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Abu Dhabi’s Original Hedge Fund Island Is Running Out of Office Space

Abu Dhabi’s quest to attract top hedge funds to its financial center is creating a shortage of office space in the oil-rich emirate.

After struggling to attract tenants for years, the four sleek towers in Abu Dhabi Global Market, which has long sat on Al Maryah Island, are nearly full. The government is now working on expanding the free zone’s jurisdiction to neighboring Al Reem Island in a move that will give it ten times as much space and make it one of the largest financial districts on the planet, stretching 14.4 million square meters (3,558 acres).

As part of that, officials are ordering existing tenants of Al Reem Island to obtain an ADGM license or vacate their offices by the end of the year. About a quarter of those tenants will likely need to move, according to the commercial real estate giant Cushman & Wakefield Core.

"With growing demand for companies to locate within ADGM, occupancy rates in Al Maryah Island have exceeded 95%," a representative for ADGM said in an emailed statement. "Consequently, expansion is the next natural and necessary step to better accommodate the increasing demand of companies seeking to establish a presence in the financial hub of Abu Dhabi."

Those forced to leave the hub will enter a commercial real estate market that’s been transformed by the broader shift in wealth to the capital of the United Arab Emirates, which sits on 6% of the world’s proven oil reserves. The emirate is also home to the world’s richest family and boasts sovereign wealth funds that manage around $1.5 trillion.

The real estate frenzy puts Abu Dhabi at odds with other major cities around the world like New York, London and San Francisco, where office vacancy rates remain elevated as many employees transitioned to work remotely more often in the aftermath of the pandemic. For instance, 16% of office space in Manhattan stood empty at the end of April, a level the city hasn't seen since the 1990s.

Over in Dubai, average occupancy rates stood at 91.3% in the first quarter. The Middle East’s business hub is building three new office towers in the heart of its financial district to catch up with rising demand.

The office space shortage is creating headaches for real estate managers at large, multinational companies. Usually, these executives have months to assess long-term leases. In Abu Dhabi, some companies have had to make such decisions within a week. The limited availability of office space to lease even has some firms considering building their own towers across the emirate.

“To find space at the moment is very challenging,” said David Short, an associate director at Cushman & Wakefield Core. “When companies identify the space they like, they often have to move fast or risk losing it.”

Abu Dhabi's Financial Hub Is Booming

Office space is hard to find with occupancy hovering around 95%.In addition to the cadre of big hedge funds, venture capital firms and crypto companies that have set up in the financial hub in the last year, there’s also billionaires like Ray Dalio and crypto’s richest man Changpeng Zhao. They all share space with the more than 25,000 people working for 1,950 firms including Apollo Global Management Inc., Blackstone Inc. and Goldman Sachs Group Inc. The rush of new entrants drove a 211% jump in the financial center’s assets under management in the first quarter.

That’s because while Abu Dhabi’s sovereign wealth funds are a big draw for hedge fund managers, the emirate’s tax-free income, sunny weather and a time zone that allows workers to trade across Asian, European and US hours are also helping the city lure firms from London, Hong Kong and Singapore.

Officials have also orchestrated a package of perks, from helping traders obtain coveted school admissions for their children to assisting them with securing memberships at country clubs, Bloomberg News reported in March.

Two of London’s biggest hedge funds — Marshall Wace and Capula Investment Management — have held talks to potentially expand operations in the emirate. They could join behemoths like Brevan Howard Asset Management, which has made the emirate its biggest trading hub, as well as Czech tycoon Radovan Vitek and Egyptian magnate Nassef Sawiris who are all setting up firms in the city.

Several firms received full ADGM licenses during the first half of the year including subsidiaries of Axa SA, Paxos Inc., Morgan Stanley and Barrenjoey Markets.

The upswing in demand has lifted average rents across Prime, Grade A and Grade B spaces, which saw rents climb 6.6%, 3.4%, and 9.7%, respectively in the first quarter.

“The strong performance is likely to continue,” said Taimur Khan, head of research in the Middle East for the real estate services firm CBRE. “Rising demand due to ongoing flight to quality along with the scarcity of available supply will keep pushing up rates.”

While financial institutions have dominated the list of new entrants in the past two years, companies across pharmaceuticals, life sciences, security and defense are either coming in or expanding their offices in Abu Dhabi.

As more private companies enter the market and look for space, they’re also altering the dynamics of the office market that’d been traditionally dominated by state-linked firms.

The city’s supply of homes and offices is split between older buildings that lack modern amenities and newer towers and developments built to suit the needs of global firms — effectively creating a two-tiered market. “That’s why there is demand for newly built offices that are high tech, environment friendly and fulfill the requirements of the large corporations,” said Haider Tuaima, director and head of real estate research at ValuStrat.

ADGM said it’s working with the tenants on Al Reem that might have to make a move as a result of the island’s inclusion in the free zone.

“The seamless transition of existing businesses on Al Reem Island is a top priority,” ADGM said in a statement. “ADGM has provided a number of incentives and amendments to various regulations to provide transitional arrangements to support existing Al Reem Island businesses.”

Supply Situation

The current supply squeeze isn’t likely to last long. For starters, the addition of Al Reem Island to ADGM will double the amount of available office space in the free zone.

Then there’s Masdar City Square, a cluster of seven commercial buildings designed to be low-carbon, which will add 50,000 square meters when completed by the end of this year. Another building, The Link, will add 30,000 square meters of office space by the end of 2025. A tower on Yas Island will add 50,000 square meters by the end of next year, Cushman & Wakefield Core’s Short said.

In fact, over the next two years developers are set to bring the largest supply of office space to the city since 2012 as they look to capitalize on the rising demand, according to CBRE.

“These master plans have been in existence for a long time, but now you see the delivery happening at much faster speed,” said Simon Townsend, who leads the Middle East and North Africa operations for the real estate advisory firm Avison Young. “That’s because there’s a bigger number of people that really get the Abu Dhabi offering now.”

For a detailed perspective on the property market, visit: Dubai - VPI Residential Capital Values - May 2024