Abu Dhabi—Real Estate Sector New Leadership
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Abu Dhabi—Real Estate Sector UAE Initiation of Coverage January 17, 2007 New Leadership, New Vision • The government of Abu Dhabi has embarked on a well publi- cized effort to transform the Emirate into a world class tourism and business destination. The authorities have taken several steps to achieve this long-term objective, the most notable of which has been the liberalization of ownership laws in residential and commercial sectors. • Historically, the ownership of property in Abu Dhabi rested with the ruler of the Emirate. However, this changed with the passing of the property law in 2005, granting ownership rights to both locals and foreigners, although on differing terms. Similarly, the granting of a free zone status to the Industrial City of Abu Dhabi (ICAD) under a decree passed in 2005 allowed 100% business ownership to foreign investors for the first time in the Emirate. • The relaxation of ownership laws is expected to significantly boost the participation of the private sector in the development of Abu Dhabi. Resultantly, the government has modified its role accordingly, laying greater emphasis on creating an environment conducive to future development. Key efforts being made by the authorities in this regard include: provision of an adequate legal structure, restructuring of government departments and devel- opment of physical infrastructure. • The economic plan envisioned by the government is aimed at reducing the Emirate’s dependence on revenues from the oil & gas sector. The heavy industry sector has been identified as a key growth area in this regard where Abu Dhabi is anticipated to posses a distinct competitive advantage. Diversification also serves as a key theme within the oil & gas industry, with expan- sion into the downstream sector viewed as the key to value addition in the sector. • Residential and tourism development also form an integral part of the government’s plan to diversify the economy. The relaxa- tion of ownership laws led to the announcement of a number of large scale mix-use projects, estimated at a value of over US$126 billion. The projects are expected to substantially add to the number of residential units in Abu Dhabi, with confirmed supply estimated at over 240,000 units over the next 10 to 15 year period. The hospitality sector is similarly expected to wit- ness a near tripling of hotel room supply over the next decade. • In contrast to the large total supply expected to flow in from the recently announced projects, a very limited number of residen- tial units have actually been made available for sale to date. Consequently, even after assuming a relatively aggressive resi- dential supply schedule between 2007 and 2009, our analysis suggests a sizable excess demand of ca. 65,000 units at the end of the forecast period. • The prevailing shortage in residential supply, combined with a rapid increase in population over the coming years, is expected to yield healthy sector returns for developers and investors alike. Prime Group Research Department This report is being issued to provide an overview of the key [email protected] developments taking place in the Emirate and serves as a pre- Tel: +971-2 -6910800 cursor to notes to be issued on listed real estate companies operating in Abu Dhabi. Fax: +971-2-6670907 PRIME EGYPT SALES TEAM PRIME UAE SALES TEAM Hassan Samir +202-300-5666 [email protected] Chahir Hosni +971-2-6910707 [email protected] Yasmine Guindy +202-300-5666 [email protected] Ahmad Hamdy +971-2-6910701 [email protected] Mohamed Fouad +202-300-5666 [email protected] Tarek Khayyat +202-300-5666 [email protected] Abu Dhabi—Real Estate Sector UAE LIBERALIZING THE ECONOMY TO PROMOTE GROWTH The ascension of Sheikh Khalifa bin Zayed Al Nahyan to the position of ruler of Abu Dhabi in late 2004 Pace of liberalization in- was accompanied by a marked increase in the pace of the liberalization and economic reform process creased under the new initiated by his predecessor. While the UAE as a whole has long maintained liberal policies by regional government standards, Abu Dhabi has been relatively conservative in opening its markets to foreigners, particularly in comparison to neighboring Dubai. However, the new leadership’s vision, combined with external pressure from bodies such as the World Trade Organization, is set to dramatically alter the social and economic outlook of the Emirate. The government of Abu Dhabi has embarked on a well publicized effort to transform Abu Dhabi into a world class tourism and business destination. It has taken several steps to achieve this long-term ob- Ownership rules relaxed jective, with the most notable being the signing of a property law in 2005, whereby locals were for the to fuel growth first time permitted to buy and sell land throughout Abu Dhabi, while GCC nationals and other expatri- ates were