Bouncing back: The market seems on track for growth as demand is set to pick up

While Qatar’s real estate sector experienced a lull in recent years, the first signs of growth are beginning to show, with an uptick in transactions and a discernible increase in bank credit available to the sector. Pricing in the market has remained largely flat for the past 12 months in most segments, a significant improvement on three years ago when prices were in freefall and distressed sales were the order of the day. These developments suggest that the market has weathered the worst of the global financial crisis and that it may once again begin to move in a more positive direction in 2012. With confidence beginning to return and the underlying conditions ripe for growth, the real estate sector may well remerge as a prominent area for investment in the coming two years.

A VITAL ROLE: Real estate has remained a vital part of Qatar’s economy over the past five years. In 2010, the last year for which data is available, real estate, finance, insurance and business services accounted for 13.4% of GDP and 27.8% of non-hydrocarbons GDP, according to the Qatar Central Bank. While this represents a slight decrease on 2007, when it stood at 14.5% of GDP, the sector is still an important component of the economy, and has consistently made significant contributions to economic growth, remaining above 12% of GDP for the last five years.

The government has a stated policy of diversifying the economy, with the goal of fully financing the national budget from non-hydrocarbons revenues and overseas investment income by 2020. Despite the challenges, the IMF has predicted that non-hydrocarbons revenue will increase from covering 52% of total government expenditure in 2011-12 to 63% in 2016-17, and the state has already made significant moves to broaden its economic base. The oil and gas sector’s share in GDP declined from 54.89% in 2008 to 51.73% in 2010, according to the central bank.

PRO-BUSINESS POLICIES: This decline is likely to be expedited by the government’s pro-business policies. Moves to introduce a flat-rate corporate tax in early 2010 and to allow 100% foreign ownership of Qatar-based companies in February 2011 should bolster the diversification process on the peninsula.

Indeed, the country has been slowly moving up the World Bank’s “Doing Business” rankings, placing 36th for 2012, two spots above its 2011 ranking.

The government’s efforts to diversify the economy and improve the business environment bode well for the real estate sector. The most obvious benefits are likely to be felt in commercial properties, encouraging news for a market segment that has been depressed and over-reliant on government clients. A November 2011 report by Jones Lang LaSalle, a global commercial real estate services firm, found that office vacancies in Doha stood at 20% and would continue to increase as new supply hits the market.

EXCESS SUPPLY: Indeed, it is clear that the sector has been in a state of oversupply for some time.

According to DTZ, a real estate brokerage, consulting and research firm, the amount of leasable office space in the Diplomatic District alone has increased by 101% over the past three years, to 1.37m sq metres. This has had an inevitable effect on rental rates, especially at a time when the global economic crisis has already suppressed demand.

The average office rental rate in the Diplomatic District of Doha fell by 25-30% in the first half of 2009, to QR200 ($54.92) per sq metre, according to Asteco, a regional real estate brokerage and consultancy firm. These rents did not recover throughout the first half of 2012, and averaged QR195 ($53.55) per sq metre in the Diplomatic District and West Bay. These are currently the prime rents in the market, with older areas such as Old Doha and the C Ring Road commanding significantly lower rents at an average of QR105 ($28.83) per sq metre and QR140 ($38.44) per sq metre, respectively.

The government has been working to absorb this excess supply, one tactic being to lease much of the space itself. “I expect the government would account for 60% of occupancy, especially in [the West Bay] area,” said Mark Proudley, associate director of DTZ. The government’s ability to lease out entire buildings seems to have averted a further slide in rental rates. This role will continue to be important. “In 2011 there was slightly more of an upturn in the private sector, but the government has still been very active,” said Proudley. “I think the vacancy rate will now come down even more, as the government has leased three more towers. Vacancy has already begun to tighten.”

NEW REGULATIONS: The government has adopted several other measures to help regulate supply and demand dynamics in the commercial sector. For example, in 2010 the Ministry of Municipality and Urban Planning issued a decree that would halt the issuing of commercial licences for companies operating out of villas, with the exception of certain businesses such as kindergartens and beauty salons. The new regulation, which has not yet been put into practice, according to Asteco, would encourage smaller businesses that are currently in villas, such as consultancies or architects, to move to dedicated office space.

These measures are likely to have some impact on the market, but long-term sustainable demand from the private sector will be equally important to ensure robust rental growth and strong returns in the commercial sector. Early signs that this demand is emerging were evident in the second half of 2011 and into 2012. While demand fell by 21% to 173,500 sq metres in 2011, according to DTZ, the vast majority (73%) is now coming from the private sector. This is a dramatic turnaround from 2010, when 60% of demand recorded by DTZ was from government bodies. In 2011 almost 50% of recorded demand came from financial services, construction and engineering leasers.

