At last year's Cityscape Abu Dhabi, the mood was a mix of hope and expectation that the emirate's property market would soon start to recover. I commented at the time that we needed to take on board the lessons of the global economic crisis for a healthy property industry to develop, and that the market was starting to mature, with higher quality property available and more attention given to asset management.
Just 12 months later, we can clearly see strong progress – and this should be welcomed, as the sector is important for personal wealth and for our society’s broad-based economic development.
Sales and leasing activity picked up strongly at the end of last year, causing property values to start rising again. Importantly for the long term, three fundamental reasons are inspiring greater confidence in Abu Dhabi – the property industry is indeed showing maturity, policy makers have taken the right steps to control speculation and encourage a healthy market and Abu Dhabi’s stable path of economic development is creating significant real demand for property.
Much has changed in a short time.
Just a decade ago a modern property industry was taking root in Abu Dhabi, with the establishment of large-scale professional developers, the emergence of contractors with strong technical expertise and the arrival of global architectural firms and other service providers. The sector was encouraged by the start of a sustained period of elevated oil prices, easy credit globally and increasing demand for new residential and commercial developments offering much higher quality than previously available.
As is usually the case for relatively young markets, matching supply to demand was an almost impossible exercise, partly because it was hard to measure demand for what was essentially a brand new product in a rapidly changing market. This led to rapid price escalation and volatility.
However, in the last five years the landscape has transformed dramatically because of collaboration between all stakeholders in the property market.
Developers, home buyers and investors are now much more experienced, and better flows of information – for example, on supply and demand, and changes in rental and capital values – are making it easier to take well-informed financial decisions. This dynamic brings greater stability to the market.
The Urban Planning Council has taken increasingly active measures to help regulate developments – from approval of detailed designs and land use to proper environmental impact surveys. This means that only well-qualified developers can be active in the market.
Meanwhile, property companies are also taking a much more measured approach, carefully calibrating new developments to the requirements of the market. Last year's merger between Abu Dhabi's biggest developers, Aldar Properties and Sorouh Real Estate, has contributed to a much more controlled environment, creating a financially solid company focused on responsible and sustainable development of the property market.
These positive market developments have been accompanied by better regulation of mortgage financing and property ownership.
For example, a recent decision by Abu Dhabi Municipality to issue title deeds has given an added layer of certainty for property buyers, and we can expect the legal environment to improve further with the planned issuance of the final real estate regulatory framework this year.
To prevent speculation, the UAE Central Bank introduced loan-to-value limits on mortgage lending that are even more stringent for second homes, and registration fees have also been increased to discourage flipping off-plan property purchases.
Developers are also doing their part to limit speculation on off-plan units, only transferring sales and purchase agreements after the initial buyer has paid a large proportion of the equity – typically 40-50 per cent of a property’s value. We are also limiting bulk buying, in order to sell more to individual end-users and investors, while we develop stringent payment collection plans.
An initiative to create a credit bureau, which will supply credit ratings for individuals, should also help promote responsible lending practices and give banks confidence to meet increasing demand for mortgages. UAE banks have been cautious, with the total value of outstanding mortgages down about 4 per cent since 2010, but some analysts predict that lending for residential purchases will now grow 10 to 15 per cent annually.
This is partly because affordability has been enhanced. Although property prices have increased, they are still significantly below 2007 levels, and mortgage rates have fallen to about 4.5 per cent, from more than 7 per cent in the mid-2000s.
Ultimately, the main driver for a healthy property market is a stable economy that gives confidence.
The UAE economy has weathered the global downturn well, and GDP is growing at a trajectory of 3.5 to 4 per cent annually. Fundamentals in key sectors such as tourism, trade, logistics, retail, health care, and education have all improved significantly in the last year – and this is reflected in the performance of equity and credit markets. The return of investor confidence has been cemented by the MSCI’s upgrade of the country equity markets to emerging status from frontier.
In Abu Dhabi specifically, investment in hard and soft infrastructure, as well as encouragement of economic diversification and private sector growth, are providing a positive environment. The new investment zones are master-planned and fully infrastructure-enabled, encouraging developers to participate in their growth.
The Government’s US$90 billion investment plan should provide a strong multiplier effect on the wider economy.
Abubaker Seddiq Al Khouri is the chairman of Aldar Properties
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