Are things look­ing up for the real es­tate in­dus­try?

Real es­tate ex­perts are hop­ing for a re­turn to form in key Gulf mar­kets this year af­ter a dif­fi­cult 2016

Gulf Business - - CONTENTS - By Robert An­der­son

Af­ter a dif­fi­cult year, real es­tate play­ers in the re­gion are re­build­ing for the fu­ture. We ex­am­ine the in­dus­try’s progress, ex­plore the phe­nom­e­non of 3D printed build­ings, and talk with the founder and chair­man of Danube, Rizwan Sa­jan

It’s fair to say that the past year may have been one to for­get for many in­volved in the Gulf re­gion’s real es­tate mar­ket.

Aus­ter­ity mea­sures, re­dun­dan­cies and re­duced eco­nomic sen­ti­ment linked to the fall­ing oil price saw de­mand in many mar­kets di­min­ish over the last 12 months with much of the pain re­flected in de­clin­ing sale prices and rental rates. “Across the Gulf, and across most real es­tate seg­ments, ac­tiv­ity and per­for­mance over the past year have ei­ther slowed down in growth, stag­nated, or de­creased,” notes Bruno We­hbe, prin­ci­pal with PwC unit Strat­egy&.

The im­pact can be seen across the Gulf’s key prop­erty mar­kets. In Saudi Ara­bia – the re­gion’s largest mar­ket – “the pic­ture is one of gen­eral de­cline”, We­hbe notes.

“With the ex­cep­tion of the Eastern Prov­ince and hos­pi­tal­ity in Jed­dah, prices and rents have de­clined year-on-year, by dou­ble dig­its in some in­stances,” he says.

Among the im­pacted ar­eas has been prime of­fice rents in Riyadh, which con­tinue to suf­fer from an over­sup­ply de­spite de­mand from pro­fes­sional ser­vices firms keen to take part in the king­dom’s diver­si­fi­ca­tion ef­forts.

Sim­i­larly, the cap­i­tal’s five-star ho­tels, have seen de­clin­ing rev­enue per avail­able room and oc­cu­pancy rates, while retail rentals are start­ing to feel the ef­fects of a re­duc- tion in dis­pos­able in­come and reg­u­la­tion to ex­clu­sively em­ploy Saudis across malls. Else­where, prime res­i­den­tial units worth SAR2m ($533,000) or more are con­tin­u­ing to see a grad­ual de­crease, We­hbe says.

In the UAE it is much the same story, with Abu Dhabi not­ing dou­ble digit de­clines in prime rentals and sales and Dubai far­ing only slightly bet­ter.

In a report pub­lished in Fe­bru­ary, rat­ings agency Stan­dard & Poor’s said fac­tors in­clud­ing the strength of the dol­lar, weak­ness of the UK pound, di­min­ished pur­chas­ing power and weak­ened in­vestor sen­ti­ment were im­pact­ing de­mand in the emi­rate. The com­pany fore­cast house prices and rents could fall up to 10 per cent in Dubai this year from de­clines of 8-11 per cent and 6 per cent re­spec­tively recorded in 2016 by REIDIN.com.

In Bahrain, con­sul­tancy Clut­tons noted the quick­est fall in rents in eight years dur­ing the first quar­ter of 2017 as tough eco­nomic con­di­tions and in­creas­ing real es­tate sup­ply im­pacted the mar­ket. A monthly fall of 8.3 per cent for apart­ments and 6.9 per cent for vil­las was seen dur­ing the quar­ter.

Sup­ply and de­mand

Real es­tate com­men­ta­tors high­light sev­eral trends that have im­pacted the sec­tor over the last 12 months.

Per­haps most sig­nif­i­cant for mar­kets de­pen­dent on out­side in­vest­ment like Dubai has been geopo­lit­i­cal un­cer­tainty, cou­pled with stag­nant oil prices and re­duced gov­ern­ment spend­ing. This in turn has led GCC in­vestors to cut back on their real es­tate in­vest­ments in the re­gion in favour of in­ter­na­tional mar­kets like the US and UK.

