Expat outflow pulls down rental rates in Oman

CYCLICAL INDUSTRY:

Rental rates have dropped in all segments, although in terms of percentage, the impact is less pronounced in more desirable neighbourhoods, according to a Muscat-based real estate expert.

Ihsan Kharouf (pictured), Head of Savills Oman — a leading real estate advisory services firm — said any improvement in rental values would hinge on a significant uptick in the inflow of expatriates into the Sultanate.

“We do not anticipate the same level of reduction in rental values seen over the past two years. However, we still expect a marginal decline during 2019, unless the current net outflow in expatriate numbers is reversed,” Kharouf noted.

Tens of thousands of expatriate workers — including white-collar professionals likely to stay in rental apartments and villas — have left the Sultanate over the past two years in the wake of the economic downturn that continues to weigh down a number of oil producing countries, among others, around the world.

When rental rates have declined across the board, higher quality properties will continue to remain in demand, according to the property market expert. “Rental rates are a function of supply and demand. If we consider the steady level of supply, and reduced demand, it is possible to see that the market will continue to drift downwards albeit at a slow rate. This would not impact all assets equally as higher quality properties, namely, newer, better located, better managed, with good access will not be impacted as badly as properties considered less desirable,” he explained.

The slump in the rentals market is evident from the proliferation of ‘For Rent’ and ‘To Let’ signs that have gone up over the past two years across large swathes of the capital region, and indeed other cities across the Sultanate.

But vacancy rates do not usually tell the whole story, Kharouf points out. “In many cases, vacancy rates are high due a mismatch between the owners’ expectations and the current state of the market. Furthermore, not all supply can be considered as still adequate for purpose due to age, location or quality.”

Neither is the decline in construction costs — a consequence of the downturn — an incentive for property investment and development in the current circumstances, he said. “The reduction in construction costs over the past two years is dwarfed by the drop in rental rates. This coupled with the increased difficulty in accessing real estate financing meant that developers are not rushed to invest in any real estate project. In the current market, investors are choosing to undertake more in-depth studies before allocating funds to a particular project.”

In Q&A remarks to the Observer, the Head of Savills Oman also sought to emphasise the key link between real estate development and economic growth. “In the short-term, real estate development can cause an increase in GDP. However, such development does not usually produce long-term sustainable economic growth, and in fact in some cases it has a negative lagged effect on economic growth. The direction typically works in the opposite way where strong economic growth produces a need for real estate development, rather than the latter necessarily causing economic growth,” said Kharouf.

Underlining the cyclical nature of real estate markets, he also noted that low rental rates or sale prices should not be seen as a sign of a bad market, just as spikes in real estate prices should not be seen as signs of a good and healthy market.