Big pipeline for projects offsets modest demand growth for real estate in Qatar

Still an important and robust driver of non-hydrocarbons growth, Qatar’s real estate sector is nonetheless beginning to feel the impact of falling oil and gas prices, which have negatively affected the office and residential markets. There are also rising concerns about an oversupply of high-end residential and commercial space, with dozens of new projects still in the pipeline expected to come on-line in the medium term. Oversupply will be a major long-term concern for nearly all segments of the market, with the stock of retail, hotel and office space surging as developers rush to capitalise on population growth and rising tourist arrivals. Despite these challenges, smaller transactions have kept the market steady in early 2016, and although land prices and rental rates remain high, muted economic growth should help reduce inflationary pressures that have priced many middle- and lower-income families out of the market.

Steady Gains

Real estate prices are still rising, albeit at a slower rate than in 2014 and 2015. According to the real estate price index (REPI) provided by Qatar Central Bank (QCB) – which measures real estate growth through land and property price analyses – the country’s commercial and residential markets returned to their pre-2008 highs as of mid-2014, with the REPI rising by 21.5% in the first six months to reach 230.6. Prices continued to soar until late 2014, with the REPI up 43.5% year-on-year (y-o-y) in September. Expansion slowed in 2015, with the REPI growing 11.3% from January to November to reach an all-time high of 310.4 before ending the year at 292.

The total value of real estate transactions in Qatar for 2015 reached QR56.13bn ($15.4bn), a 10% increase over 2014, although the number of recorded transactions declined from 7757 to 5136. Real estate consultancy firm DTZ reported that freehold prices have been rising consistently since 2011, although sales prices stabilised during the latter months of 2015. The Pearl-Qatar’s Porto Arabia witnessed the highest levels of sales activity; second-hand units typically sell for between QR13,000 ($3570) and QR15,000 ($4120) per sq metre, while new units can achieve more than QR17,000 ($4670). “A big readjustment is happening in the market at the moment, but we saw that 2014 was really a record-breaking year. So when the market goes that high, it can only come down afterwards,” Khadija Jackson, project choreographer at real estate group Coreo, told OBG.

Lending

QCB reported that credit to the real estate sector rose by 86.4% between 2010 and 2014, hitting QR95.14bn ($26.1bn) from QR51.04bn ($14bn). Real estate credit growth maintained this strong momentum in 2015, according to the bank, rising by 27.4% from QR95.14bn ($26.1bn) in 2014 to QR121.21bn ($33.3bn) at the end of 2015.

With Qatar boasting one of the world’s highest levels of per capita income, and the government moving to permit freehold property ownership for non-nationals in 2004, the state’s mortgage market has expanded steadily over the past decade. Qatar Development Bank (QDB), which began as a small business lender, offers interest-free home loans to Qatari citizens, who instead pay an administrative fee worth 1% of the total loan value. Between 2009 and 2013 QDB provided QR17bn ($4.7bn) in home loans, and in its most recent 2014 annual report, the bank stated that new home loans reached QR1.8bn ($493.9m). Maximum home loan limits are set at QR1.2m ($329,280) with a 35-year defrayment period and a maximum monthly payment of QR3365 ($923).

Other lenders, which include the International Bank of Qatar, Arab Bank Qatar, the Commercial Bank of Qatar and Doha Bank, have witnessed significant growth in mortgage lending in recent years. Doha Bank, which introduced mortgages at a 3.99% interest rate in November 2012, reported that mortgages comprised 25% of its lending portfolio as of October 2015. Regulations stipulate a loan-to-value ratio of 70% or less for commercial lenders, with a maximum duration of 20 years, although this appears to vary across projects. For example, at the mixed-use development The Pearl-Qatar, 25-year mortgages with an 85% loan-to-value ratio are permitted.

Real Estate Development Law

Recent legal reforms should further underpin market maturity and stability. In April 2014 Law No. 6, the Real Estate Development Law, came into effect. Prior to this, the state had not established a legal framework for off-plan sales, but under Article 7 of the new law, developers must meet specific requirements, including commencing and completing construction works specified by sales agreements and purchase contracts. Under the law, all developers must also obtain a developer’s licence from a designated department within the Ministry of Economy and Commerce, with licensing open to Qatari nationals, incorporated companies and any firm incorporated outside of Qatar, provided its activities are limited to areas in which non-Qatari nationals are permitted to own property.

In Qatar there are 18 areas open for foreign property ownership, including three on a freehold basis – namely, The Pearl-Qatar, West Bay Lagoon and Barwa’s Al Khor City. The rest are available on a leasehold basis, including Asia Towers, Musheireb, Doha Jadeed and Lusail City. Developers are also required to open an escrow account for any money earned from off-plan sales and submit cash flow forecasts for project completion, including construction milestones.

Changing Dynamics 

Legislative reforms are ongoing, and in July 2015 the Cabinet approved a draft law with special provisions for real estate brokers, and setting new obligations and disciplinary accountabilities for the first time. The Cabinet also approved a separate draft law to streamline real estate registration, documentation and notary processes.

