_How are Abu Dhabi office rents affecting occupier demand?

There relatively low levels of activity in the market with firms continuing to hold off executing major corporate decisions until they are able to fully understand the impact of new regulations and the growing number of mergers in the banking sector. 

Overall, whilst the announcement of new regulations – such as the 100% foreign ownership law – have been well received, it is too early to tell the magnitude of the impact these will have on occupier demand, particularly as details of the scope of the laws remain limited.

As at Q1 2019, prime rents registered at AED 1,685 (sqm/p.a.), a 6.1% decline when compared to the same quarter a year earlier. The decline in Grade A rents looks to have moderated in Q1 2019 with the rents falling by 2.1% over the year to March 2019, a significant retreat from the double-digit declines witnessed a quarter earlier. Whereas the rate of change in Citywide rents has increased, with year-on-year rents to Q1 2019 falling by 16.9%. As a result, citywide rents currently stand at AED 925 (sqm/p.a.) on average.

During the first quarter of 2019, Knight Frank has recorded a third of demand stemming from firms in the general services sector of the economy. A range of six sectors, which offer a broad range of professional services, accounted for the remaining two-thirds of office space according to Knight Frank data.

Over the same time period, 82% of demand remained for floor areas below 500 square metres, up marginally from 79% six months earlier. As a result of weak market conditions, business consolidations and the delivery of new stock, we have seen the vacancy rate in the market rise to 24% from 23% a year earlier.

Given these market conditions, landlords are increasingly more flexible to execute leases, not only have landlords become accepting of lower lease rates but many are willing to offer rent-free periods amongst other incentives to secure long term leases.

Key findings 

• Abu Dhabi’s economy returned to growth in 2018 with GDP increasing by 1.9%, up from the 0.9% contraction witnessed a year earlier.
• As at Q1 2019, prime rents registered at AED 1,685 (sqm/p.a.), a 6.1% decline when compared to the same quarter a year earlier.
• The decline in Grade A rents looks to have moderated in Q1 2019 with the rents falling by 2.1% over the year to March 2019.
• In the first quarter of 2019, Knight Frank data shows 82% of space demanded was for floor areas below 500 square metres, up marginally from 79% six months earlier.

Outlook

We expect that in the short to medium term, we are likely to see continued pressure exerted across Abu Dhabi’s commercial market if the current trend of subdued demand continues. 

The Prime and Grade A segments of the market are likely to be comparatively less impacted given the scarcity of such stock. The majority of the circa 136,000 square metres of forecasted supply due to enter the market in 2019 is classed as citywide stock in non-core areas. The delivery of additional supply and the recent consolidation activity means we are likely to see the vacancy rate begin to rise.

In the short run, we may begin to see pressure on the market ease, if increased activity in the hydrocarbon sector leads to additional downstream contracts being awarded, which may drive private sector activity. In the long term, increased investments and easing of business regulations may help induce long term demand.