It is no secret that Dubai’s residential market is starting to move into positive territory, with the second quarter of 2012 witnessing rental increases of approximately 2 and 5 per cent for apartments and villas respectively.

However, Abu Dhabi remains a different story. During the second quarter, rents fell by between 3 and 5 per cent compared to the first quarter and by 15 to 25 per cent compared to the same period in 2011. In the second quarter of 2011, a good quality two-bedroom apartment would lease for between Dh130,000 and Dh150,000, while the same can now be had for between Dh115,000 and Dh130,000.

The reason for this decline continues to be the significantly increased supply coupled with no major increase in demand. It has been reported that over 7,000 apartments and over 1,500 villas were delivered in the first six months of 2012, with another 7,000 apartments and 4,500 villas expected in the second. Even if half of these units slip into 2013 due to last stage approval delays, we would end the year with a 7 percent year-on-year increase in stock. By the end of 2014, aggregate supply is expected to go up to 238,000 units.

Most of the supply comprised of handovers in Saadiyat Island, Al Raha Beach, Reem Island, Al Reef Villas, Rawdhat and Danet Abu Dhabi. Rihan Heights, Boom Gardens, Burooj Views, Marina Blue and Amaya Towers are some of the new towers that have come into the market.

Upcoming supply includes more units in these masterplan projects as well as projects such as Nation Towers and Al Bateen Park. It has been reported that two thirds of the upcoming supply comprises of apartments, while most of the villa supply is within Emirati housing communities like Al Falah and Watani.

It is worth noting that rental declines have not been uniform throughout Abu Dhabi, with Al Raha Beach and Marina Square witnessing the biggest drops of over 15 per cent quarter-on-quarter.

A similar situation resonates in residential sales where prices have declined by over 4 percent in the second quarter, with major declines in the new masterplan developments such as Shams, Marina Square and Al Raha Beach. Though demand for these units has risen and transactions are taking place, prices continue to fall due to the continuous increase in prices as well as the existence of distressed sellers in the market.

Residential prices peaked in the last quarter of 2008 to average around Dh2,000 a square foot. The average selling price in the second quarter of 2012 was Dh975 a square foot. Asking prices for apartments are slightly higher at Dh1,050 a square foot compared to villas at around Dh900 a square foot.

Abu Dhabi might have some saving grace in the form of new regulations which makes a tenancy contract mandatory for visa applications. Also, the fact that Dubai’s prices are on the rise and Abu Dhabi’s still falling, would mean that some of the populace working in Abu Dhabi, but living in Dubai, might decide to move closer to work.

In addition, even though rents and sale prices have fallen, yields on investment remain competitive when compared to other alternatives.

The writer is the head of valuations and research at Chesterton International.