Other draft laws include provisions for maintaining real estate registration, records of registration and the ratification of signatures. They also include various other important components, such as registration fees, documents due to be registered and enrolled, and the unification of the real estate and land registries. As of May 2016 the draft law had yet to be promulgated and implemented.

Rapid population growth is the primary driving force behind residential demand, although market dynamics can be seen to be shifting as a result of the state’s recent economic setbacks. According to the Ministry of Development Planning and Statistics (MDPS), Qatar’s population rose by 9.2% y-o-y to reach 2.37m in May 2015 and increased by a further 190,000 people to hit 2.59m in April 2016.

Despite the growing population, however, sweeping layoffs across state-owned oil and gas company Qatar Petroleum (QP) in 2015, and semi-state-run RasGas occurred as part of ongoing restructuring. Other redundancies have also been reported across the oil and gas sector, a major employer in the state, which has led to increased vacancy levels in prime residential markets, according to real estate consultancy DTZ’s first quarter 2016 market report.

Inflation & Rent Stabilisation 

On the bright side, Qatar’s cooling economy is expected to reduce rising inflationary pressures, with the state’s Economic Outlook 2015-17 projecting that inflation will average 1.5% in 2016, which is compared to an annual average of 3.56% in the decade to 2015 and an all-time high of 16.59% in 2008.

Price increases have been most acute in the real estate sector, where rents have been steadily rising in recent years. In March 2016 the MDPS reported that inflation for housing and utilities had increased to 5.6% y-o-y, although in April 2016 the average cost for renting a home dropped for the first time in 29 months, albeit only slightly at 0.1%, as housing demand begins to fall and supply increases.

However, as a result of stubbornly high land prices (see Construction chapter), rents had not recorded dramatic declines by May 2016, with landlords instead offering incentives such as one month of free rent. DTZ reported that average rental rates for a prime three-bedroom residential unit hovered at around QR17,000 ($4660) per month in the first quarter of 2016, compared to QR14,000 ($3840) for a two-bedroom and around QR11,000 ($3020) for a one-bedroom. These were down from 2014 prices, which were approximately QR19,000 ($5210), QR15,000 ($4120) and QR12,000 ($3290), respectively.

Up & Coming

Supply growth in high-end residential units has been driven by two primary developments – The Pearl-Qatar by United Development Company (UDC) and Qatari Diar’s Lusail City, both of which were launched following the government’s 2004 decision to relax rules for foreign real estate investment.

The Pearl-Qatar is a massive mixed-use development made up of 10 themed districts, offering residential options, including beachfront villas and luxury apartments, as well as five-star hotels, marinas and restaurants. The project is located 20 km north of the West Bay central business district on a 400-ha man-made island. In development since 1999, and ranking as the first residential development to offer freehold title ownership to international investors, it is expected to have almost 19,000 apartments, chalets and townhouses when construction finishes in 2018.

In June 2014 Doha News reported that up to 12,250 units had been completed, between 3500 and 4000 of which were actually occupied. DTZ reported that the total number of prime residential units in The Pearl-Qatar and West Bay stood at 14,000 as of the third quarter of 2015, and in March 2016 DTZ estimated that the supply of new apartments in Qatar could increase by more than 30% in 2016, with new towers in the Porto Arabia and Viva Bahriya districts of The Pearl-Qatar near completion. Nonetheless, some stakeholders are voicing concerns that ongoing development at Lusail City could put greater downward pressure on occupancy rates at The Pearl-Qatar.

Lusail City

Slated to become a major residential centre over the next five years, Lusail City is a $45bn development stretching across four islands, covering 38 sq km. Offering 19 mixed-use residential, entertainment and commercial districts, the city is forecast to have 200,000 residents, 170,000 employees and 80,000 annual visitors on completion. Under Cabinet Decision No. 6 of 2006, foreigners are permitted to purchase leasehold properties under a 99-year renewable contract, which can then be used for commercial or residential purposes, including subletting. The project was launched by Lusail Real Estate Development Company (LREDC) and stands as the largest single development to be undertaken in the country.

In March 2015 LREDC announced QR6.2bn ($1.7bn) worth of construction contracts for Lusail City, including a QR4.12bn ($1.1bn) contract for Lusail Plaza – awarded to the Qatari Diar-Saudi Bin Laden Group – and a QR1.21bn ($332m) contract for the Commercial Boulevard project, a 1.8-km shopping street – awarded to a joint venture between Malaysia’s WCT and Al Ahli. In July 2015 EllisDon was awarded a project management consultancy project for the Commercial Boulevard and Qetaifan Islands development, worth an estimated $3bn.

Oversupply

By the end of 2015, a number of commercial and residential properties had come online at Lusail City, offering much lower rental rates than The Pearl-Qatar. However, some stakeholders worry that without new supply of high-end tenants, both developments may have difficulty reducing vacancy rates.

“Lusail is opening at the moment, and prices there are a little more than half of what they are at The Pearl. Prices for a two-bedroom are very low, maybe QR9000 ($2470) per month, and around QR5000 ($1370) for a studio, which is unheard of at The Pearl. Because of these prices, we will see a migration of people from The Pearl,” Jackson told OBG. “If Qatar’s situation improves and companies start hiring high-earning staff again, we could see those prices go up, but as it stands now, there are not many new potential tenants for these developments coming into the market.”

