Down to business: Free zones attract commercial real estate investors

Although Oman’s office real estate segment is generally characterised as being oversupplied, the market still presents opportunities for construction firms. Indeed, much of the market’s oversupply is in lower- to mid-range quality office space, while the availability of higher-quality real estate that meets the needs of multinational firms is still relatively limited. A number of recent projects are addressing this need.

According to Dubai-based investment bank Alpen Capital’s recent report on construction in the GCC, graded office stock in Muscat had reached roughly 600,000 sq metres by the end of the third quarter in 2011. Commercial office space has increased substantially over the past several years due to economic growth, an expanding population and government strategies to privatise and diversify the economy.

Property Size

The most sought-after commercial real estate ranges from 100 sq metres to 250 sq metres, according to UK property consultancy Cluttons. About half of those looking to lease offices are seeking a space this size. Yet Cluttons recently reported that there is particularly high demand for smaller and fully furnished offices located in higher quality buildings. Demand for large, shell offices, on the other hand, is much lower, and the government is the primary lessee of spaces larger than 1000 sq metres.

Real estate consultancy Jones Lang LaSalle (JLL) calculated in late 2011 that between 200,000 sq metres and 250,000 sq metres of commercial real estate will be added to the market over the coming five years. The consultancy also estimated that prime office rents average around OR8 ($20.80) per sq metre per month. While this represents a slight dip since late 2010, rents appear to have stabilised and for the most part, quality space will likely remain undersupplied.

New Projects

Many firms in the capital area are debating constructing purpose-built commercial space to compensate for the shortage of quality office real estate. At the same time, a number of recently completed or ongoing construction projects aim to increase quality supply. For example, the Al Tilal Complex, a mixed-use development in Bawsher, was recently finished. Developed by the locally based Al Madina Real Estate Company, the development includes 40,000 sq metres of high-quality office space in addition to 180 residential apartments, 110 service apartments and a shopping mall known as Muscat Grand Mall, according to Cluttons’s data. The Tilal offices are located in the Grand Mall on five levels.

Bahwan Properties, the property arm of local holding company Suhail Bahwan Group (SBG), has also recently added Grade A office space in Muscat with the completion of its commercial property in Al Rawaq.

The development has six floors – in addition to a ground floor – and covers 44,000 sq metres in total, according to SBG. While the ground floor is expected to house an auto showroom, the developer anticipates much of the remaining space to be leased by international companies operating in Oman.

Another newly completed project, the Beach Plaza in Shatti Al Qurum, has added some16,000 sq metres of high-quality space in the capital area, according to an April 2012 report by Cluttons. The Saud Bahwan Plaza, located in the Muscat suburb of Al Ghubarh, is scheduled to be completed shortly and should add approximately 50,000 sq metres of Grade A space.

On A Greater Scale 

One significant effort to expand commercial real estate will be a large, mixed-use development known as the Oman Convention and Exhibition Centre (OCEC). The project is being developed by Omran, a government-owned development, investment and asset management company focused on the tourism sector. In addition to providing office space in a high-quality business park, the OCEC will include a 3200-seat auditorium, 14 meeting rooms, two ballrooms, a 22,000-sq-metre exhibition area, a five-star hotel, three four-star hotels, a large shopping area and serviced apartments.

Located in the Bawsher wilayat of Muscat, a number of construction firms are working on the OCEC development project. WATG, a Hawaii-based design consultancy, was awarded with a contract to work as the project’s master planner and architect, and a partnership between Scottish RMJM and Kuwait-headquartered SSH firms has been contracted for engineering consulting. The OCEC landscaping will be carried out by a partnership between WATG and Strata Landscape Architects.

Sur Development

Office space is also being built outside of the capital. Al Sharqiya Real Estate Developers (SRED), a Muscat-headquartered company, officially announced plans in 2012 to construct a large, multi-use development in Sur, which is located in Oman’s north-eastern region of Al Sharqiya. Known as Sur Gate, the development will provide a business centre of over 20,000 sq metres. Various exhibition halls as well as a lounge with cafes will be part of the business centre. SRED plans to build the development on the Sur Industrial Estate, which is managed by the Public Establishment for Industrial Estates (PEIE).

Sur Gate will cover more than 200,000 sq metres and include a shopping mall (58,437 sq metres), a commercial area (25,670 sq metres), a hypermarket (11,812 sq metres), residential town houses of various sizes and an accommodation area (6000 sq metres). Over OR120m ($313m) will likely be invested in the entire development, according to recent data provided by the PEIE.

Striking A Balance

Commercial real estate developers in Oman are challenged by a shortage of car parking. Although a general rule has been set which requires developers to create one car parking spot for each 50 sq metres of office space, Cluttons has reported that ideally this ratio should be smaller. The difficulty has been in part the result of some developers working to maximise their project schemes, limiting parking space as a consequence. Both the Muscat Municipality and the Ministry of Housing, however, have taken steps to make sure that new developments include adequate parking. While these measures will not immediately correct the undersupply, a better balance should be reached in the coming years.

Heavy traffic congestion in the capital area has caused difficulties for office space developers. JLL noted in late 2011 that demand was beginning to move to the west of Muscat, where the roads tend to be less congested. The Omani government has recognised the growing need to increase traffic flows and has set aside substantial funds to develop the governorate of Muscat’s road network. In the most recent five-year economic plan, which runs from 2011 to 2015, a total of OR24m ($62.5m) has been allocated for this purpose. An additional OR25.5m ($66.5m) has been reserved for easing congestion on Al Burj road in the Muscat commercial centre of Ruwi. The combined OR49.5m ($129m) allotted for roadworks projects in the Muscat governorate represents around 4% of total government spending on road construction for the five-year period.

Free Zones

Demand for office space should increase as Oman’s developing free zones attract new businesses and facilitate economic growth. The free zones offer investors a range of benefits including close proximity to transport links. The Salalah Free Zone (SFZ), for example, provides investors with tax exemptions, full foreign ownership, a simplified licensing process and exemption from import restrictions. Set up in 2006, the SFZ covers 18 sq km and is located in the centre of a $620bn regional market stretching from Eastern Africa to the Indian subcontinent, according to SFZ data. The free zone sits next to the Port of Salalah, which is Oman’s largest seaport and one of the biggest container ports in the world.

Freezone Sohar is another emerging economic area in Oman. Phase 1 of the free zone is made up of 500 ha of built-up land. Of this, 200 ha of land has already been leased, according to data provided by the nearby Port of Sohar. Five phases of development are planned for the free zone, and the first stage should be finished by 2014. The entire area of Freezone Sohar covers 4500 ha of land. Approximately $14bn has been invested into the free zone and the Port of Sohar’s infrastructure. The neighbouring port is growing quickly, and recently reported that dry bulk jumped by more than 400% between 2010 and 2011.

The free zone typically attracts firms in the logistics and downstream steel manufacturing industries. Those companies operating out of Freezone Sohar receive a number of benefits including a 10-year corporate tax holiday; full foreign ownership; a single processing system for all licences, permits and approvals; and a simplified Customs duty of 5%, according to the Port of Sohar.

With increased benefits available to companies operating in Oman, collaboration may be the way forward. “Consolidation should become more prevalent in the construction sector in Oman as competition is fierce,” said Vedat Koca, the regional representative for Turkish construction company STFA, which is at work on a three-year major road project in Oman. “Joint ventures are beneficial because firms are able to share risk.”