Playing to its strengths: Prudent development and business models keep the sector afloat

Government incentives on residential purchases helped the real estate sector make significant progress in 2011. According to the Department of Land and Surveys (DLS), it grew by 7.5% from JD5.98bn ($8.4bn) in 2010 to JD6.4bn ($9bn) in 2011. By contrast, real estate agents reported a difficult year for non-residential activity, as office space remained in oversupply and developers worked to finish projects amidst liquidity shortages. Still, investor interest is on the rise, and work is proceeding on many large mixed developments. At a time when the regional property crash still haunts the market, developers nonetheless feel that prudent business models can tap new growth markets.

RESIDENTIAL: The number of apartment sales jumped by 20%, from 23,721 in 2010 to 28,493 in 2011. Demand from this sector boosted land sales in 2011 by 9%, with most growth seen in Amman. “Last year was difficult for Jordanian real estate, but apartment sales have certainly been good,” said George Abu Judom of the Abu Judom Real Estate Company, in an interview with OBG.

Government incentives that benefitted homebuyers and developers inspired much this growth. From mid-2010 until the end of 2011, incentives reduced registration fees on property sales to 5% and completely exempted the first 150 sq metres of units smaller than 300 sq metres. This applied to both development and resale units. In 2012 fees rose to 9%, but exemptions for new developments still exist for up to 120 sq metres.

The change in exemptions has had the biggest impact on the sale of apartments sized between 120 and 150 sq metres, falling by 32% in January and February 2012 year-on-year (y-o-y), according to the DLS. Although continued exemptions on the first 120 sq metres somewhat cushioned the fall, the number of purchases still declined by 26% in the first two months of 2012 y-o-y. The demand for medium-sized apartments is also likely to decline. Sales numbers for apartments of 150 sq metres or more decreased by 18% in the first two months of 2012 y-o-y, a slightly slower decline than that seen in small apartments. Given the importance of these units in residential real estate demand, the change in exemptions will likely drag down the market. Indeed, in the first two months of 2012, the sector shrunk by 22% y-o-y to JD649m ($912m).

With groups like the Housing Investors Society pushing for renewed exemptions, authorities may restore some incentives. “Another drawback is that with higher registration fees, real estate traders will try to avoid registering their property and instead apply for power of attorney through the court system. Resorting to this process could ultimately reduce the revenues that accrue to the DLS through registrations,” Yahya Shami, the CEO of Better Homes Jordan, told OBG.

However, the government is hesitant to reintroduce exemptions as it attempts to shore up strained public finances. The DLS’s revenues jumped by nearly 40% in the first two months of 2012 y-o-y, a source of income that the government does not want to give up. With demand at the low-end to middle of the market fuelled by population growth, short-term realisation of this potential will depend heavily on government policy.

AFFORDABLE HOUSING: Given the serious growth in residential demand and the often prohibitive housing costs, the government carries out a programme known as “Decent Housing for Decent Living”. The initiative, begun in 2008, aims to construct 100,000 affordable apartments in five cities over a period of five years.

Part of the plan provides subsidised housing units to low- to middle-income groups. About 35% of the 8448 units had been sold as of March 2012, while the remainder is expected to sell over the course of 2012 and 2013, according to Suleiman Hasanat, the strategic planning unit director at the Housing and Urban Development Corporation (HUDC). However, some have voiced concerned over the slow uptake of the units. In March 2012 the Minister of Public Works and Housing announced that a new marketing scheme would be launched in order to help boost participation.

Private sector developers have played an important role in the scheme. Through an agreement with the Housing Investors Association, the government has agreed to pay 20% of costs at the construction stage and the remaining 80% at the marketing phase, Hasanat said. The HUDC is evaluating strategies to create new opportunities for private investment in the residential sector. One possible incentive will be to allow private investors in public-private partnerships to be subject to HUDC's building regulations, which are generally more lenient than those of the private sector.

PREMIUM BUYS: “The increase in registration fees is likely to affect demand at the upper end of the market,” said Shami, noting that demand was depressed in 2012. However, local media reported in January 2012 that some real estate agents remain upbeat about the strong purchasing power in West Amman, where property prices are much higher than the rest of the city.

“There is strong demand for apartments in prime locations in West Amman,” Abu Judom told OBG, echoing this view. A report from Asteco, a property management company, released in January 2012 expected sales prices for medium-sized and larger apartments in prime locations to remain stable.

The supply of quality residential properties throughout the region is significantly less than the demand, according to Niall McLoughlin, the senior vice-president of Damac, the UAE-based developer of high-end properties. He claims that the same quality apartments available in the UAE are now being demanded by citizens throughout the region. Damac is developing premium residential property at the gateway to Jordan’s Abdali downtown development and reported progress on construction work in late 2011.

However, a strong take-up of premium properties cannot be guaranteed when purchasing power is reduced and Gulf investors are still subdued following the recent property crash. “Premium buys in Abdali are very expensive. Apartment space is about 33% higher here compared to Abdoun,” said Shami. He added that despite the construction progress, take-up at Abdali could be limited while the site remains under construction.

Yet developers are confident that cautious business models can still yield promising results. Peter Titus, the general manager of Emaar Properties Jordan, a major UAE-based developer, told OBG that the company “was fortunate to enter the market in 2009 – after the boom and bust. We have a prudent approach to business, only building what we can sell.”