Indeed, demand for affordable residential units catering to middle-class families and single male labourers is strong at the moment, although many developers have so far failed to capitalise on the trend (see Construction chapter). At the same time, strong population growth in the lead-up to the 2022 FIFA World Cup is forecast to peak over the medium term, which could leave the market facing significant oversupply across all segments.

Office

The office market has perhaps been the hardest hit by falling oil and gas prices. DTZ reported than an estimated 65% of all office space in West Bay is occupied or leased by government or hydrocarbons-related companies. With oil revenues falling, and in the wake of QP’s restructuring, Doha’s prime commercial real estate market is oversupplied. According to a December 2015 report in Qatar Construction News, no commercial leases for space in excess of 5000 sq metres were reported in the second half of 2015, with the majority of transactions related to office suites of less than 250 sq metres.

Approximately 300,000 sq metres of new office accommodation is expected to be completed through to mid-2017, according to DTZ, increasing both supply levels and vacancy rates, and putting downward pressure on rental prices. Without a recovery in the energy market, a significant increase in private sector activity will be needed.

As with the residential market, however, rising vacancy rates are expected to be temporary, with DTZ reporting that there are currently less than 150,000 sq metres of vacant offices available in West Bay, representing less than 9% of the total supply. Grade-A rental rates in West Bay range between QR150 ($41.16) and QR250 ($68.60) per sq metre per month, according to DTZ, depending on the quality and amount of space leased. The firm reported that a supply gap remains in small office units located within high-quality buildings, which still command premium rents. Outside of West Bay, offices in the C and D Ring Road area, as well as Old Salata, Airport Road and Al Sadd, are priced between QR120 ($32.93) and QR180 ($49.39) per sq metre per month, depending on the age and quality of the building.

Hospitality 

Hospitality is another sector facing potential oversupply, despite soaring near-term demand. According to the Qatar Tourism Authority (QTA), in 2015 the tourism sector grew by 3.7%, totalling 2.93m visitors, just short of the goal of 3m. Additionally, the QTA’s National Tourism Sector Strategy Plan 2030 envisions $45bn of investment in new tourism projects over the next 14 years, with the aim of more than doubling annual arrivals to 7m within that period. However, a rising number of hotel rooms are expected to present a challenge to hotel developers and owners in the coming years. At the beginning of 2016 there were approximately 20,700 rooms available, a significant rise from the 8500 available in 2008. Supply was up 30% in 2015, with approximately 4800 rooms added over the course of the year. However, occupancy rates declined in the hospitality sector in 2015, according to DTZ, as supply outstripped demand growth. Average daily room rates fell from QR557 ($153) in 2013 to QA526 ($144) in 2015, a decline of 9.3%, according to QTA data. Occupancy will come under further pressure by the end of 2016 as an estimated 4000 new hotel rooms enter the market and supply could climb higher in the coming years, with QTA reporting that approvals are in place for an additional 130 hotel establishments.

Retail 

The retail real estate sector is witnessing a rapid expansion at present, driven by high levels of disposable income – averaging approximately $100,000 per person – and soaring population growth. There is strong demand for retail accommodation from international and local retailers, and occupancy levels remain high across the state’s 14 shopping centres, comprising almost 700,000 sq metres of retail space.

This has translated into rent increases on lease renewals at busier malls. According to DTZ, prime retail rentals range from QR260 ($71.34) to QR300 ($82.32) per sq metre for standard line units, while larger anchor stores pay between QR170 ($46.65) and QR220 ($60.37) per sq metre per month.

A number of new retail centres came online in 2015, including Gulf Mall, which soft launched in April 2015, although the final completion date is still unconfirmed. The showroom market also saw total supply rise in 2015 when a number of major retailers at Barwa Commercial Avenue, which offers 250,000 sq metres of retail accommodation, opened their doors. Reportedly, over 50% of its retail units were reserved as of September 2015.

Availability of new retail space is expected to surge in the coming years, with over 1.3m sq metres of space across 11 shopping centres currently at various construction stages. Most of these developments are slated to open before 2019, including the Mall of Qatar, Doha Festival City and Place Vendôme The QR3bn ($823.2m) Alhazm Mall on Markhiya Street, meanwhile, is scheduled to open in September 2016.

“The level of existing supply is by no means excessive. At the moment it’s still quite a positive story, but a lot of supply is coming into the market in the next several years,” Mark Proudley, director of research at DTZ, told OBG. “There is 690,000 sq metres of space in the market at the moment, but 1.3m sq metres is under construction, so we’re looking at retail supply rising by nearly 200% in less than five years. This will have a dramatic impact on the retail market.”

Outlook 

The real estate sector’s outlook remains dependent on long-term economic prospects, and therefore the recovery of the oil and gas industry. Although the sector’s growth trajectory stayed on course in 2015 and early 2016, the sustainability of a number of major planned projects – particularly in the retail, office and hospitality sectors – remains in doubt. In the short term, population growth should help offset these challenges, but an anticipated population peak and eventual decline will likely present considerable long-term challenges to stakeholders.