LOOKING AHEAD: This suggests that many companies are gearing up for the potential contracts that will be awarded under the government’s development plans for the 2022 World Cup and as part of Qatar National Vision 2030. This bodes well for the absorption of the additional 330,000 sq metres of stock DTZ estimates will be brought to the market in 2012.

Indeed, analysts think it is possible that the commercial sector may see upward movement on rents in the medium term. “Looking at estimates for 2014, I think there is potential for there to be a bit of a shortage,” Proudley said. “While supply slows, but before sales start to hit the market, there could be a window of undersupply where there’s [rental] growth.”

Analysts are also already beginning to suggest that corporate growth is changing the dynamics of the market. According to Jed Wolfe, regional associate director and general manager of Asteco Qatar, 750 new businesses are registered in Qatar every month. While some do not actually take office space, the sheer number of new companies is putting pressure on certain segments of the market. “For smaller spaces, the market is actually undersupplied. So far demand is from small businesses,” said Wolfe. For many of the new office towers in the Diplomatic District, landlords are looking for a single tenant, leading to a shortage of multi-tenant, grade-A space. “I think rents will be reasonably stable, but where landlords have reasonably good stock that they are able to sub-divide, there will be room for growth,” Proudley told OBG.

This could lead to a different kind of development in the market. According to Wolfe, there could be room in the market for multi-tenant space outside this established central business district. The first sign of this could be the Crowne Plaza Doha Business Park, a 23,000-sq-metre project located 2 km from the airport which includes a 365-room hotel, retail space and office towers. “It is the closest thing we have to a mini out-of-town business park,” Wolfe told OBG. “I think that sort of project will be successful, but the demand is not quite there yet.”

Nonetheless, it seems that the government’s growth and diversification plans are already beginning to have a discernible impact on the commercial market. They are also likely to spur significant demand in the residential sector, not least because a broader economic base will bring with it an increase in the country’s middle- to high-income population.

POPULATION GROWTH: Qatar has already experienced a period of rapid demographic growth, which fuelled the expansion of the real estate market prior to the 2008 crisis. The population more than doubled between 2004 and 2010, reaching 1.69m people, according to the 2010 census. Although such a staggering increase is not expected to occur over the next decade, the growth rate is likely to remain above that in most developed countries. In 2011 the growth rate hit 4.25%, compared to 2% in 2010, according to DTZ, while the National Development Strategy Qatar 2011-16, predicts that the population will increase at a rate of 2.1% up to 2016, reaching 1.9m people. The Ministry of Municipality and Urban Planning estimates that it will reach 3m people by 2026.

This figures suggest that, in the medium term, there will be more pressure to expand Doha’s residential stock, which was 157,503 units in 2010, according to the country’s census, the latest count available. But in the shorter term, the capital’s residential market is likely to see only limited growth, as an uptick in demand is being absorbed by the additional recent supply brought to the market. “In the higher-end apartment sector, demand has really caught up with supply [in 2011], and supply is fairly limited,” Proudley told OBG. “A lot of residential towers are running at quite high occupancy rates. In the last few months we’ve seen landlords trying to increase rental levels slightly.”

MORE CONCRETE: Significant additional supply is forecast to hit the market throughout 2012, suggesting any rental growth will be limited. DTZ predicts that the luxury apartment stock in the city will increase by 66% in 2012, bolstered predominantly by the addition of new towers at The Pearl-Qatar development, which is 5 km north-east of the city centre, and in the Diplomatic District. The supply of luxury apartments in these two areas alone is likely to hit 16,250 units by the end of the year, according to DTZ. “Since the financial crisis, the real estate industry has had to take a step back, and emphasis has been on the importance of building based on sound data and research,” said Mohamed Fakhro, the CEO of Tanween, a development consultancy. The supply glut has given a boost to some services firms, however. “This has created many opportunities for consultancy and research within real estate development,” Fakhro told OBG.

While the new additions may skew the supply-demand dynamics to some extent, Qatar is better placed than most markets to absorb new units at the luxury end of the spectrum. The Gulf state’s economic growth over the past five years has driven the country to the top of the global GDP per capita rankings. Indeed, the hydrocarbons success story, coupled with growth in other segments, has allowed significant wealth-generating opportunities for the peninsula’s residents. According to a September 2011 study by the Hay Group, pay in Qatar is now the highest in the region, averaging 20% more than elsewhere in the GCC. This trend was supported by a government announcement, effective from September 1, 2011, increasing gross salaries of Qatari employees by 60%. The announcement also boosted salaries for defence employees of officer rank by 120%, and the monthly pensions of retired government employees by 60%.

