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Construction Project Financing/Valuation Market Review A Brief Essay

¶ … Construction Project Financing/Valuation Market Review

A brief search of Internet-listed one-bedroom apartments in Abu Dhabi confirms a current yearly rental price of AED 75,000 for most properties in the city (JustRentals.com, 2012). Many apartments located in different buildings and in different [arts of the city are listed for exactly this amount, though some were also found for lower (AED 60,000) and several were found that were higher (approx. AED 85,000), however as an average current price AED 75,000 seems quite accurate (JustRentals.com, 2012). Likewise, an estimation of AED 120,000 as the current annual average rent for a two bedroom is also fairly accurate; there is a greater variance observed in prices for two bedrooms that is likely reflective of differences in actual size and also appears to be neighborhood- and building-driven to a greater degree than is the pricing of one-bedroom apartments, however AED 120,000 does seem to be a fair median estimate of rental rates for two bedroom apartments for the entire region of Abu Dhabi as a whole (JustRentals.com, 2012; PropertyWire.com, 2012).

The estimation of a five-percent drop per year in this price for only the next three years followed by a stabilization in price may perhaps be optimistic. Rental rates in Abu Dhabi generally fell five percent just in the first quarter of 2012, with some areas falling much more steeply (PropertyWire.com, 2012). In addition, many analysts are predicting steeper and ongoing price drops due to the number of properties still under construction. When these properties reach the market, the already-present over supply will become much more extreme, which will all but certainly lead to further price drops for residential rental properties (PorpertyWire.com, 2012). Not only will this growing over-supply lead to lower prices for properties, but occupancy...

The project will thus not only experience lower per-unit rental revenue each year into the foreseeable future -- perhaps at faster-dropping rates than estimated, but it is also likely to see faster-dropping occupancy rates and thus lower overall revenue.
Financial Market Analysis

Abu Dhabi remains one of the stronger of the emirates in the United Arab Emirates financially speaking, especially in comparison to Dubai which was very heavily impacted by the global economic crisis that the world recently experienced (Jones, 2011; Reuters, 2011). Accounting for more than half of the UAE's total GDP, Abu Dhabi remains an anchor for the collection of Arab states and ahs a solid credit rating, however it has also had to check its rampant growth and attempted transition away from extreme economic dependence on hydrocarbon production, refinement, and distribution due to the global recession recently experienced (Jones, 2011; Zawya.com, 2012). All of this could have an impact on the capital-raising abilities for the project, which contributes both to the high cost of equity the project bears and will almost certainly lead to a rather high cost of debt based on the uncertainty of true profitability to arise from the project. That is, uncertainty in the ability of the Abu Dhabi government and hydrocarbon sector to continue promoting growth, combined with the uncertainty of an economic transition and with the over-supply of housing, could lead lenders to demand a high rate of return as security against a potential default.

Expansion has unquestionably slowed in recent years in Abu Dhabi, and current projections must take this into account (Zawya.com, 2012). Despite an estimated 4.5% growth in the overall economic output in 2011, this is markedly less…

Sources used in this document:
References

Jones, M. (2011). CEO Magazine Interview. Accessed 10 April 2012. http://www.ceoqmagazine.com/economicoutlook/gcceconomicoutlook.htm

JustRentals.com. (2012). Accessed 10 April 2012. http://www.justrentals.com/abu-dhabi-rent/1-bedroom-abu-dhabi-apartments-for-rent.html

PropertyWire.com. (2012). Downturn for property rents in Abu Dhabi as market is flooded with new supply. Accessed 10 April 2012. http://www.propertywire.com/news/middle-east/abu-dhabi-rental-prices-201203286352.html

Reuters. (2011). S&P keeps Abu Dhabi outlook. Accessed 10 April 2012. http://www.emirates247.com/business/economy-finance/s-p-keeps-abu-dhabi-outlook-2011-05-24-1.396898
Zawya.com. (2012). Economic growth in Abu Dhabi offers encouraging outlook for real estate sector. Accessed 10 April 2012. http://www.zawya.com/story/Economic_growth_in_Abu_Dhabi_offers_encouraging_outlook_for_real_estate_sector-ZAWYA20120331061219/
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