“More­over, a re­duc­tion in for­eign cap­i­tal flows from economies im­pacted by de­val­u­a­tion of their cur­ren­cies com­pared to the US dol­lar, par­tic­u­larly Rus­sia and the UK, into the re­gion has fur­ther damp­ened in­vest­ment de­mand in lo­cal mar­kets,” says Karim Ab­dal­lah, part­ner with Strat­egy&.

Other damp­en­ing fac­tors in­clude re­duced spend­ing power and con­sumer spend­ing, as seen in Saudi Ara­bia where pub­lic sec­tor em­ployee ben­e­fits were cut for more than six months be­fore be­ing re­in­stated in April.

But per­haps the most com­mon con­cern across the re­gion has been sup­ply ex­ceed­ing de­mand, due to a large back­log of projects com­ing back on­line over the last two years.

“Soft­en­ing de­mand has been cou­pled with con­tin­ued new sup­ply across most sec­tors, fur­ther plac­ing down­ward pres- sure on val­ues,” notes Chris Hob­den, as­so­ciate direc­tor of Sav­ills North­ern Gulf.

This has been re­flected in seg­ments as broad as Riyadh’s of­fice mar­ket to ho­tels and retail malls in Abu Dhabi and re­mains a par­tic­u­lar con­cern in Dubai and Bahrain, where con­sul­tan­cies have pointed to the high num­ber of units due to be handed over in the com­ing years.

In a report at the be­gin­ning of the year, CBRE noted there were 70,000 units ex­pected to be de­liv­ered in Dubai be­tween 2017 and 2019, while in the smaller Bahrain mar­ket Clut­tons said there were 4,100 due to be com­pleted over the next two years and 7,100 by 2020.

Given th­ese fig­ures, some sug­gest han­dover de­lays are in­evitable as de­vel­op­ers seek to avoid flood­ing the mar­ket.

Al Ruwad Real Es­tate man­ag­ing direc­tor Is­mail Al Hammadi says there are 35,000 units sched­uled for com­ple­tion this year in Dubai, which would bring the unit to­tal to 502,000 across the mar­ket, but in re­al­ity much fewer could be handed over.

“As in past years, it may hap­pen that the ac­tual num­ber to be handed over is lower

“more­over, a re­duc­tion info reiGn cap­i­tal flows from economies im­pacted By de val­u­a­tion of their cur­ren­cies com­pared to the us dol­lar, par­tic­u­larly rus­sia and theuk, into there G io n has fur­ther damp­ened in­vest­ment de­mand in lo­cal mar­kets. ”

than ex­pected, with de­liv­er­ies in re­cent years typ­i­cally equat­ing to about 35 per cent per cent of fore­casted numbers,” he says.

Sim­i­larly, David God­chaux, CEO of Core Sav­ills, sug­gests only 15,000 more units will be handed over in Dubai this year, from a to­tal of 3,100 in the first quar­ter, rep­re­sent­ing a 50 per cent short­fall on the 36,000 the firm es­ti­mates were an­nounced by de­vel­op­ers.

“This large dis­crep­ancy be­tween the an­nounced and de­liv­ered stock has been a his­tor­i­cal trend in Dubai,” he says. “This has in fact helped de­vel­op­ers to ad­dress over­sup­ply con­cerns by align­ing de­mand and de­liv­er­ing prod­ucts at re­al­is­tic prices, aid­ing ab­sorp­tion - al­beit in the mid and prime seg­ments.”

Drive to af­ford­abil­ity

An­other fac­tor im­pact­ing the real es­tate mar­ket is a lack of sup­ply in the so-called ‘af­ford­able seg­ment’, which has been tra­di­tion­ally ne­glected by de­vel­op­ers in favour of lux­ury prop­erty.

As Strat­egy& part­ner Ramy Sfeir notes, de­spite re­cent ef­forts from de­vel­op­ers in­clud­ing Danube and Nshama in Dubai there is still a per­sis­tent gap in many mar­kets.

