Growth drivers: Strong fundamentals support further expansion

With data from the Qatar Central Bank (QCB) indicating that real estate prices rose by 108% between July 2009 and December 2013, the local market is showing signs of steady recovery from the drop in prices caused by the onset of the global financial crisis in 2008. The rising prices point to growing confidence in the market and strong supporting fundamentals. Much of this growth can be attributed to government reforms that relaxed the rules for foreign real estate investments in 2004.

The reforms triggered a number of significant investments into the sector, including two major projects that have reshaped Qatar’s real estate market. United Development Company’s (UDC) The Pearl and Qatari Diar’s Lusail City are adding a tremendous amount of residential, commercial and retail space, but so far demand continues to match supply.

The thriving economy, growing population and upcoming FIFA World Cup football tournament, which the state is hosting in 2022, have helped bolster the local market and are likely to continue driving growth in the sector going forward. Population growth, in particular, is expected to help maintain expansion over the long term. According to Qatar National Bank’s “Qatar Monthly Economic Monitor” for February 2014, the population grew by 5.9% year-on-year at end-January 2014 to reach 2.01m. While the rate of population growth slowed in the same month, it is still expected to reach double digits for the year. Qatar’s real estate market is anchored by local investments, both by the government and by households and businesses; however, foreign investment and sentiment play a significant role in determining growth within the sector. Global trends indicate a fairly competitive real estate sector.

Overall Conditions

According to the World Bank’s “Doing Business 2014” report, Qatar ranks quite well globally on the property-related categories of “Dealing with construction permits”, “Getting electricity” and “Registering property”, ranking 23rd, 27th and 43rd, respectively. Securing a construction permit typically takes 17 procedures, 62.5 days and costs around 1.1% of of annual income per capita. In terms of connecting electricity to a new location, this requires only four procedures; however, the average amount of time is 90 days, with the costs averaging at around 4% of income per capita.

According to the World Bank, registering property in Qatar currently takes seven procedures, 13 days and costs some 0.3% of annual income per capita. However, the country’s ranking in this respect is expected to improve considerably. In late 2013, the Ministry of Justice, which includes the Real Estate Registration Department, announced plans to develop e-services capacity that would help expedite the property registration process.

Stable Property Values

In Doha residential property values have remained fairly stable over the past year, and gains in the real estate price index have been moderate. Over the longer term, however, data from the QCB shows that prices have risen dramatically. This is particularly notable within the context of the global financial crisis; property prices in Doha initially dropped by more than 50% following their peak in 2008, with prices only now beginning to approach pre-crisis levels. Following the drop, a number of government initiatives to boost the market’s appeal in parallel with broader developments such as the 2022 FIFA World Cup helped to restore confidence drive recent growth.

Total weekly real estate transactions in Qatar typically range between QR500m ($137m) and QR1bn ($273.9m), according to data issued by the Ministry of Justice. However, the figures show several spikes across the year. The biggest in 2012 was almost QR3.5bn ($959m) in transactions, while 2013 saw a spike of QR2.6bn ($712.1m) in mid-November.

The data shows strong demand for property ownership, with sales in July 2013 growing by more than 100% compared to the same month in 2012, according to data issued by Ezdan Holding on August 19, 2013. Transactions totalled $1.5bn for the month, over double the $741m for July 2013, with the real estate firm attributing the increase in part to a ramping up of development projects and work associated with the staging of the World Cup.

Residential Property Market

The total stock of new luxury residential properties has grown quite rapidly over the past eight years. According to data from DTZ’s third-quarter 2013 market report, the supply of luxury residential properties is largely concentrated in West Bay Lagoon and on The Pearl, two areas which allow foreigners freehold ownership of property. New apartments in the West Bay started coming on-line in 2006, rapidly growing to almost 6000 apartments in 2009 and an estimated 9000 in 2013. New stock on The Pearl began opening in 2009, and the total number of new apartments in the development reached 6000 in 2013.

According to the report, “At the end of 2010, the total stock of luxury apartments [on both developments] had reached approximately 8500 units. Supply increased by 32% in the 24 months up to the end of 2012, reaching 11,200 units.”

