Abu Dhabi: Uncertainty in the global economic outlook is putting landlords in Abu Dhabi under increasing pressure to lower rental rates as tenants look for more affordable homes in the UAE capital.

According to the latest Abu Dhabi Property Review by Asteco, a real estate consultancy, large units are being affected the most amid a flight to smaller, cheaper units. In prime units, rental rates fell around six per cent in the third quarter of 2016 compared to the same time last year.

The drop was more prominent in certain areas in Abu Dhabi, with high-end units on the Corniche seeing rates drop nine per cent year-on-year.

“The ongoing redundancies across various industry sectors and the reduction of staff housing allowances continues to negatively affect demand in Abu Dhabi, with a number of tenants opting to downsize and/or move to more affordable developments,” said John Stevens, managing director at Asteco.

But it’s not just employees whose jobs are being axed or whose housing allowances are being cut or scrapped that are moving.

Even employees who still have their jobs are moving to more affordable units, according to Edward Carnegy, director and head of Cluttons Abu Dhabi, a property consultancy. He said the sentiment of uncertainty is far-spreading across industries and is impacting employees.

“Where people are worried about job prospects, there’s a natural flight to trim your costs, so this is showing itself in the market where tenants are moving from premium locations to secondary locations that are cheaper,” he said.

Such a drop in rental rates, which wasn’t so pronounced in 2015 and early 2016, is now narrowing the gap between rates in Abu Dhabi and Dubai where the decline in rates was more accelerated.

In its report, Asteco said the price difference for one- and two-bedroom apartments between Dubai and Abu Dhabi was typically Dh20,000 per annum, but this has narrowed to Dh10,000.

“The majority of vacant apartments, which were offered at reduced rates in Q2, have now been leased, especially the smaller unit types (studios, one- and two-bedroom units) … In comparison, rental rates for larger and more expensive three- and four-bedroom duplexes and town houses have fallen by 10 per cent since the last quarter, with a high percentage remaining vacant for over six months,” Asteco’s Stevens said.

In the office market, the performance is even weaker, with office rental rates currently at their lowest point since the market peak in late 2008. Rents in prime office buildings are now at around Dh1,600 per square metre, marking a four per cent decrease quarter-on-quarter.

“Large corporate and government entities often form the main tenants of prime office space, and with uncertain economic conditions and low oil prices, demand from these organisations has weakened considerably,” Stevens said.

The decline comes amid a period of restructuring for many companies. In the past few months alone, there were announcements about mergers between sovereign wealth funds (Mubadala and Ipic), banks (National Bank of Abu Dhabi and First Gulf Bank), and subsidiaries of Adnoc (Zadco and Adma).

According to property consultancy, JLL, this has placed downward pressure on rents in the office market, with rents for Grade A and Grade B office supply down 5 and 12 per cent respectively in Q3 2016 year-on-year.