“In Saudi Ara­bia alone, the de­mand/ sup­ply gap for af­ford­able hous­ing, in­volv­ing unit prices lower than SAR650,000 ($173,000), is ex­pected to reach more than 1 mil­lion units in the king­dom’s five key re­gions alone,” he says.

While some fac­tors like high land prices forc­ing de­vel­op­ers to look at sites up to 30km out­side of the city for af­ford­able projects and labour chal­lenges re­main unique to Saudi Ara­bia, oth­ers are deemed com­mon across the Gulf re­gion.

“Less than com­fort­able pay­ment plans” and ba­sic real es­tate pro­ject fi­nanc­ing op­tions are key chal­lenges, Sfeir says.

An­other is­sue, Is­mail sug­gests, is that the con­cept of af­ford­able hous­ing still re­mains “strange” to many de­vel­op­ers that pre­vi­ously cow­ered away from the seg­ment due to high land costs, lower qual­ity con­struc­tion, faster de­pre­ci­a­tion and per­cep­tion is­sues.

But times are chang­ing. He es­ti­mates 40 per cent of to­tal and de­liv­ered stock in Dubai in the first quar­ter was in the low and mid mar­ket cat­e­gory, while Al Ruwad Real Es­tate’s mon­i­tor­ing sug­gests the ma­jor­ity of new projects launched in the quar­ter were pri­mar­ily aimed at mid­dle in­come cus­tomers and buy­ers.

“This cat­e­gory rep­re­sents more than 65 per cent of res­i­dents and ex­pa­tri­ates in Dubai, that are now be­ing of­fered more vi­able op­tions in terms of find­ing the most suit­able place of res­i­dence,” he says.

It’s a trend backed up by Tom Rhodes, ex­hi­bi­tion direc­tor of real es­tate trade show, Ci­tyscape Global.

“Af­ford­able hous­ing is a re­cur­rign theme at Ci­tyscape events, and we've seen a num­ber of de­vel­op­ers such as Bloom and Dabube show­case their projects that aim to pro­vide a bal­ance of well-crafted hous­ing units and pric­ing points,” he says.

“We ex­pect to see more af­ford­able hous­ing projects be­ing an­nounced at this year's event as de­vel­op­ers seek to cor­ner the gap in the mar­ket to ac­com­mo­date the ex­pand­ing mid-marker in­vestor, who make up a ma­jor­ity of Dubai's pop­u­la­tion.”

God­chaux notes the in­creased ser­vic­ing the af­ford­able seg­ment com­pared to a few years ago, but he sug­gests poor qual­ity and sub-par units re­main con­cerns.

An­other is­sue in the UAE is a lack of mort­gage lend­ing to res­i­dents with a monthly in­come that falls into the Dhs10,000 ($2,723) to Dhs15,000 ($4,083) thresh­old, ac­count­ing for a sig­nif­i­cant chunk of res­i­dents, and op­por­tunist in­vestors.

“The cost of bor­row­ing cap­i­tal still deters many buy­ers to be able to put down the ini­tial down pay­ment and th­ese af­ford­able units in many cases are bought in bulk by in­vestors to achieve high yields (typ­i­cally on smaller stu­dio and one-bed units) and don’t serve the pur­pose of cater­ing to the low-mid in­come end-user,” God­chaux says.

This all sug­gests there is some way to go in this seg­ment, even if there is en­cour­ag­ing progress be­ing made.

Time for an up­turn?

Amid the gloom of the last year, real es­tate mar­ket ex­perts es­ti­mate an up­turn may only be months away.

“In 2017, the de­cline trend has con­tin­ued, how­ever the sit­u­a­tion is sta­bil­is­ing, and in­vestors, de­vel­op­ers and con­sumers are adapt­ing to the new re­al­i­ties,” says Strat­egy&’s We­hbe.

“The mar­ket is ex­pected to bot­tom out this year, with a po­ten­tial re­ver­sal dur­ing the end of 2017 or be­gin­ning 2018.”

Is­mail ex­pects a sim­i­lar drive for­ward in Dubai in 2017 driven by gov­ern­ment in­fra­struc­ture projects and prepa­ra­tions for Expo 2020.

