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No property crash so far in Abu Dhabi
September 12, 2008
As an antidote to the property-related crisis sweeping over Lehman Brothers, I went over to the Javitz conference centre in Manhattan yesterday to learn about one property development that is not short of money.
It is Saadiyat Island, the mind-boggling $27bn project to develop an island next to Abu Dhabi in the United Arab Emirates. At about $1bn per square kilometre, the emirate is not stinting on Saadiyat.
I suppose the falling oil price may crimp the style of Abu Dhabi and its next-door emirate Dubai a little. But it is not stopping the creation of Saadiyat, which will not only have nine resort hotels along a 9 kilometre beach but a cluster of world-class museums.
Three of them - the Louvre Abu Dhabi designed by Jean Nouvel, the Guggenheim Abu Dhabi designed by Frank Gehry, and the Sheikh Zayed National Museum by Norman Foster, are due to be completed by 2012.After that should come a performing arts centre designed by Zaha Hadid (pictured above) and Tadao Ando’s maritime museum.
Details of the development were being shown off to US investors by officials of the Abu Dhabi Tourism Development & Investment Company, which is the developer owned by the Abu Dhabi government.
Abu Dhabi clearly wants to get in on some of the action generated by the frenetic growth of Dubai but is doing so in a gentler, more restrained way. As the UAE’s richest and largest emirate, it can afford to be lower-key.
For the moment, at least, there does not seem to be a residential property crisis in Abu Dhabi. The first 350 homes planned for Saadiyat have just been sold off-plan, with townhouses fetching about $1.8m each.
As yet, foreigners are barred from owning freehold property in the emirate - they can only buy 99-year leases. But it seems likely that Abu Dhabi is going to have to follow Dubai in relaxing the restriction.
Although I took in a little of the breathless expansion when I visited Dubai and Abu Dhabi last year, it remains astonishing to see such vast projects conjured up out of the desert.
Where will this all end? These cannot conceivably be energy-efficient developments. What is the point of pouring so many billions to waste in one of the most inhospitable places on earth? These excesses are not helping the planet. Why not buy a chunk of territory in some more temperate locale and pour the money there?
You are wrong about the leases. There is almost no difference between a 99 year lease and a freehold. Who would care about what happens with the property in 99 years, apart from states that must retain control of their land? By then the islands would probably have been inundated due to global warming. The building’s useful economic life is probably less than 99 years. Mathematically, the difference between a freehold and a 99 year lease is the value of the land, deferred 99 years. The present value of 1 pound deferred for 99 years at a 5% yield is: 0.0079847. At an 8% yield it is: 0.00049. This means that even putting aside the certain complete depreciation of the improvements, and assuming the property will still be worth $1.8m in 99 years, that sum in present values is only $14,372 (assuming a 5% yield). That amount, $14,372, is the upper bound for the difference between a 99-year lease and a freehold. That means that if a freehold in the property is worth $1.8m, then a 99-year lease should be worth $1.785m. Certainly not something to be squeamish about, for anyone who can afford their dream town-house on a scorching island.
Posted by: RCS | September 12th, 2008 at 11:36 pm | Report this commentI find it odd if the real estate market does not go down, even drastically, in the emirates.
The reason being that the price of oil only fuels the construction effort, but much of the demand for the real estate comes from outside of the oil economy, which is very vulnerable at the moment around the world as of now.
That being said, given that the amount of available real estate is very limited and unique in the emirates, they might succeed in avoiding the downturn due to the unique features of the market.
Posted by: Rodger | September 15th, 2008 at 4:38 am | Report this commentI have a good friend who recently graduated from a leading engineering school who took a job in
Abu Dhabi. Ok salary, no taxes, 5 trips back home, some very advanced engineering in progress, lots of good press and some of the worlds most beautiful girls live and work there.
However, the last word I heard from him is that an apartment rents for $55,000.00 per year … consequently, five of them are renting one place.
Arabs better not give up their day job, eh?
Posted by: smokey888x2 | September 19th, 2008 at 6:02 am | Report this commentIn response to the environmental concern, Abu Dhabi is developing Masdar, one of the greenest developments in the world. the consciousness for the environment and climate change is remarkably high, contrary to what the world believes about the UAE.
Posted by: Mukta Naik | September 30th, 2008 at 7:49 am | Report this commentIn response to the environmental concerns, Abu Dhabi is developing MAsdar which will be one of the greenest developments in the world. contrary to perception, there is a high awareness for climate change in the UAE.
Posted by: Mukta Naik | September 30th, 2008 at 7:50 am | Report this comment