies for development.

In order to cater the demand from mid and low income categories, the developments needs to be price competitive to

that of Dubai. Moreover, the developments in Dubai will continue to influence this segment thus posing huge

uncertainties in terms of take-up, vacancies and price levels. Developments targeting income generation should compete with

the offering in the non-freehold areas as well which would be

cheaper compared to the freehold areas given their locations. Development targeting these segments would not be attractive

until the oversupply conditions are corrected in Dubai, which cannot be expected to happen in the near term given the supply

forecasts. Hence, we recommend restraint despite of the short-

supply forecasts in Exhibit-1.

On the other hand, higher quality developments with associated amenities would cater the incremental high income demand and

would lure back the demand so far diverted to Dubai as well. The extent of impact of Dubai and the resultant uncertainties

will be softer as well, as discussed above, thus providing lower

risk. This explains the concentration of the shorter term supply in the high end segment with around 1600 apartments under

offer in Al Reem Island alone scheduled to be delivered during 2010 accounting for 80% of total supply which rises oversupply

concerns (Exhibit-9). Our near term forecasts suggests a high

end supply close to 20,000 units during 2009-12 which would result in a oversupply scenario by 2012 given the current

scenario. However, the materialization of these forecasts is highly uncertain as these developments should overcome delays

and cancellations due to the financing constraints faced by the

developers in the current market conditions. This would provide with attractive development opportunities for investors provided

the developments matches the equivalent developments in Dubai in terms of building quality and other amenities.

Exhibit-9 : Locational break-down of short term supply

Al Reem

Island

Al Raha

Al Raha

Al Reef

Al Reef

Hydra Village

Golf GardensAl Ghadeer

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Apartments Villas

Source: Markaz Real Estate Research estimate

Developments needs to

be price competitive to that of Dubai in case of

mid and low end

developments

Competition from off the main island as well

for developments

targeting income generation

Mid end developments not attractive till

uncertainties in Dubai prevails

High end developments

to lure back demand diverted to Dubai while

serving incremental

demand

Materialization of near

term high end development forecasts

uncertain due to financing constraints


November 2009


Longer term outlook

Ability to generate more employment and economic activity in the private sector, controlling the supply side and avoiding

massive oversupply like current Dubai, improvement in infrastructural and regulatory architecture and generating the

ability to compete and integrate with Dubai would tend to

determine the longer term Abu Dhabi residential real estate trends.

The longer term economic growth trend is determined by the Emirate’s success in diversifying its economy from oil and

government spending which constitutes 65% of the total economy right now. This has been as outlined in the Economic

Vision-2030 as well and forms part of the long term strategy of

the Emirate.

The master developments of Abu Dhabi would be flexible enough to keep the pace of developments under check in order

to avoid an oversupply situation in the future in line with the

strategic vision of Abu Dhabi. While plans to improve infrastructure and creation of a regulatory authority are already

in the anvil, in order to be able to compete with Dubai and to be able to be freed of its influence, plans should be designed

keeping the current sophistication of Dubai in mind.

Private sector

employment, supply side controls and

infrastructure & regulatory

improvements are the long term drivers


November 2009


بيان صحفي

2009

2011

47

301315

2009

15

22

0.71.6

20102.40.22009

2355

142009192010

26

2009412010


November 2009


2009

201130112

25

1045

1525

1.81.2

3011220092011

2020092012


November 2009


Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is

regulated by the Central Bank of Kuwait. The report is intended to be circulated for general information

only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction.

The information and statistical data herein have been obtained from sources we believe to be reliable

but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, estimates and

projections in this report constitute the current judgment of the author as of the date of this report.

They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the

event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn.

This report does not have regard to the specific investment objectives, financial situation and the

particular needs of any specific person who may receive this report. Investors are urged to seek

financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and to understand that statements regarding future prospects

may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Investors should be able and willing to accept a total

or partial loss of their investment. Accordingly, investors may receive back less than originally invested.

Past performance is historical and is not necessarily indicative of future performance.

Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the

firm may have a conflict of interest that could affect the objectivity of this report.


November 2009

Strategic Research

What is left for 2009? (Sept-09) Kuwait Investment Sector (Jun-09) Missing The Rally (Jun-09) Shelter in a Storm (Mar-09) Diworsification: The GCC Oil Stranglehold (Jan-09) This Too Shall Pass ( Jan-09) Fishing in Troubled Waters(Dec-08) UAE Outlook (Oct-08) Down and Out: Saudi Stock Outlook (Oct-08) Kuwait Stocks: Fair Value Not Far Away (Sept-08) Mr. GCC Market-Manic Depressive (Sept-08) Global Investment Themes (June-08) To Yield or Not To Yield (May-08) The Golden Portfolio (Apr-08) Banking Sweet spots (Apr-08) The “Vicious Square” Monetary Policy options for Kuwait (Feb-08) Outlook 2008: GCC (Jan-08) China and India: Too Much Too Fast (Oct-07) A Potential USD 140b Industry: Review of Asset Management industry in Kuwait (Sep-07) A Gulf Emerging Portfolio: And Why Not? (Jun-07) To Leap or To Lag: Choices before GCC Regulators (Apr-07) Derivatives Market in GCC (Mar-07) Managing GCC Volatility (Feb-07) GCC for Fundamentalists (Dec-06) GCC Leverage Risk (Nov-06)

Periodic Research Title Frequency

Markaz Daily Morning Brief Daily Markaz Kuwait Watch Daily Daily Fixed Income Update Daily KSE Market Weekly Snapshot Weekly KSE Market Weekly Review Weekly International Market Update Weekly Mena Mergers & Acquisitions Monthly Option Market Activity Monthly GCC Quants Monthly Thought Speaks Monthly Market Review Monthly Investment Outlook Quarterly GCC Equity Funds Quarterly

Infrastructure GCC Power GCC Ports GCC Water GCC Airports Real Estate

Abu Dhabi - Residential Saudi Arabia – Residential Real Estate Outlook (Jun-09) Saudi Arabia (Sep-08) Abu Dhabi (July-08) Algeria (Mar-08) Jordan (Mar-08) Kuwait (Feb-08) Lebanon (Dec-07) Qatar (Sep-07) Saudi Arabia (Jul-07) U.S.A. (May-07) Syria (Apr-07)

Sector Research

Real Estate Strategic Research GCC Distressed Real Estate Opportunities (Sep-09) GCC Real Estate Financing (Sept-09) Real Estate Earning -2009 (May-09) Supply Adjustments Are we done? (Apr-09) Dubai Real Estate Meltdown (Feb-09)

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mailto:[email protected]


November 2009

Markaz Research is available on: Bloomberg Type “MRKZ” <GO>, Thomson Financial, Reuters Knowledge, Zawya Investor & Noozz.

To obtain a print copy, kindly contact: Kuwait Financial Centre “Markaz”

Client Relations & Marketing Department Tel: +965 2224 8000 Ext. 1804

Fax: +965 22414499 Postal Address: P.O. Box 23444, Safat, 13095, State of Kuwait

Email: [email protected] markaz.com

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