“A tighter mar­ket reg­u­la­tion and more dis­clo­sure and trans­parency, as well as higher prop­erty trans­fer fees and mort­gage caps are among other fac­tors of op­ti­mism to cater to the fu­ture mar­ket needs and en­cour­age for­eign in­vest­ment.”

Rhodes agrees, adding: "Many in­vestors iden­tify Expo 2020 as the key driver for lo­cal mar­ket. We have seen new projects launch­ing such as DAMAC's Akoya Oxy­gen, and over the past year more than 1,200 con­tracts have been awarded for Expo 2020, with 47 con­struc­tion con­tracts worth Dh­s11bn ($3bn) awarded in Jan­uary alone.”

How­ever, sev­eral key chal­lenges are ex­pected to re­main.

“Lim­ited ac­cess to mort­gages, cou­pled with high-lev­els of un­sold in­ven­tory, will likely con­tinue to chal­lenge res­i­den­tial val­ues mov­ing for­ward, with de­vel­op­ers in­creas­ingly of­fer­ing pro­mo­tions to en­cour­age sales,” says Hob­den.

Is­mail points to sup­ply and de­mand bal­ance con­cerns, the stag­nant oil price, the fall in the value of the Bri­tish pound versus the dol­lar and the re­cent diplo­matic rift be­tween Qatar, Saudi Ara­bia, Bahrain and the UAE as other damp­en­ing fac­tors.

“Grow­ing un­cer­tainty in the Gulf re­gion fol­low­ing the Qatar crisis may have an im­pact de­ter­ring in­vestors from en­ter­ing the mar­ket, while si­mul­ta­ne­ously en­cour­ag­ing other in­vestors to exit, prompt­ing re­duc­tions in sales prices,” he says.

But with this said, there are also deemed suf­fi­cient op­por­tu­ni­ties for de­vel­op­ers to dif­fer­en­ti­ate them­selves in the cur­rent mar­ket.

Ab­dal­lah ar­gues cur­rent con­di­tions mean de­vel­op­ers can shift from a “pro­duct­based ex­pe­ri­ence” to an “ex­pe­ri­ence-based busi­ness” through ac­tively of­fer­ing in­no­va­tive and com­mer­cially vi­able dig­i­tal prod­ucts and en­hanc­ing the cus­tomer ex­pe­ri­ence.

He also points to ris­ing ac­tiv­ity and in­ter­est around re­gional real es­tate in­vest­ment trusts (REITs), of­fer­ing de­vel­op­ers a new av­enue for fund­ing, and new ef­fi­cient and cost-sav­ing con­struc­tion tech­niques like mod­u­lar de­sign and 3D print­ing as a source of op­ti­mism.

“REITs in our view of­fer one of the most im­por­tant op­por­tu­ni­ties for some de­vel­op­ers and fam­ily busi­nesses with very large real es­tate port­fo­lios look­ing for al­ter­na­tives to fund their growth,” he says.

Oth­ers sug­gest the gen­eral mes­sage is that re­gional mar­kets re­main at­trac­tive to in­vestors de­spite the down­turn af­ter ma­tur­ing over the last decade amid a back­drop of pro­gres­sive reg­u­la­tion led by the UAE.

“While 2017 will likely see a fur­ther soft­en­ing of Bahrain sales and rental val­ues, res­i­den­tial prop­erty will con­tinue to present an at­trac­tive value propo­si­tion when con­sid­ered in a GCC con­text,” says Hob­den.

De­vel­op­ers, own­ers and in­vestors will be hop­ing this proves true as the re­gional real es­tate mar­ket con­tin­ues to nav­i­gate chal­leng­ing con­di­tions.

“Grow­inG un­cer­tainty in the Gulf re­Gion fol­low in G the Qatar crisis may have an im­pact de­ter­rinG in­vestors from en­ter in G the mar­ket, while si­mul­ta­ne­ously en­cour­aG­inG other in­vestors to exit, prompt in G re­duc­tion sin sales prices .”

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