The report notes that there have been no new developments coming to market in 2013, but an estimated 4000 new units are close to completion. In addition to easing restrictions for foreign investment in real estate, the government of Qatar also offers residency permits for property purchases.

According to real estate services firm Asteco’s fourth-quarter 2013 Qatar report, there has been a significant increase in applications for mortgage valuations; however, this began tailing off in December 2013. At the end of the year, the QCB reported that the country’s banks had provided QR85.39bn ($23.39bn) in mortgages, down slightly from the QR85.56bn ($23.43bn) recorded at the end of 2012. Despite the drop, this is still a drastic increase from 2009, when QR40.43bn ($11.07bn) was provided.

Property ownership is protected by the Property Law, which states, “The government, or any branch thereof, may divest an owner of title to private property and redistribute it for public use only if the owner receives fair compensation in return.” In practice, expropriation has been limited to properties on land required for infrastructure developments and would not include individual units in the areas designated for foreign investment.

The Pearl

UDC is behind one of Qatar’s biggest real estate development projects over the past decade. The company markets The Pearl to investors and owners looking for luxury developments in the region. The development, which consists of an artificial island built on 4m sq metres of reclaimed land in Doha, has 32 km of coastline with a total capacity for almost 50,000 residents in around 19,000 residential units. Demand for properties on The Pearl is high, as the luxury development offers foreign investors freehold residential units. In contrast to Qatar’s overall market, residential prices on The Pearl have demonstrated quarter-on-quarter growth of around 5%, according to Al Asmakh Real Estate Development’s “Qatar Real Estate Report Q3 2013”.

Prices on The Pearl spiked prior to the crash in 2008-09, but regained a footing and have grown steadily since 2010. Average prices per square metre range between QR11,000 ($3013) and QR23,000 ($6300), according to DTZ, with more luxurious units selling for as much as QR15,000 ($4109) per square metre. Luxury four-bedroom villas on The Pearl can sell for up to QR5.5m ($1.5m), while studio apartments are around the QR1m ($273,900) mark.

Lusail City

In addition to The Pearl, Lusail City is another major local real estate development. The project is led by Qatari Diar Real Estate Company, which was established by the state’s sovereign wealth fund, the Qatar Investment Authority, in 2005. Qatari Diar launched Lusail City in the same year.

In 2008 the firm established a dedicated real estate company to manage the development and construction of Lusail City called the Lusail Real Estate Development Company. Located just north of Doha, the 38-sq-km Lusail City is envisioned as a self-contained, planned city. It is the largest single real estate development in Qatar and plans for the project include a light rail transport system.

The development’s 19 districts will eventually house an estimated 200,000 people and provide office space for 170,000 workers. The development will create entertainment space for 80,000 visitors and also cater to other needs, including schools, mosques and medical facilities.

Rental market

Purchasing residential property can cost between QR400,000 ($109,560) and QR3.5m ($958,650), according to Al Asmakh, indicating the lower end of the spectrum is still fairly expensive. However, property rentals generally provide reasonable rewards, with gross returns on investment typically around 6-8%. This rate varies between the areas restricted to locals, areas with larger villas and luxury apartments, and developments such as The Pearl.

According to the real estate company, the range for a two-bedroom apartment in Doha spans from QR5500 ($1506) in certain parts of the city to more than QR15,000 ($4109) in popular areas, such as on The Pearl. One-bedroom properties, which are in short supply, are not significantly cheaper, renting for around QR4000 ($1096) to QR12,000 ($3287) on The Pearl. Luxury four-bedroom apartments on The Pearl can rent for as much as QR24,000 ($6573).

Two-bedroom apartments are in the greatest demand on the rental market, accounting for 25% of demand, while one-bedroom and studio apartments account for 20% and 12%, respectively. This demand is generally driven by retail and institutional investors. This segment is set to continue growing as more expatriate workers enter Qatar. Analysts expect short-term rental prices to continue rising by 3-5% based on this steady demand.