INCREASING VALUES: Such measures are likely to support demand growth in the high-income segment of the real estate market. A December 2011 report by DTZ attributes improved sales activity and greater optimism from potential investors and purchasers to the salary hike. Statistics from the Ministry of Justice Real Estate Registration Department show that the value of transactions in the market increased by 27% in December 2011, to QR2.4bn ($659m). This may lead to some limited price appreciation.

However, prices remain below the peak seen in 2008. In the first half of 2012, sales prices on apartments in Viva Bahriya Pearl-Qatar ranged from QR11,000 ($3020) to QR15,500 ($4256) per sq metre, whereas prices averaged between QR20,000 ($5492) and QR24,000 ($6590) per sq metre in 2008, according to Asteco. The Pearl-Qatar has become a preferred site for freehold purchases, according to analysts. “The Pearl-Qatar is becoming an established destination,” said Proudley. “It is not all off-plan sales anymore. There’s more confidence in the build.” However, even here sales prices remain depressed, suggesting the market is still fragile. According to an October 2011 survey by Bayt.com and YouGov, 58% of Qatari respondents said they would avoid property investments in the next 12 months, while 29% of those surveyed were considering investing in the property market.

Parts of the market are performing well. United Development Company (UDC), the publicly listed local developer that constructed the Pearl-Qatar, suggests that at the high end of the market, where most deals are made in cash, there is significant price appreciation. “The highest demand is on villa plots and villas – the highly priced properties,” said Badr Al Meer, vice-president of engineering and construction at UDC. “Qataris often take these properties as a second homes, and 85% of villas are bought by nationals. In the last 18 months villas that used to sell for QR12m ($3.3m) have doubled in price.”

BUY-TO-LET: Another area of the market where solid returns can be achieved is in the buy-to-let apartment segment. There are plenty of distressed sales occurring and rental rates that are holding relatively steady at QR3500-9500 ($961-2609) per sq metre for a one-bedroom apartment, depending on location, according to Asteco. Given these factors, there seems to be an opportunity to generate substantial rental yields. According to Al Meer, at the Pearl-Qatar development, net rental yields of 7-8% are achievable – a significant return when the benchmark interest rate was 4.5% in the third quarter of 2012.

GIVING CREDIT: For the market to be truly revived by such investments, and for all residential market segments to see upticks in both volumes and values, the credit environment in Qatar will need to improve. “The demand to buy freehold has dried up. Banks basically shut off the taps or made terms very conservative,” Proudley said. He suggested that the slight improvement in sales transactions volumes could have been influenced by the re-entry of banks into the retail mortgage market, with the Qatar National Bank announcing new offers in the first quarter of 2012 from its new mortgage loan centre.

Credit to the sector has been growing. In the 12 months to October 2011, bank lending to the real estate sector grew by 95.1%. This may have been from a low base, but it still represents dramatic growth. In the first half of 2012, credit to the sector reached QR82bn ($22.5bn), up from QR76.2bn ($20.9bn) in 2011. According to a report by Samba Financial of Saudi Arabia, domestic credit in Qatar is forecast to grow by 20% in 2012, the highest of any GCC country.

Still, challenges exist for a young mortgage sector that remains underdeveloped. A mortgage penetration rate of 12% of GDP, lower than both the UAE and Kuwait (at 14% and 17%, respectively, according to Saudi Arabia’s National Commercial Bank, NCB), suggests that much of the bank credit to the sector is not going into the retail mortgage segment. Furthermore, analysts have suggested that the October 2010 central bank regulation limiting the loan-to-value (LTV) ratio of mortgages to 70% (of the value of the property) has had a negative impact on the sector. “There needs to be a distinction and a change in policy between retail and commercial mortgages,” Arron Browne, the managing director of LS:RES, the residential sales division of local property firm LS: Keep Moving, told OBG. “Retail mortgages are unfavourable at the moment and are holding back the sector.”

According to Wolfe, the regulation changes the risk calculations for expatriates who were previously happy to use rental allowances to make mortgage payments. “However, putting in 30% [of the value of the property] makes it quite different: the risk increases. If the central bank increases the LTV, we might see some movement,” he said. Indeed, an expansion of credit to the sector could act as a significant market stimulus. According to a recent study by the IMF, cited by NCB, a 10% increase in household credit is associated with a 6% average increase in house prices.

