Abu Dhabi's real estate sector could face oversupply issues as the number of new residential stock entering the market is expected to spike this year.
According to consultants Cushman & Wakefield Core, more than 7,000 units could be handed over in the emirate this year, with particular focus on Al Reem Island and Al Raha Beach.
Over 4,500 units were delivered in Abu Dhabi in 2020 with most handovers also located in Al Raha Beach and Al Reem Island.
Prathyusha Gurrapu, head of research and advisory at Cushman & Wakefield Core, said: “The Abu Dhabi market historically has had relatively lower levels of supply handovers each year, however, in 2021 we foresee a spike with over 7,000 units expected to be handed over.
"Most new supply projected for 2021 is expected in Al Reem Island and Al Raha Beach which are witnessing substantial development activity followed by Yas Island."
She added: "While the number of actual handovers may be lower, we expect existing and future inventory to face relative absorption challenges given the current softening in demand.”
Cushman & Wakefield Core’s annual Abu Dhabi Market Update said that although Abu Dhabi’s economy and real estate sector saw the lingering impact of Covid-19, the market was relatively resilient in 2020 due to previous optimisation measures taken during 2016-2017, particularly in the hydrocarbon and banking sectors.
This market sentiment has been further supported by robust state-led measures including various stimulus packages, rebates and limited supply-side deterrents, it noted.
The report added: “During 2020, residential prices and rents displayed stability, particularly for superior built residential stock as prices were already at cyclical lows with little room for further contraction. In fact, a few established residential districts saw green shoots of recovery over Q4 2020. Whether this interim uptick will be sustained over 2021 will inherently depend upon the overall buoyancy of the economy.”
Gurrapu added: “For the first time in five years, average villa sales prices witnessed a 2% year-on-year increase, however, apartment prices saw a nominal 4% drop, albeit because of limited transaction activity as buyers took a wait-and-see approach, making prices appear to be relatively stable.
"Abu Dhabi also saw the common theme that is being reflected in most markets post the pandemic, with larger units and villas witnessing higher demand as occupiers adjust to lifestyle requirements. This has translated into a rise of 3.5% quarter-on-quarter in average villa prices over Q4 2020,” she said.
“While Covid-19’s impact is expected to continue affecting demand, we foresee the residential sales market to show continued signs of recovery in 2021 with prices stabilising provided the broader economy improves,” she added.
According to Cushman & Wakefield Core, average villa market rents displayed a relative level of stability with a 3% year-on-year drop as rents started to plateau over the second half of 2020, particularly for well-developed villa communities in Yas Island, Al Raha Gardens and Saadiyat Island.
"This resilience stems from the rising demand for properties with more open space, gardens and swimming pools due to work-from-home demands. Furthermore, many tenants are looking to move away from apartment living as they are hesitant to share common areas with other residents," its report said.
While average apartment rentals displayed a 5% drop compared to 2019 values, older apartment stock has witnessed further reductions as tenants relocated to superior buildings at similar or lower rentals.
Cushman & Wakefield Core added that while rental reductions may show lower year-on-year changes, various landlord incentives such as rent-free periods, a higher number of cheques and other forms of flexibility are supporting headline rentals.
On Abu Dhabi's office market, Robert Thomas, head of agency at Cushman & Wakefield Core, said the impact of Covid-19 has further heightened the trend of flight to quality with tenants looking to upgrade to superior built and managed properties to bolster employee confidence and safety while not significantly altering cash outflows.
"Most movement from large occupiers in the oil & gas sectors, government and semi-government entities ranged between 500 to 2,000 sq m,” he said.
This pivot from occupiers towards Grade A space has led the limited Grade A stock in Abu Dhabi to display relative resilience in occupancy and rents.
"With most of the office stock in Abu Dhabi being Grade B and C, we are witnessing a significant drop in occupancy levels in this segment as most tenants look to relocate. With landlords being pushed further to offer flexible terms in the aftermath of Covid-19, making the market notably tenant-friendly, rent-free periods, rental deferrals, multiple check payments and contributions to fit-outs are becoming increasingly common.
"We expect these trends to continue over to H1 2021 as the market continues to adjust to ongoing economic conditions," Thomas said.