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ABU DHABI COMMERCIAL SNAPSHOTOffice, Industrial and Retail market overviews | 2018

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FOREWORD

CONTENTS

Office MarketDiverging Grade A and Grade B market performances

Industrial MarketOngoing stability in oil prices and government initiatives are expected to buoy weak demand levels

Retail MarketBurgeoning supply exerting further downward pressures on a weak market

Areas to watch out

Real estate in Abu Dhabi continues to feel downward pressure across most sectors due to the lingering impact of job losses and consolidation activity witnessed during 2016/2017. With VAT being introduced across the UAE, a marginal negative impact has been felt in Abu Dhabi’s retail sector, whereas other asset classes are yet to register a shift in dynamics.

Rents are softening across the board, however , the pace is starting to decelerate with the Grade A market displaying relative resilience. With oil prices witnessing sustained upward momentum and government spending on the rise, these positive forces are driving up the overall economic sentiment. Although a clear turnaround is distant in the office and industrial sectors, we expect this deceleration to continue in the mid-term, followed by a gradual increase in demand as occupiers continue to consolidate and optimise current foot-print.

Rising supply figures further amplify the weakening performance witnessed by the retail sector and create diverging performance trends between the resilient prime super regional malls and the under-performing regional & community malls.

ABU DHABI COMMERCIAL SNAPSHOT 2018

This publicationThis document was published in April 2018. The data used in the charts and tables is the latest available at the time of going to press. Sources are included for all the charts. We have used a standard set of notes and abbreviations throughout the document.

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Office market

The office market has adjusted to redundancies and office consolidations seen over the last two years and has reached a new equilibrium by stabilising at lower rental rates in most office districts.

Due to ongoing gradual recovery in oil prices, we are starting to see a marginal uptick of downstream oil and gas occupiers expanding or looking to upgrade existing units whilst trading and construction sectors continue to be under pressure and are witnessing contraction in spatial requirements. International first phase expansions in the office sector continue to be limited. Most of the ongoing office leasing activity is led by occupiers, particularly those with stronger performance track record despite the current downturn, upgrading to better premises by locking attractive mid-long-term contracts. With landlords pushed to offer better terms in what is now a dominantly tenant friendly market, rent free periods, multiple check payments and contribution to fitouts are becoming increasingly commonplace.

Rents are forecast to remain under pressure across the board in 2018, whilst Grade A assets are expected to be relatively resilient due to limited stock availability and sustained underlying demand. Elsewhere, we expect tenant migration (for the reasons of either shifting to better premises or lowering operating expenditures) to cause rising vacancy levels and further rental drops.

This has led Grade B buildings and older office districts to continue witnessing deflationary pressures. Landlords who have not adjusted to these evolving market conditions by either adjusting headline rents, upgrading building premises or offering further floor divisions, are facing a standoff and losing tenants to better built premises offering flexible terms.

With government measures of diversification starting to bear fruit, and subject to continued stability in oil prices, a potential economic recovery is expected to start in 2019. However, new spatial demand in the wake of this effect, is predicted to be very gradual as occupiers optimise existing office space and remain cautious towards expansions.

ABU DHABI COMMERCIAL SNAPSHOT

Prime/Grade A+ Grade B

2,500

2,000

1,500

1,000

500

0

Rental range

Abu Dhabi office rental range H1 2018

Source: Core Savills Research

Rent

s in

AED

/ sqm

/ ann

um

Grade A Grade A in secondary areas

2018

Industrial market

Abu Dhabi’s industrial sector has witnessed a decline in rents over the period 2015-2017, which is largely attributed to the 2015/2016 fall in oil prices. Enquiries from oil and gas companies, that previously comprised a large share of total enquiries, unsurprisingly decreased significantly. Rents across all key industrial areas registered a decline of over 10% over this time period with areas such as KIZAD, Abu Dhabi Airport Free Zone and Mussafah seeing rental declines of more than 16%.

Industrial supply

The supply of high quality warehouse space in Abu Dhabi has continued to increase over 2015-2017. KIZAD, for example, offers strong infrastructure and continues to invest in increasing its terminal capacity which is expected to grow from 2.5 million containers to 6 million over the next few years. Phase two of KIZAD Logistics Park was launched in 2016, adding 105 units over 118,965 sq. m. to the market after phase one achieved full occupancy. The Eco Logistics Park, launched by Masdar City, has also added approximately 10,916 sq.m. GFA to the total supply of high quality industrial units and offers customised build to suit opportunities. A purpose-built facility by Honeywell already occupies half of the total plot.

Occupier sweet spot emerges for properties offering flexiblespace, preferably warehouses with an option to have servicedoffices (15-25 Sqm), enabling occupiers to test the marketconditions and expand as they scale up operations.

