Shifting priorities: Developers look to secure end-buyers and address a market imbalance

For real estate developers who are used to wide margins and off-plan sales, the current market in Qatar is proving to be trying. In a post-crisis environment where demand has been significantly depressed, particularly in sales, it has been difficult for developers to shift units. The last 12 months have therefore been a period of reflection and readjustment for most developers, with belt-tightening a priority for many.

MARKET PRICING: The change in Qatar’s real estate market since its high in 2007-08 is seen in the country’s consumer price index (CPI). Inflation, which in the GCC was driven by rent and real estate for several years, displayed a markedly different trend in 2011. While the CPI for Qatar increased by 2.1% in 2011, the rent and utility component decreased by 5.6%, according to the Qatar Statistics Authority.

The deflationary impact of rent on consumer prices on the peninsula is a reversal of the pre-crisis trends and illustrates the bruised confidence and weak demand in the country’s real estate sector. “The similarity (with Dubai) is that there are potentially too many properties with not enough people to occupy them, leading to a build-up of capital in the residential property sector, and consequently potentially a liquidity squeeze for developers or investors down the road,” Raj Madha, a regional banking analyst at the UAE’s Rasmala Investment Bank, told OBG.

WHAT LIES AHEAD: There are early signs that the market is turning a corner, with Qatar National Bank (QNB) predicting the housing CPI to grow by 1.4% in 2012. However, developers remained frustrated and impatient in the early part of the year. “The pace is slower. People get excited by 2022 and expect us to move from one place to the next overnight, but it doesn’t happen that way,” said Seraj Al Baker, the CEO of Mazaya Qatar Real Estate Development Company, a private developer. “We are waiting for the property market to recover and took a conscious decision not to build unless we’d secured a final tenant. We do not believe that there will be any recovery until 2013.”

The company has thus been working on a strategy whereby it can effectively build to order. Mazaya has secured two deals with Qatar Foundation (QF), building accommodation facilities for employees of QF projects. For the first project, QF took the units on a 10-year lease, while the second project is being executed by Mazaya on a 20-year build-operate-transfer basis. By first securing an end-user, the company is hoping to minimise the high risk in the current market. Al Baker told OBG that the company can still get yields of over 10% and internal rates of return of 15%.

While these may not compare to the margins of three years ago, they are still substantial and keep the company’s shareholders happy, he said.

CURVEBALLS: However, not all developers have been able to navigate the market with the same results. Barwa Real Estate saw its profits fall in 2011, with net profits for the full year dropped by 8.9% to QR1.3bn ($357m). The erosion was largely the result of debt obligations, particularly those relating to Islamic finance contracts. Indeed, the performance in 2011 was partly the delayed result of a difficult market in 2009 and 2010. The company significantly boosted its cash revenues in 2011, with several projects coming to the market. Sales revenues from properties increased by 249% to QR556m ($153m) in 2011, while rental income increased by 59%.

The company has been successful in securing end-tenants and buyers for its projects. This is evident in the middle and affordable income segments, where its developments such as Barwa Village – Wakra have substantial waiting lists. The company was also able to sign an agreement with Qatar Petroleum for the sale of the QR11bn ($3.02bn) Barwa Financial District project. As a builder for the government, Barwa has been able to service specific government construction demand. The firm will remain important for fulfilling the government’s development agenda over the coming years. According to the National Development Strategy 2011-16 by the General Secretariat for Development Planning (GSDP), Barwa and Qatari Diar will spend QR100bn ($27.46bn) in the five years to 2016 on commercial and residential projects.

NEW TRACKS: For private developers, however, the environment remains challenging. According to Jed Wolfe, regional associate director of Asteco, this could begin to change in the near future. “It comes down to the new rail system. We won’t see any significant changes in the market until plans are in place for the metro,” he said. “All businesses involved in [serviced apartments and hotels] will fix their resources around that as there are technical issues relying on where the rail will go. Once that’s finalised we’ll see a marked difference in the existing market.” The first five project tenders were released in April 2012, marking the beginning of the Doha metro construction by Qatar Railways Development Company. One benefit of this project is that it will give developers a clearer picture of how development ahead of the World Cup will materialise, and how they can build projects to fit in with the government’s agenda. The rail is also seen as the starting gun for the government’s QR130bn ($35.7bn) infrastructure building plan, a programme that in itself will bring population growth and space demand for office and residential space.

MAKING MOVES: While developers are reluctant to build before there is a clear idea of where basic infrastructure will be, announcing these projects is likely to lead to higher costs. “The sooner you tender and build, the more you’ll save. Now you have 15 contractors who would be bidding [for a project]; in a few years, it may only be two or three,” said Badr Al Meer, vice-president of engineering and construction at United Development Company. Indeed, the depressed market has had a positive impact on construction costs for developers. “If you secure the tenant, now is a good time to build,” Mohammed Ahmad Al Emadi, general manager of Barwa Al Saad, told OBG. “Construction costs are currently good because of the recession.”

Costs are likely to increase steadily over the coming years, not only for materials, which shot up in price during the building boom in 2007 and 2008, but also in terms of land prices. “Land values have held up relatively well in Qatar,” Wolfe said. “One reason is because it is owned by Qataris and there has been reasonable levels of trading between locals. Land pricing wasn’t affected in the same way as residential unit prices and the rental market.”

ON LAND: Many developers do not see land as an undue influence on the cost of construction in the current market. In many GCC states, such as Kuwait and Saudi Arabia, land prices and availability skewed the development agenda and inflated the building cost above sustainable levels for affordable construction, according to Saudi Arabia’s National Commercial Bank Capital. While there is little indication that land price inflation will skyrocket, it will likely become more location-sensitive, with significant increases in areas primed for government infrastructure development.

In Al Thumama, close to Doha Airport, the first signs of infrastructure development led to a jump in land prices of 72.2% to QR310 ($85) per sq ft. It is likely that the announcement of rail and metro station locations, as well as other government projects, will have an even greater impact on land prices.

This is an interesting challenge for Qatari developers. While there is widespread recognition that the price of construction is likely to increase substantially, there is little appetite to commit to new projects in this fragile market. With 6500 residential units expected to come on-line in the Diplomatic District in 2012, according to DTZ, and 15 towers in the Pearl-Qatar project to be complete in the same time period, developers are concerned that supply continues to outstrip demand. As such, the development agenda is likely to remain cautious for the next 12 months, with the security of an end-user remaining the top priority. While this is a significant readjustment from the time before the crisis when off-plan sales, resales and stellar margins were the order of the day, this new development model is likely to position the Qatari real estate market for a more sustainable future.