Wednesday, June 23, 2010

Empty buildings everywhere

Rent in Abu Dhabi is exorbitant and not expected to fall. There are thousands of empty apartment buildings in the city — and new buildings go up every month.

I can't make sense of it, other than if we are looking at seriously lagged housing demand or a very forward looking construction boom (I suppose the city would see it that way). But how could developers afford to be so forward looking?

According to an assessment of the property market put out by the Urban Planning Council, current demand is outstripping supply. So why then are so many spaces empty? There is only one thing that makes sense of this: the housing/rent market in Abu Dhabi is not a market.

Land is allocated on the basis of merit not demand. Any local in Abu Dhabi is guaranteed an income so they never feel the pinch. Foreigners are prohibited from ownership in all but select areas, so locals can procure plentiful territory in this deserted country with limited competition.

Furthermore, since Islamic banking does not allow interest, there is little opportunity cost for investing in housing. There is little to lose if your building stays empty (little more than capital depreciation, which admittedly is high in this environment), even over a long period of time.

Putting these ideas together you get the outskirts of Abu Dhabi, a dusty, desolate place filled completely with empty apartment buildings and 'villas'. The contradictions never cease in this place, and don't imagine this changing for years to come.

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