Segment outlook

Demand for industrial units is expected to recover as the sector resumes growth, allowing declining rents to stabilise towards early 2019. Abu Dhabi is already seeing an increase in industrial activity, as indicated by the Industrial Production Index which rose 6.1% over Q3 2017 according to SCAD, compared to the same period in 2016. We forecast leasing enquiries to rise, particularly for newer higher quality units in industrial areas such as KIZAD and ICAD. Nevertheless, due to increasing stock, this sector is also expected to see lease rates remain

under pressure as the market gradually absorbs new supply.

Over the medium term, it is likely that occupiers will start shifting to higher quality units leading to an increasingly two tiered market. Better build quality and accessible stock will continue to outperform the market, whereas areas with poorer quality warehousing and inferior infrastructure are expected to continue seeing rental declines, leading to a widening market segmentation.

20172015

Abu Dhabi Airport Free Zone

Mussafah ICAD ICAD2 KIZAD Al Markaz Al Mufraq

20182016

Abu Dhabi industrial areas lease rates H1 2018

Source: Core Savills Research

900

800

700

600

500

400

300

200

100

0

Rent

s in

AED

/ sqm

/ ann

um

Over the medium term, it is likely thatoccupiers will start shifting to higherquality units leading to an increasinglytwo tiered market.

Areas to look out for

Office: Al Maraya Island is likely to offer significant leasing potential due to Abu Dhabi Global Market anchoring growth in this upcoming Grade A office district.

Reem Island is also likely to see a marginal spike in office demand as it gains momentum due to a variety of product offerings coupled with its nearness to residential clusters, making it a preferred mix-use district – albeit, with commercial rents remaining under pressure.

Industrial and Warehousing: Despite rising stock levels, this sector remains fundamental to Abu Dhabi’s diversification measures due to continued government spending and international interest, particularly with China’s Maritime Silk Road project. Recent large investments, including Agility’s AED 80 million investment in Mussafah and Honeywell’s light industrial facility in Eco Logistics Park, are likely to cause network effects and stimulate demand for supplier/feeder companies seeking to locate themselves in proximity to larger industrial premises.

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engagement with shoppers, in-turn increasing footfalls. Retailers in this softened market are carrying higher risk on the back of shrinking profit margins.

To maintain occupancy levels and viability, mall operators may resort to easing tenancy terms in line with revenue generation(linking rents to tenant revenue). Re-strategising marketing initiatives with a higher focus on social media, branding and public outreach, taking into account the affordability and demographics of the catchment areas, is expected to have a positive impact on footfalls.

Retail supply

Retail GLA in the capital is set to rise steadily over the next 2 years. Maryah Central, which is expected to add at least 785,000 sq. m. to the total supply, is nearing completion. Reem Mall on the other hand, projected to bring a GLA of approximately 270,000 sq. m., is likely to be delayed beyond the projected opening in 2020.

Retail market performance

Weak overall economic sentiment over the past 2 years, contractions in household incomes and limited discretionary spending has clearly impacted the Emirate’s retail sector. Deflationary pressures in the hospitality sector are also negatively affecting the retail market, given that tourist expenditure traditionally contributed a significant portion of Abu Dhabi’s overall retail spend. Although tourists from other growing markets such as India and China have partially offset the contraction, the strong dollar continues to impact traditional source markets such as the UK, Europe and Russia and their expenditure levels.

Despite overall weakness in the retail sector, prime & super regional malls appear to be more resilient than older regional & community malls. Many of those are finding it challenging to maintain occupancy levels as retailers increasingly prefer to position themselves in newer and larger retail spaces, which draw higher footfalls due to their overall appeal as leisure destinations. These underperforming older malls are expected to face further downward pressure on occupancy levels, footfalls and rents as new retail space is handed over in the next 3 years. This is likely to lead to further divergence between rental rates for regional and community malls and prime & super regional malls which already show a difference of almost AED 1,000 /sq. m. on average.

To avoid obsolescence, mall operators/asset managers of these older, weaker performing malls may look at proactive marketing strategies, optimising tenant mix while creating higher

Average Rent

Average Occupancy

Total gross leasable area

Regional & Community Malls

Regional & Community Malls

Prime Super Regional Malls

Prime Super Regional Malls

1,800 - 3,000 AED/sqm

78 - 85%

2,600 - 3,800 AED/sqm

85 - 90%

2014 20172015 2018E2016 2019E 2020E

3.5

3

2.5

2

1.5

1

.5

0

Source: Core Savills Research

Milli

on S

q.m

2018

ABU DHABI COMMERCIAL SNAPSHOT

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This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Core, UAE Associate of Savills, accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Core’s research team. © Core Real Estate Brokers.

Prathyusha GurrapuHead of Research and Advisoryprathyusha.gurrapu@core-me.com

Aruba KhalidAssistant Manager - Research and Advisoryaruba.khalid@core-me.com

Andrew AussamaAssociate Director - Head of Abu Dhabi Officeandrew.aussama@core-me.com

CORE - UAE ASSOCIATE OF SAVILLS

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