The downward readjustment of housing allowances amongst companies in Abu Dhabi is creating further strain on the higher end of the residential market and underscores the need to address the UAE capital’s lack of affordable housing options, according to leading international real estate consultancy Cluttons.

The shrinking pool of high-end management level tenants in the oil and gas sector in particular, has meant rising void periods for properties at the higher end of the rental spectrum and increased demand for more affordable options, stated Cluttons in its 'Abu Dhabi Spring 2016 Property Market Outlook' report.

According to the report’s findings, budgets continue to hover around Dh100,000 to Dh150,000 ($27,219 to $40,828) per annum at the lower end of the spectrum while average apartment rents stand at just over Dh160,000 ($43,550) per annum, rising to almost Dh270,000 ($73,491) per annum for villas, highlighting the affordability challenges faced by households.

According to Cluttons, landlords are now increasingly aware of the challenging market conditions and have begun to explore ways in which to attract and retain tenants.

On Reem Island for example, not only are some landlords lowering rents, but some are demonstrating greater flexibility in payment terms, with some accepting payment in up to four cheques per annum, up from one to two previously, it added.

Edward Carnegy, the head of Cluttons Abu Dhabi, said: "Despite the maturing attitude, the market’s fundamentals remain frail, with tenant demand for high-end stock not likely to stage a turnaround in the near term."

"Based on the prolonged period of oil price weakness, we now expect slightly stronger rent falls of up to five per cent on average. That said, we expect areas perceived to be more affordable to continue to outperform the wider market," he observed.

Cluttons' latest report shows that rents in more affordable submarkets such as Hydra Village will remain resilient and are likely to post modest rent rises of around two to three per cent during 2016. This follows a similar pattern to the previous 12 months, during which Al Reef Villas (8.7 per cent) and Hydra Village (25.9 per cent) have been the city’s star performers.

Away from the rental market, the value of villas across Abu Dhabi’s residential investment submarkets fell by 1.4 per cent in the 12 months to the end of the first quarter of 2016. This decline pushed the average price of Abu Dhabi villas to approximately Dh1,250 ($340) per sq ft.

According to Cluttons, the apartment prices remained largely unchanged in the first quarter but despite this there had been further compression in the annual growth rate, which has slipped to 0.8 per cent from 1.1 per cent at the end of 2015.

The deflation in residential values reflects growing caution in the market, which is being compounded by low levels of demand, it stated.

On the office market, Cluttons said that after a year of stability in office rents across Abu Dhabi, they have now begun to slip in more secondary and tertiary locations, while some previously resilient Grade A schemes have also begun to experience rent declines.

Average Grade A rents remained unchanged at Dh2,000 per sq m in the first quarter, while more secondary (Dh1,200 per sq m) and tertiary stock (Dh800 per sq m) experienced average rent falls of Dh100 per sq m, marking the first decline in almost 18 months.

Faisal Durrani, Head of Research at Cluttons said: “Despite the stability at the top end of the market, a handful of prominent Grade A developments registered downward rental movement during the first three months of 2016.

"For example, rents at World Trade Centre Tower were reduced by eight per cent. This reflects landlords’ acceptance of the challenging operating environment and it is these landlords that are likely to be best placed when growth eventually returns," stated Durrani.

"Positively, the limited availability of the Grade A office market in Abu Dhabi in comparison to Dubai has in part aided the market’s ability to withstand the oil price shock and the ensuing slowdown in business activity; however as is the case with the residential sector, the atmosphere in the office market is increasingly cautious," he added.

According to the Cluttons report, in addition to the ongoing trickle of completions, office space is also being returned to the market by oil and gas firms, which is fuelling a supply-demand imbalance.

"It is our expectation that further average office rent falls of around five to seven per cent are likely before the year is out, in addition to a raft of lease incentives, unless oil prices stage a major comeback; however, this appears unlikely at this stage," observed Durrani.

"The recycling of space through consolidation activity is something we're keeping an eye on as the supply-demand imbalance may well widen further this year, exacerbating the quieter conditions now bedding in. There will of course be exceptions to our forecast, with centrally located, well managed buildings expected to buck this trend, particularly if the rents are perceived to offer good value," he added.-TradeArabia News Service