Abu Dhabi: Abu Dhabi’s real estate market is starting to show early signs of decline after 18 months of relatively stable conditions, with rents in the second quarter of 2016 declining for the first time in three years.

According to the latest Real Estate Overview report issued by JLL, the property advisory firm, Abu Dhabi’s market may be seeing a downward trend soon, which is supported by lower government spending and weak investment sentiment. This stems from the decline in oil prices.

In the residential sector, vacancy rates rose, sending rental rates down about two per cent in Q2 2016.

Though the decline was nominal, JLL expects to see further declines in rental rates in the second half of the year. The drop is likely to be relatively modest, however, compared to the growth that was seen from 2013 to 2015 (average prime rents in Abu Dhabi rose 17 per cent in 2013, 11 per cent in 2014, and five per cent in 2015).

“While we commend the government’s prudent approach to reprioritizing spending in the current period of low oil prices, we hope that the tap is not turned off for too long or Abu Dhabi will lose the momentum it has built and we could enter a more damaging downward spiral,” said David Dudley, international director and head of the Abu Dhabi office at JLL Middle East and North Africa.

Though demand (be it from the government, corporates, or individual investors) has taken a big hit, rents have only declined marginally because supply has been at an all-time low, leading to relatively stable market conditions over the past 18 months.

In Q2, however, even as supply remained stable, the drop in demand was enough to drag rents down, albeit marginally so.

In its report, JLL also said, with more companies axing jobs, the impact of these cuts will “become more pronounced over the summer, as some people look to either leave or downsize.”

This will, again, push vacancy rates up and rental rates down in the second half of 2016.

During the quarter, just 400 units were delivered in Abu Dhabi, bringing the total residential stock to roughly 246,000 units. Around 4,000 units are expected to have entered the market by the end of this year, although many of those may experience a delay in handover.

Sales market

In the sales market, average prime prices declined by five per cent to reach around Dh15,200 per square metre.

“Over recent years, prime residential prices went up at 25 per cent per annum, which was unsustainable. As the market softened during 2015, prices have remained stable but transaction volumes have dropped significantly, which is starting to put pressure on sales prices. While we expect this pressure to continue, we also do not anticipate a sharp fall in prices,” JLL’s Dudley said.

‘One of best performing sectors’

Despite the anticipated drop that is yet to come, Abu Dhabi’s residential sector is still expected to remain one of the best performing sectors in the emirate’s real estate market, according to a separate report by CBRE, a consultancy firm.

“I think the residential market is relatively well-insulated because we really haven’t seen a huge amount of supply coming into the market. Last year, there were about 5,500 units completed over the course of the year. It’s a comparatively small pipeline in the short-term as well, so at least from a supply perspective, the market is actually well-insulated,” said Matt Green, head of research and consulting for UAE at CBRE Middle East.

“We expect the residential sector to perform comparatively well and to be relatively resilient to the downward pressure that we’ve seen recently.”

CBRE said that more affordable units are still in demand, reflecting the demographic of the vast majority of expatriates, whereas prime units were the ones seeing some deflation.

Even as oil prices start to climb back now, investor appetite may not return just yet due to macroeconomic uncertainty, which was exacerbated just a month ago by the UK’s vote to leave the European Union.

“The economic environment at the moment is certainly filled with uncertainty … With the Brexit, the global economic picture is certainly somewhat cloudy at the moment, and there doesn’t seem to be consensus of when that’s going to change or how much change we’ll see particularly in relation to currency, which will obviously have a big impact here on investor appetite,” Green said.