Fundamentals of Qatar's real estate sector strong despite oversupply

As a key driver of efforts to diversify Qatar away from reliance on the energy industry, the real estate sector has been an important contributor to economic growth in recent years. According to a 2018 report from the Planning and Statistics Authority (PSA), non-mining and quarrying sectors registered a combined compound annual growth rate (CAGR) of 6.8% between 2013 and 2017, which was largely attributed to four sectors: construction, health care, insurance and real estate, with the last registering a CAGR of around 7.6%.

Despite this positive performance, early 2018 saw growth moderate somewhat, most likely due to latent effects caused by the regional blockade, which saw Saudi Arabia, the UAE, Bahrain and Egypt sever diplomatic ties with Qatar in July 2017. However, the effects were short-lived and the sector is back on track and poised for growth.

General Trends

Qatar’s real estate development has closely mirrored that of the nation’s recent history. Major urban development began following the discovery of oil in 1939. Infrastructure expansion led to road projects and the introduction of the first cars in the 1950s, and by the 1960s mid-rise apartment buildings had begun replacing traditional courtyard houses. After independence from the UK in 1971, the country set up the Ministry of Municipal Affairs and Agriculture, which created a master plan for the original design of a modern urban skyline. Although today Qatar’s skyline is dominated by skyscrapers, it was not until the 1980s that buildings higher than 10 stories made their first appearance on the peninsula. By the late 1990s Qatar had constructed several buildings over 100 metres tall, an upward trend that continues to this day.

Demographics have worked in the real estate sector’s interest, with the population growing from around 47,000 people in 1960 to 2.7m at the end of 2018. This rapid growth in the number of residents which the UN expects to reach 3.2m by 2030, has served as a catalyst for real estate development. The majority of the population resides on the east coast of the country, with over 85% of housing units located in capital city of Doha and neighbouring Al Rayyan, and another 11% in the municipalities of Al Wakrah, Al Khor and Umm Salal, according to a 2015 PSA census. The remaining 4% of are dispersed across the rest of the country. This amounted to a total of 313,889 residential units, including 105,976 villas and 141,324 apartment buildings.

Size & Performance

Total real estate activities rose in value from QR28.6m ($7.9m) in 2013 to QR38.3m ($10.5m) in 2017, growing by 34.1% at constant 2013 prices, according to the PSA. The same period saw the sector’s contribution to GDP increase from 4% to 4.7%. From the imposition of the regional blockade in mid-2017, activity in the sector continued to expand in real terms from QR9.5m ($2.61m), to QR9.6m ($2.64m) and QR10m ($2.7m) in the second, third and fourth quarters, respectively.

In early 2018, however, the value of real estate activity saw its first significant decline since 2013, with first quarter results showing a quarter-on-quarter fall of 5.6%, to QR9.4m ($2.6m) – although this was still up 2.7% year-on-year (y-o-y). Despite the setback, however, growth resumed in the second and third quarters of 2018, expanding by 2.1% and 3.5%, respectively, to reach QR9.9m ($2.7m) – representing a y-o-y increase of 3.5%.

Property Sales

While real estate activity as a whole has shown steady growth, the same cannot be said for individual property sales. The Qatar Central Bank’s “Financial Stability Review”, which includes a price index of property sales registered with the Ministry of Interior, reported an all-time high of 311.5 points on the index in October 2015, after having steadily climbed from a 10-year low of 91.2 in June 2009. According to latest available data, the index stood at 245.5 in September 2018, down 66 points since its peak, and equivalent to a 21.2% decrease in just under three years.

However, this trend is good news for some. “Prices are now more realistic, and as supply continues coming on to the market, they are unlikely to rise again soon. People are seeing opportunities now to invest in property,” Khadija Jackson, senior property consultant at Coreo Real Estate, told OBG. She also pointed out that even in these conditions, investors are still making 5-6% annual returns. “Despite the blockade, the economy is doing well, and confidence is returning. Current real estate prices are being established at more sensible levels,” she added.

The latest figures from the PSA – which compiles data for all property types in the country, including residential, commercial and administrative buildings – painted a mixed picture of real estate sales, with performance down compared to the previous year, but value continuing to rise. Registering 344 transactions, overall sales volume was down 13.1% y-o-y in November 2018; however, there were noticeable exceptions in some categories. For example, apartment and villa sales were up 133.3% and 16.7% y-o-y, respectively. Regional figures also differed, with the number of transactions up by 82.4% in Al Shamal and 54.3% in Al Daayen.