SUSTAINABLE DEVELOPMENTS: An expansion of credit would also help broaden the market and shift developers’ focus from the luxury segment to more sustainable long-term models. The Qatar Development Bank (QDB) was established in 1997 as the Qatar Industrial Development Bank as a means for supporting the growth of small and medium-sized enterprises. Today the QDB has take on a more active role in promoting homeownership among local residents.

As the bank’s target and scope have expand, so too has its purse. In 2008 the government increased the QDB’s capital base from QR200m ($55m) to QR10bn ($2.75bn). With these funds, the QDB oversees a range of government-funded housing loans, which are a crucial component of the government’s social policy under the Vision 2030 plan. In 2009 the bank gave loans of at least QR600,000 ($164,760) to 5400 Qatari nationals. In 2011 the government increased the maximum loan size to QR1.2m ($330,000) and the loan tenor for interest-free loans to 37 years.

SOCIAL LIVING: Given the emphasis on social policies, the affordable housing segment is of growing importance to the state. “Of a total population of 1.7m people, probably 1m are in the affordable housing bracket,” Proudley said. This ratio is unlikely to change in the medium term. According to Mohammed Ahmad Al Emadi, associate director of real estate at Barwa and general manager of Barwa Al Saad, “If we categorise the people that will come [because of World Cup and development plans], 70% will be workers.”

Barwa is one of the main actors in this market segment, building units to lease to lower-income categories. The developer’s projects include Barwa City, a 1.35m-sq-metre project containing 6000 apartments in the upper-middle-income bracket, and in and Masaken Mesaimeer and Masaken Al Sailiya, which offer two- and three-bedroom residential units at the middle- and lower-income segments of the market. “There is significant demand from low-income customers,” Al Elmadi said. “We have large waiting lists. For example, if we have 1000 units to lease, we have a waiting list of between 300 and 400.”

AFFORDING OPPORTUNITY: This suggests that there are significant opportunities in this segment of the market. A 2010 study by AT Kearney found that the affordable housing market in the Middle East and North Africa region could be worth as much as $125m a year. However, there is still some reluctance amongst developers to get involved in this market in Qatar, according to Al Elmadi. “Credit would be needed to get private developers involved in this market,” he told OBG. “The return on investment is lower in the lower-income segment. You have to study your investment very carefully before entering the market.”

STRATEGIC ENTRY: In the longer term, it seems likely that developers will have to adjust their sights and modify business plans to accommodate the lower market bracket. In a statement accompanying the AT Kearney report, Olivier Laroche, principal in the real estate practice at AT Kearney Middle East, said, “In terms of profitability, investors and shareholders must take a more realistic approach to market demand. Given that there are millions of people to satisfy, volume is the goal; developers of adequately managed properties should plan on project returns in the 10% range, not the 20%-plus margins of high-end projects.”

This has already become a reality for investors and developers in a fragile Qatari market. While certain factors, like construction costs, are now stacked in their favour, muted demand and a strong pipeline of supply is leading to a cautious approach among many developers. For example, Mazaya Qatar Real Estate Development Company, a private developer that entered the market in 2008, is adopting a conservative development strategy in the medium term. According to the company’s CEO, Seraj Al Baker, “We are now concentrating on projects where we have secured the final tenant.” This includes a 346-unit housing project for the Qatar National Convention Centre staff, in which the owner and operator of the centre, Qatar Foundation, has taken on a 10-year lease. The company is also building Sidra Village, a 1165-residential unit development for Sidra Medical and Research Centre on a 20-year balance-of-trade basis.

Al Baker believes that in the current market, this is the best approach. “We are looking for security and we are getting good returns – better than bank deposits, but not spectacular returns,” he said. “It puts a cap on our upside. There is a price adjustment for rent, but it is not as dramatic as if rents were to double over the next few years. But we are getting yields of over 10% and internal rates of return of 15%. Compared to Europe, we are in great shape. It is not the 20-30% of three years ago, but it is still pretty good.”

OUTLOOK: This sentiment seems fairly representative of the general market mood. While the past few years have been difficult for developers, investors and brokers, the first shoots of a recovery are emerging. Definitive signs of increasing demand, government commitment and indications for a growing mortgage market can all be taken as promising signs. Yet caution remains the watchword, and few within the industry are willing to get carried away by the promise of large-scale development and rapid growth.

The Qatari market seems to have emerged from the global economic crisis all the more wise, for while most people acknowledge that the long-term indicators for both the commercial and residential property sectors are promising, no one wants to see a return to the conditions of 2008, when prices overheated and the market was held up on speculation. Indeed, developers are now beginning to build for demand, and investors are moving with caution, suggesting that prices over the coming years are likely to move more slowly, but more sustainably. All of these factors point to an industry progressing towards maturity.