[A142]Abu Dhabi In Dubai

The fast growing Arabian capital of Abu Dhabi is the richest and largest of all the seven UAE states. The city is located on a T-shaped island leading into the Persian Gulf, from the central western coast, and has a population of around 900,000 inhabitants. It currently controls 90 per cent of the oil wealth in the region, making it one of the largest producers of oil in the world.

The economy
Abu Dhabi has the largest fossil fuel reserve in the UAE, is the fourth biggest natural gas producer in the world, has the world’s highest income per capita, is home to almost all of the Arabic Fortune 500 companies, and is currently sitting on over 88 billion barrels of proven oil reserves.

Nonetheless, the emirate is now actively trying to reduce its reliance on oil, and is diversifying its economy into the financial services and tourism sectors. Billions of pounds have been allocated for infrastructure projects and the development of residential, leisure and cultural schemes across the oil-rich emirate.

Abu Dhabi is determined to challenge Dubai and establish itself as a major tourist destination, buoyed by its subtropical climate and 700 km coastline of unspoiled beaches and cultural sites.

Tourist attractions include the Louvre and Guggenheim museum, a wildlife reserve, a UAE public library, the National Theatre, and the development of the £13.5 billion Saadiyat Island.

In 2009 Abu Dhabi will host its first ever Formula One grand prix on the Yas Island, which includes a Ferrari theme park. Elsewhere, Aldar Properties will develop a $3billion (£1.5billion) Motor World, including service centres and a museum, as well as offices, hotels and homes for 30,000 people.

David Nicholls of EM concepts says: “The plans for Abu Dhabi are truly remarkable. The transport infrastructure is also already sound and the states pockets are bottomless."

The emirate is served by several major airlines, including British Airways, BMI, Eagle Air, KLM, Etihad Airways, Gulf Air, Qatar Airways and Lufthansa. Incidentally, hotel occupancy rates currently stands at over 80 per cent, up from around 60 per cent in 2003.

James Gonzalez of Obelisk comments: “Abu Dhabi plans to be a premier global tourism destination. Within the next three years, the emirate will see major investment in airport infrastructure, which will increase airport capacity from seven million to 20 million passengers a year by 2011."

Abu Dhabi’s rapid growth and rising tourism levels is driving demand, causing a massive property surge, similar to that experienced in Dubai a few years ago.

Property market
Unlike neighbouring Dubai, where it is feared that there will soon be a total oversupply of properties, in Abu Dhabi, there is currently a reported housing shortfall of around 20,000 units.

The supply of housing stock remains scant, partly because Abu Dhabi is not part of a community master-plan like those pioneered by Emaar and Nakheel in Dubai.

Supply constraint in relation to demand, combined with soaring building material and labour costs, effectively forced average property prices in Abu Dhabi upwards by around 30 per cent last year, according to HSBC.

This level of capital growth appears to be sustainable in the short to medium-term, as Abu Dhabi’s property market is still developing and is not interlinked with the financial markets, as is the case in some other mature economies.

Consequently, the housing market in Abu Dhabi does not operate on the same fundamentals as a more established property market. The release of new residential schemes is currently happening in a controlled fashion, thus avoiding an oversupply. Yet, the city’s population is increasing, placing extra pressure on the property sector.

Furthermore, a glance at the UAE’s maturing mortgage market seems to suggest that property prices will indeed appreciate further. The size of the UAE’s mortgage market, which currently stands at around $4.4billion (£2.2billion), is expected to grow to around $44billion (£22billion) over the next four years, according to financial group, EFG Hermes.

The vigorous demand being recorded, could see property prices in Abu Dhabi - which reportedly average around £250 per sq ft - exceed those in Dubai over the next three years, according to UAE investment bank, Shuaa Capital. HSBC forecasts that average property prices in the emirate will appreciate by a further 25 per cent this year alone.

Flipping
Rapid price growth has encouraged some speculative investors to resale before they’re even been built, otherwise referred to as ‘flipping’. Buying off-plan property abroad and 'flipping' it is not uncommon, particularly in an emerging market like Abu Dhabi, as this can prove to be a highly lucrative way of making money.

Middle East business provider, AME Info recently reported that some property investors’ are currently doubling their money in off-plan units in as little as nine days. But investors should be aware of the potentially high risks associated with ‘flipping’ properties, particularly in a market that lacks transparency. A medium to long-term property investment strategy will often lower the associated risks.

Buy-to-let
Investors seeking a longer-term property investment will be keen to learn that average rents in Abu Dhabi rose by 22 per cent last year, according to HSBC. Double figured rental yields are currently being achieved by some buy-to-let investors. Property prices will therefore have to rise, so that rental returns achieve traditionally lower yields, as is the case in more mature property markets.

However, Abu Dhabi is now trying to control rental inflation with a rent cap. The city plans to follow the example of Dubai, who recently lowered its cap from secent to five per cent.

Cheap finance
The UAE Dirham (AED) is fixed to the US dollar at one value, meaning the UAE Central Bank has to follow US interest rate policy. While the recent poor US dollar showing has devalued the AED, it’s also lowerered the cost of borowing money to buy property in the UAE. However, the falling US dollar is adding to the UAE’s inflation problem. Therefore the existing mechanism is proving a problem. Consequently, there are now murmurings that the AED may finally break free from its peg to the US dollar.

“The only way to combat this (inflationary problems) is to lose the peg and allow the AED to float freely," says Nicholls. “If the AED does break free from the US dollar, then the value of the Arabian currency is likely to appreciate very quickly, which will translate back to a greater return to the investor when the AED based property asset is sold and funds returned to the UK."

Tax-efficiency
As a domicile in Abu Dhabi there is no income or capital gains tax to pay, making the emirate a tax haven, and there is no restriction on setting-up residency. Properties in Abu Dhabi are offered on a leasehold basis of up to 99-years, as there are no freeholds available. Purchasing costs equate to around 1.5 per cent of the property price.

Summary
With demand heavily outweighing supply, fast appreciating property prices, cheap borrowing costs and strong rental returns, 2008 should prove to be a great year for Abu Dhabi property as an asset class.