From a value perspective, Qatar’s November 2018 property sales hit QR2.7bn ($741.5m), representing an increase of 5.7% y-o-y. The month also marked considerable growth of 52.6% over October 2018; although, as the market is relatively small, with the total number of monthly sales across all real estate types typically in the hundreds, monthly figures are not always indicative of broader trends.

Structure & Oversight

Oversight of the real estate sector is managed by several organisations. Among these are local municipalities, the Department of Real Estate Agents and the Ministry of Justice (MoJ), which plays a key role in registering and documenting property transactions, as well as developing the regulatory environment.

In October 2018 the MoJ signed a memorandum of understanding with the UK’s Royal Institution of Chartered Surveyors, a professional body that promotes global best practices in the industry, with the aim of improving investor confidence and increasing foreign direct investment (FDI). The agreement forms a key step in the MoJ’s goal of enhancing market transparency by reorganising and developing the country’s property market in line with the highest international standards.

As part of the agreement, a training programme will be conducted covering the real estate life cycle and the principles of valuation and property measurement. The programme is expected to lead to Qatar to adopt international benchmarks, including the International Property Measurement Standards and the International Valuation Standards. Officials have also targeted the creation of a sector database to store all real estate records and transactions.

Foreign Factor

The market may soon be bolstered through a legislative change allowing foreigners to buy property on a freehold basis. Previously, non-GCC expatriates were only allowed to purchase leasehold property in certain areas, such as in The Pearl Qatar, the West Bay Lagoon in Doha or Al Sultan Beach Resort in Al Khor, for a period of up to 99 years. However, in December the Cabinet approved Law No. 16 of 2018, permitting the use and ownership of real estate by non-Qataris. The legislation applies to land sales, buildings, residential flats and commercial property, and will allow foreigners to pass on and inherit properties.

As part of the legislation, a committee headed by members of the MoJ was established to determine factors related to the scope of the law. The committee will decide the designation of areas where non-Qataris can own property; the rules of ownership; the benefits, incentives, services and facilities foreign owners will be entitled to; as well as any applicable fees. However, these matters had yet to be finalised as of early 2019.

As the change takes effect, it is anticipated that residential and property sales will receive a boost, with increases in FDI and new businesses from abroad coming to the country. These, in turn, will be expected to create a large-scale injection of liquidity to the real estate market.

Brokerage Reforms

Other legal reforms include Law No. 22 of 2017, dealing with real estate brokerages. The law, which came into effect in January 2018, transferred regulatory responsibilities from the Ministry of Commerce and Industry to the MoJ. All brokers are now required to register with the latter to be granted a licence to practice. The new legislation also defines the duties and responsibilities of brokers, together with criteria and qualifications to receive a licence, as well as issues relating to brokers’ remuneration, prohibited activities and related disciplinary penalties. Under the law, brokers will have to take training courses and pass tests set by the committee in order to qualify.

The law also established the Committee of Real Estate Brokers’ Affairs, which has a range of responsibilities, including dealing with disputes relating to broker’s fees, complaints against brokers, as well as grievances filed by or against the MoJ.

Major Developments

A number of ongoing developments are continuing to add residential and commercial stock. Lusail City will be one of the centrepieces of the 2022 FIFA World Cup, with Lusail Stadium hosting both the opening and closing matches. The 38-sq-km residential city is the flagship project of Qatari Diar, the real estate wing of the Qatar Investment Authority (QIA). Four residential islands will house some 200,000 permanent residences, and a further 19 mixed-use districts, including a new financial centre and dedicated entertainment and energy cities, will employ over 170,000 people. Designers incorporated sustainable and environmentally friendly techniques that will embody the real estate aspects of Qatar National Vision 2030. Construction was reportedly more than 90% complete in December 2018.

In the centre of Doha, on the opposite side of West Bay, the Msheireb Downtown Doha project is expected to revive the historic commercial area by constructing residential and commercial properties as well as hotels and museums. The project is being developed by Msheireb Properties, a subsidiary of Qatar Foundation, a semi-private, non-profit organisation focused on education, science, research and community development. The project, which has a budget of QR20bn ($5.5bn), is considered to be the first fully sustainable downtown regeneration project. According to its developers, the district has already taken on its first tenants and is set for completion by the second quarter of 2019.

Beyond its borders, Qatar also has an impressive portfolio, largely due to the QIA’s overseas acquisitions. According to a February 2018 report from Property Week Magazine, Qatari investors now account for the single largest property portfolio in London, totalling 24m sq feet in the city. Holdings are spread over historic areas such as Canary Wharf, Queen Elizabeth Olympic Park, the Shard skyscraper, Harrods department store and the former Chelsea Barracks in Westminster.