In Asteco’s third-quarter 2013 Qatar report, the company indicated that an undersupply in the residential market due to an influx of expatriate workers has led to continuous increases in rental prices, particularly on The Pearl. However, by the end of the fourth-quarter, the introduction of three new residential towers on The Pearl helped address this undersupply and stabilise rental rates.

Retail Space

Qatar’s thriving economy has led to a parallel growth in the retail and commercial real estate segments. Like the housing market, demand for retail floor space is being driven by a growing and increasingly affluent population, as well as by retailers seeking to attract Qataris who look to Dubai for their top-end shopping needs. Qatar’s citizens benefit from the highest GDP per capita in the world and have the disposable income that comes with it.

The retail boom has led to the development of scores of new shopping malls across the capital. The Doha region is currently home to 13 malls offering almost 570,000 sq metres of leasable space. A number of these malls are fairly small neighbourhood malls but some, such as Villagio, City Centre and Landmark, are huge retail centres. Al Asmakh estimates that occupancy in the bigger and more popular malls is high, at around 90%, while smaller malls have occupancy rates of closer to 65%.

DTZ reports that rental space in the bigger shopping malls costs between QR225 ($62) and QR275 ($75) per square metre per month. Meanwhile, Al Asmakh estimates other malls lease space for between QR200 ($55) and QR270 ($74) per square metre per month. Villagio and City Centre dominate foot traffic with an estimated 23m visitors each year. Landmark Mall is a distant third with around 10m visitors each year, while other shopping malls see fewer than 5m visitors each year. One of the largest urban developments in the Middle East and a major centre for retail, The Pearl-Qatar signed several new agreements in February 2014 with restaurant brands and luxury fashion outlets.

Building on this success, developers in Qatar are planning up to another 10 malls that will bring total retail space in malls to 1.61m sq metres. DTZ estimates that around 40,000 sq metres of space was added to retail stocks in 2013 and another 1m sq metres of space will come on-line by 2017. Mazaya Qatar Real Estate Development, for example, is developing the QR1bn ($274m) Marina Mall in Lusail with 72,000 sq metres of leasable space built on 57,000 sq metres of land. The mall will be one of the largest in Qatar and is expected to open in 2016.

Barwa Real Estate, a major asset, property and facility management services group, is currently developing the Barwa Commercial Avenue. According to the firm, the area will add an estimated 910,000 sq metres of mixed-use space, with approximately 250,000 sq metres reserved for retail showrooms. DTZ estimates that this equates to a 25% increase in total retail showroom stock.

The company estimates rental rates for showroom space range from QR125 ($34) to QR200 ($55) per square metre per month. It is likely that the sheer number of new shopping malls and commercial space coming up in the country will lead to an oversupply of retail space and will favour the newer, larger and more fashionable spaces.

Commercial Markets & Offices

As with the residential market, premium office space in Doha is centred in the West Bay and the Diplomatic Area. DTZ estimates there is a total of 1.54m sq metres of office space in the Diplomatic Area, up from about 1m sq metres in 2009. The amount of space lying vacant has remained at around 156,000 sq metres, or an estimated 10% of the total. Demand for new office space spiked in 2010, reaching more than 300,000 sq metres over the year. However, demand subsequently dropped in 2013, with less than 50,000 sq metres leased during the first half of the year. According to Asteco’s fourth-quarter 2013 Qatar report, a number of significant rental agreements were signed for office buildings in West Bay, which will lead to a drop in the availability of prime office space in the area, potentially driving up rents.

Rental rates in the central prime district can reach QR230 ($63) per sq metre per month, though larger offices can secure lower rates in the range of QR145 ($40) per square metre per month. Continued economic growth is likely to sustain this market, but market reports from DTZ suggest increased supply will cause rates to remain fairly flat into 2014.

Unlike the residential market, offices located further away from the premium areas typically provide a better return for investors. Buildings in the West Bay area yield an average return of 6%, for example, compared to up to 9% on the C-Ring Road, which lies between the airport and the downtown area. Some developers are also trying to attract tenants to less desirable areas by catering to specific sectors.

