The ongoing drive for economic diversification in the UAE capital Abu Dhabi is helping to underpin growth in the emirate’s property market despite a backdrop of low oil prices, according to a report.

In the residential market, the impact of falling oil prices on job creation levels is likely to be offset to an extent by an intensification of economic diversification efforts, such as the launch of Abu Dhabi Global Marketplace, the emirate's new dedicated financial free zone, stated leading international real estate consultancy Cluttons in its 'Spring 2015 Abu Dhabi Property Market Outlook' report.

For now, however, the slowdown in the overall pace of growth comes at a time when other major cities in the UAE such as Dubai and Sharjah have also seen rental value growth curbed in recent months as tenant demand stabilises, it noted.

"With oil prices fluctuating around the $50-per-barrel mark, we are likely to see this start to impact the rate of job creation in the oil and gas sector as the year progresses and hydrocarbon-linked firms begin reassessing their growth plans," remarked Steve Morgan, chief executive of Cluttons Middle East.

"The impact this may have on the capital’s residential market is still too early to assess as the government remains committed to further diversifying the economy, which may accelerate the rise of other sectors to compensate for loss in hydrocarbon related business activity," he noted.

Last year, Abu Dhabi saw its rents across the main freehold submarkets grow strongly. Apartments outperformed villas and average annual rents breached the Dh200,000 ($54,439)-mark as demand continued to outstrip supply.

The star performing submarket last year was Saadiyat Island. In particular, three-bedroom apartments saw a rental surge of just over 22 per cent in the fourth quarter alone, he added.

Cluttons’ international research and business development manager Faisal Durrani said as a whole, apartments on this emergent and desirable island submarket saw a rise of 11.2 per cent in rents during 2014.

"The completion of key infrastructure and the ongoing delivery of units on Saadiyat Island is helping to drive up tenant interest. People are generally more inclined to show an interest when they can physically see a community emerging and this is clearly the case on Saadiyat Island," he noted.

"Furthermore, the perceived seclusion and exclusivity offered is allowing this submarket to set a new benchmark for top end rents in the city. Its popularity amongst residents is expected to continue intensifying as key attractions and amenities such as the Louvre and Guggenheim museums inch closer to completion," he added.

In the commercial market, demand remains lop-sided and centred on prime stock, which is still in short supply. Demand however is stable, but robust, which is translating in to strong upward pressure on Grade A rents across the city,said the property expert.

With falling oil prices likely to negatively impact the short-medium term rate of office take up and the subsequent level of job creation, the Abu Dhabi government continues to focus its efforts on diversifying the economy further by reducing dependence on the hydrocarbon sector, which remains stubbornly fixed around the 50 per cent mark.

However, with the imminent opening of Abu Dhabi Global Marketplace, the banking and financial services looks set to join other thriving non-oil sectors, such as healthcare, aviation and education, all of which are experiencing strong growth, while positively influencing the emirate’s property market by diversifying the demand drivers, stated Cluttons in the report.

The new free zone is expected to address the backlog of demand from financial institutions looking to enter the Abu Dhabi market and operate in an environment that is governed by international financial regulations, said the expert.

It is still too early to assess how rapidly these units will be absorbed in to the market, given the significant price differential and that the majority of wider international occupier requirements still stem from the requirement to secure trade licenses in order to operate in the emirate, it added.  

Durrani said Abu Dhabi Global Marketplace was clearly the capital’s answer to the Dubai International Financial Centre, but its more critical role in nurturing and catalysing growth in the financial services sector is even more important.

The ramifications this will have on the long-term evolution and rebalancing of the economy as the government works to tip the scales in favour of non-hydrocarbon related growth will be tremendous.

"The banking and financial services sector is a prized economic segment in any nation, thanks to the economic and human capital boost that accompanies it. For Abu Dhabi while this is certainly not a new economic segment, but it will offer the sector a fresh relaunch pad for it to take its place amongst the key economic pillars in the emirate," noted Durrani.

"For the residential real estate sector, the emergence of a rapidly expanding number of affluent new households will mean sustained medium to long term demand for rented and owned accommodation, which takes a step closer to the elusive goal of sustainable market growth," he added.

Cluttons pointed out that at present, the performance of the office market was however very much dependent on the demand from oil firms, which for the large part remain dominated by public sector entities.

"The evolution of oil prices over the course of the year will very much dictate how the office market fares not just in Abu Dhabi, but across most Opec member states," explained Morgan.

"For now, it is our view that with the limited amount of Grade A space available and in the pipeline, and with demand likely to persist, according to our central scenario, office rents are likely to hold steady, with almost no movement in expected this year at the top end of the market," he noted.

However, Cluttons believes that rents in general will continue to stabilise throughout 2015, with tenant demand unlikely to deteriorate significantly this year.

"There will, of course, continue to be pockets of the capital, such as Saadiyat Island, where a supply-demand imbalance is likely to sustain upward pressure on rents, but again as with the wider residential lettings market, any growth is expected to be more subdued when compared to 2014," added Morgan.-TradeArabia News Service