granted permission to own land on freehold and leasehold basis respectively in designated areas. Similarly, one of the most significant steps taken by the government to boost industrial develop- ment was allowing 100% ownership rights to foreign investors in the Industrial City of Abu Dhabi (ICAD) in 2005. In fact, the granting of permission to foreigners to fully own business in ICAD high- lights the increased pace of liberalization under Sheikh Khalifa’s government. Although ICAD was es- tablished in 2004 under the rule of Sheikh Zayed Al Nahyan, it was not granted Free Zone status until late 2005 under the present government. Abu Dhabi: More Progressive Than Generally Perceived Progressive ownership The UAE’s Commercial Company Law limiting foreign ownership to a maximum of 49% is arguably the structures in key indus- most frequently cited corporate regulation in popular media. This reflects particularly negatively on Abu tries Dhabi due to the presence of large free-zones allowing complete ownership in other emirates. How- ever, focus on the restrictive ruling masks the fact that Abu Dhabi has embarked on a strategy of liber- alization and has adopted some of the most progressive ownership structures in the region in key in- dustries, particularly in the oil and power sectors. Foreign companies al- In line with the trend followed by its fellow OPEC members, Abu Dhabi took steps in the 1970s to gain lowed to maintain 40% control of its oil industry by renegotiating contracts with international oil companies. However, while stake in oil production many of its peers opted for nationalization, Abu Dhabi decided to permit foreign oil companies to main- projects tain a 40% stake in large oil production projects. A new national oil company, ADNOC, was thus formed to take the remaining 60% stake. The government continues to implement this ownership structure, with foreign companies offered holdings in new projects as well. This stands in contrast to policy adopted by the majority of other oil producers in the region. Abu Dhabi pursuing a Abu Dhabi is also pursuing a long-term goal of privatizing the water and electricity sector. As part of long-term goal of privatiz- the program, a number of Independent Water and Power Producers (IWPPs) have been established on ing water and electricity a Build, Own, Operate (BOO) basis as joint ventures between Abu Dhabi Water and Electricity Author- sector ity (ADWEA) and various international companies. The Emirate currently has six such projects, with ADWEA holding a 60% stake in each instance. The Oxford Business Group estimates that Abu Dhabi has attracted FDI worth AED33 billion in its infrastructure sector as a result of the launch of the IWPP program in 1997. With the latest privatization completed in 2006, the government has reaffirmed its commitment of increasing private sector participation in the infrastructure sector. Ownership of non- The government has also announced its intention of transferring ownership of non-strategic industries strategic industries being to the private sector over the coming years. In fact, the authorities have already started implementing transferred to private this strategy, with the recent privatization of solid waste management in the form of an AED1.2 billion sector contract to Al Qudra Holding serving as a good example. The political scenario in the country is also undergoing a slow, but steady reform. The appointment of the first woman minister in 2004 has widely been heralded as evidence of the government’s desire to Political environment un- improve the political framework. Elections were also held for the first time in 2005 to select the Board dergoing gradual reform of Directors for the Abu Dhabi Chamber of Commerce and Industry (ADCCI). Lastly, and arguably most significantly, elections were held for the first time in 2006 to select 20 of the 40 members of the Fed- eral National Council (FNC). The elections served as the first of a three-phased approach adopted by the government to transform the FNC into a more effective legislative body. The second phase will witness an enlargement of the Council, accompanied by an expansion in the powers of its members, while the final phase envisages an open election for half the Council. Given Abu Dhabi’s status as the capital of the country, we expect it to continue to be a key driver and beneficiary of the gradual over- haul of the political system. Prime Research 2 Abu Dhabi—Real Estate Sector UAE LAYING THE FOUNDATION FOR GROWTH Prior to passing of the property law in 2005, the ownership of property in Abu Dhabi rested with the ruler of the Emirate and resultantly, all commercial and residential construction was conducted by Change in ownership specialized government agencies. However, the liberalization of ownership rules is expected to signifi- rights leading to modified cantly raise the participation of the private sector in the development of the Emirate.