Abu Dhabi’s quest to attract top hedge funds to its financial centre 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 have long sat on Al Maryah Island, are nearly full. The government is now working on expanding the free zone’s jurisdiction to neighbouring 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 sq m.

As part of that, officials are ordering existing tenants on 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 commercial real estate giant Cushman & Wakefield Core.

"With growing demand for companies to locate within ADGM, occupancy rates on 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 US$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, Manhattan has seen vacancy rates more than double to 16%, a level the city hasn’t seen since the 1990s.

Even in Dubai, the Middle East’s business hub, average occupancy rates stood at 91.3% in the first quarter.

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.”

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 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 centre’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.

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 the 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 defence 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's 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, environmentally friendly and fulfil the requirements of large corporations,” said Haider Tuaima, director and head of real estate research at ValuStrat.

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 sq m when completed by the end of this year. Another building, The Link, will add 30,000 sq m of office space by the end of 2025. A tower on Yas Island will add 50,000 sq m 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 capitalise 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.”

  - Bloomberg