Land Prices

Land acquisitions for Qatar’s major infrastructure and development projects have been one of the underlying drivers of higher land prices, which in turn drive prices in the real estate market. The land market has been booming in recent years, fuelled in part by Qatar’s infrastructure plans that will eventually connect more municipalities through the metro and other major highways.

Land in the West Bay area can cost as much as QR32,293 ($8845) per square metre, though the highest land prices are near Grand Hamad Street, which is dominated by commercial properties including banks, according to figures from Al Asmakh. The real estate company points to demand for spacious villa compounds from locals and expatriates from the GCC region as one of the factors sustaining land prices outside of the West Bay and The Pearl areas.

One development that is set to boost property prices is the Msheireb Downtown Doha project, which is located in the centre of the city. Covering some 31 ha and worth an estimated QR20bn ($5.5bn), the project is owned by Msheireb Properties, a subsidiary of the national development agency, Qatar Foundation. The multi-use Msheireb Downtown project is set to add new vitality to Doha’s core and will consist of office space (36.9%), retail (12.3%), hotels (15.4%), residential (29.2%), and social facilities such as community centres, mosques schools and museums (6.3%). Construction began in 2010 and is set to continue through to 2016.

Tourism & Hospitality

The biggest driver for hotel rooms in Qatar is currently demand from business travellers. However, the 2022 FIFA World Cup, which is an increasingly strong influence on most non-hydrocarbons economic sectors in Qatar, is likely to boost the market going forward.

The government has fast-tracked investments across a number of sectors to prepare for the event, which is expected to help secure Qatar’s position as a regional, and increasingly global, sports and tourism destination. The event is driving hotel expansion in and around Doha. The Qatar Tourism Authority (QTA) estimates that the country currently has approximately 14,000 rooms, with plans to add another 5000 over the next four years. Occupancy rates in the industry average between 60% and 65%. DTZ reports that hotels that are rated as four or five stars dominate the market, with these accounting for between 39% and 41% of total rooms (see Tourism chapter). The government is expected to invest more than $20bn in the tourism sector in advance of the 2022 FIFA World Cup, with a particular focus on developing Qatar into a niche luxury destination. According to DTZ, 2013 did not see a significant number of new openings. There are, however, several new four- and five-star properties that are scheduled to open their doors in 2014 and beyond.

Outlook

Rapid population growth will continue driving demand for housing and office space, while the strong economy is likely to ensure ongoing support for retail outlets. Over the longer term, new space – particularly in retail – is set to come onto the market and will likely soften prices. A significant number of real estate developments are directly or indirectly supported by government investments, which is likely to ensure liquidity in the market going forward. However, the government is increasingly cautious of banks overextending lending to the real estate sector. The QCB recently reduced the limit on the exposure banks can take in the real estate sector from 30% to 10% of their capital and reserves.

The sheer number of large-scale infrastructure and construction projects in the country and across the broader Gulf region will inevitably affect market dynamics. The cost of construction, for example, is a concern for the government as prices for cement are rising given the increased demand. Speaking to OBG, Abdulla Abdulaziz Al Subaie, Group CEO of Barwa Group, remained sanguine, however. “We do not foresee the supply of raw materials or human resources as challenges for us going forward, as Qatar has already started securing resources to meet expected future demand,” he said.

Qatar also faces growing competition from other regional markets – primarily Dubai, with Expo 2020, and Saudi Arabia, which has recently begun awarding a range of massive infrastructure projects. However, Al Subaie was optimistic on this front as well. “Regional development in the construction industry is a positive for the Gulf as a whole. We do not view it as competition but rather as a complementary factor, as it will attract further investment, business and people to the Gulf region,” he told OBG.

Qatar’s development trajectory is broadly similar to that of existing regional hubs. However, targeted investments in infrastructure, ranging from hotels and leisure facilities to roads and transport, built on the solid foundation of the nation’s core hydrocarbons sector, will likely support the economy and, in turn, the real estate market for the foreseeable future.