Residential

Despite ambitious developments, however, oversupply in the domestic residential market remains a key challenge. According to a 2018 quarterly report from professional services and auditing firm KPMG, an additional 7000 units were added to the country’s housing stock in the first half of the year, 65% of which were apartments, the remainder being villas and compound units. Real estate advisory DTZ Qatar reported that demand was still low in the second half of 2018, but was expected to pick up closer to the 2022 FIFA World Cup, in particular from service sector workers, for which there are now more affordable options in the leasing market. “The real estate market always goes up and down, especially in the GCC region,” Ahmed Al Jolo, chairman of the Qatar Society of Engineers, told OBG. “Therefore, in Qatar we are actively building to meet future demand.”

According to the DTZ Qatar report, rental prices remained largely stable in the third quarter of 2018; however, this followed a 10-15% decline the previous year. The drop in prices has led to an increase in leasing activity, as residents scout the market for better deals, and landlords in some areas regularly offer a month’s free rent to attract occupants. With regard to residential sales, oversupply has led to a rise in activity. In July and August 2018 there was a 9% increase in transactions compared to the same period the previous year – which despite the downward pressure on property prices, led to an overall 3% increase in the value of residential properties.

Commercial

As with the residential segment, Doha’s office demand faces challenges related to oversupply. The capital city was home to roughly 4.6m sq metres of gross leasable office space as of the first half of 2018, according to KPMG, with a further 410,000 sq metres expected to be delivered by the end of 2019. Capacity for commercial offices outstrips demand, leading landlords to offer rentfree periods of up to six months to attract tenants. KPMG’s office rental price index, which was set at a baseline of 100 in the first quarter of 2016, fell to 78 by the second quarter of 2018.

The vast majority of new leases in 2018 were due to relocations, as companies sought to take advantage of the lower prices to consolidate their footprint, find lower rents and upgrade their premises. West Bay, which accounts for 30% of Doha’s purpose-built office space with some 1.7m sq metres, continues to be Doha’s main commercial district. However, most new deliveries planned for 2019 are located in Lusail City’s Marina District, and relocations to the nearly complete Msheireb Downtown Doha district are also expected. Median office rental prices in the West Bay area were approximately QR150 ($41) per sq metre per month as of June 2018.

Retail

Shopping centres are an important part of social and family life in Qatar, as well as commercial activity. The retail market enjoyed full occupancy and an upward rent trend in the years leading up to 2016, according to DTZ Qatar. However, since 2015 an additional 600,000 sq metres of prime leasable retail property has been added, bringing the total to 1.4m sq metres as of the third quarter of 2018. That same period saw six retail malls open at the same time consumer spending was in decline. These factors have created an environment characterised by growing vacancy rates and falling rents.

As of the third quarter of 2018 prime rents in the main retail shopping malls ranged between QR250 ($68.66) and QR350 ($96.12) per sq metre per month, while showroom and high-street rents typically commanded between QR100 ($27.46) and QR160 ($43.94) per sq metre per month.

Hospitality

The first half of 2018 saw 883 keys added to the country’s hotel stock. This brought the total number of hotel rooms to 25,828, which is in line with sector forecasts. In 2011 it was estimated that the country’s then-existing stock of 15,000 rooms would grow by an additional 16,000 new keys over the coming decade in preparation for the 2022 FIFA World Cup. Given that Qatar is anticipating as many as 1.5m visitors for the event, the addition of accommodation is essential.

In the long term, the National Tourism Sector Strategy 2030 targets boosting the number of international visitors from the 2.9m seen in 2016 to 5.6m by 2023. However, according to government data, some 944,689 visitors came to the country during the first half of 2018, marking a 35% y-o-y decline; GCC arrivals in particular were down 84%, largely attributed to political tensions. The greatest increases in visitors came from India, Russia and Germany, which rose by 33,529, 10,842 and 10,621 travellers, respectively. This is most likely a result of Qatar Tourism Agency’s efforts to reach out to new source markets, including by opening representative offices in Russia and India in early 2018.

Despite the combined effects of the blockade, hotel performance has shown considerable resilience, with occupancy rates reaching 59% as of June 2018, marking only a slight decline from 61% a year earlier. The average daily rate fell from QR462 ($127) to QR398 ($109) over the same period.

Outlook

While in general the Qatar real estate market is characterised by oversupply, however, a growing economy and expanding population are expected to help redress this balance in the near to medium term. The 2022 FIFA World Cup is set to boost visitor numbers, further stimulating the sector. Meanwhile, many can still expect to capitalise on the opportunities presented by lower prices.