COMMERCIAL: Office space in Amman is still in oversupply following the property crash. “There is still a major problem with oversupply in the commercial segment,” Wael Al Jaabari, the owner of Abdoun Real Estate, told OBG. “One solution to this problem would be to make the business and investment environment more favourable to foreign companies, which could take up some of the extra space,” he said.

Although there is still strong demand for space in prime locations, such as Sweifieh, Mecca Street, Abdoun and Jebel Amman, office rents have declined moderately over the last year, according to Abu Judom. Ahmad Abd Al Halim, senior vice-president at Arab Bank, said that the retreat in prices was around 10%. Average office rental rates also remained stable despite regional instability, according to a 2011 report by Asteco.

However, compared to the peak of 2008, office prices have dropped by 25-60% in prime locations in West Amman, according to Al Jaabari. Office rental rates are not projected to increase in 2012, as new commercial buildings are expected to keep supply outstripping demand. “In particular, when the office space in the Abdali Development comes on-line this year, we expect prices in the office leasing market to fall,” Shami said.

FOREIGN BUYERS: The biggest foreign buyers in Jordan’s real estate market are Iraqis, making up 56% of the non-Jordanian market in 2011 and spending around JD252m ($354.1m), according to the DLS. The average value of land and apartment transactions by Iraqis was around JD94,500 ($132,790) in the first two months of 2012, compared to JD55,000 ($77,286) for Saudis. Iraqi spending potential was given a boost in 2009 when the Jordanian government declared that it was no longer necessary for Iraqi nationals to acquire security clearance in order to make a real estate purchase.

The subdued interest of property investors from the Gulf may compromise demand for luxury apartments in Amman, according to the Global Property Guide. Yet as Jordan remains stable amidst the unrest that has swept much of the Middle East, real estate investors may begin to view the kingdom as their best bet in the region. In particular, Saudis seem to be boosting their spending in the market. After Iraqis, they now spend the most money on Jordanian real estate.

While Iraqi real estate spend fell in January and February 2012, y-o-y Saudi spending spiked by some 146%, from JD3.1m ($4.4m) to JD7.7m ($10.8m). In 2011 Saudis spent JD252m ($354.1m) in the market, equivalent to 11% of non-Jordanian purchases. Furthermore, Saudi Arabia is boosting its investment in Jordan across a range of sectors, and if the kingdom joins the Gulf Cooperation Council (GCC), Jordanian real estate could see a spike in Gulf investments.

SYRIAN POTENTIAL: Political unrest in Syria and its impact on Jordan’s real estate market has also become a trend to watch. Early indicators suggest that Syrian activity in Jordanian real estate is increasing. According to the DLS, Syrians spent the third-largest sum (JD1.6m; $2.2m) on real estate among non-Jordanian buyers in January and February 2012, whereas in the previous year they did not feature among the top-four. “If the Syrian unrest continues, Jordan may become a more attractive foreign real estate destination, as Syrian consumers and investors flee to its more stable neighbour,” Rami Adwan, the deputy CEO at Taameer Jordan Holdings, said in an interview with OBG.

However, most of the Syrians who have moved to Jordan enquire about properties to rent rather than to buy, Omari explained. A number of Syrian business leaders have made informal agreements with Jordanian landlords to make temporary use of commercial properties, as they anticipate returning home soon, according to local media reports in March 2012. However, the longer Syria’s troubles continue, the more permanent Syrian residents in Jordan are likely to become.

RETAIL: The many malls that have emerged in Amman over the past decade also face challenges, given falling consumer confidence and the rising costs of living. But demand for retail space is still reported to be high, “Rental rates for retail space are often still very high in prime locations, as the space allocated for retail outlets in commercial buildings can be small,” said Shami.

Amman’s retail segment continues to expand, with the Taj Lifestyle Centre opening in Abdoun, one of the capital’s prime locations, in November 2011. Take-up has been encouraging; upon opening, nearly 80% of the space available for lease had been let, according to the owner, Al Tajamouat of Tourism Projects Company. “Taj Mall is off to a good start, given conditions,” Abu Judom told OBG, although he added that he believes Amman’s retail segment is reaching full capacity. Taj Lifestyle has added 150,000 sq metres to the capital’s retail environment, and this is second in size only to Mecca Mall, which offers 180,000 sq metres.

NEW LEGISLATION: The long-debated Landlords and Tenants Law, first enacted in 2001 and amended in January 2012, has ramifications for real estate contracts made prior to 2001. Agents report that the amendments create a more favourable environment for landlords by allowing them to renegotiate existing tenancy agreements and to align rental rates with their market value. “Since the law’s passing in 2001, there has been more activity in the leasing market,” Shami told OBG.

The amendments could encourage developers to look to the rental market to make investments. A report released in January 2012 by Asteco stated that rental rates on apartments had already started to rise. In Abdoun, for example, rents rose by 5% between the final and third quarters of 2011, while in Rabiah they jumped by 19% over the same period. “There is huge demand at the moment for smaller-sized apartments in particular, Abdoun Real Estate’s Al Jaabari told OBG. As contracts continue being renegotiated, rental rates in certain areas are likely to rise throughout 2012. However, the increasing supply of rental properties anticipated in 2012 should put downward pressure on rents.

Tense debate could yet pressure the government to make changes to the amendment. In March 2012, frustrated traders and commercial workers staged strikes to protest the increasing rents. Among other clauses, they want a repeal of the stipulation that tenants must renegotiate their contracts. Landlords argue that many among their rank have been losing money on outdated rental agreements. “It is important that landlords are allowed to increase their rents, but this should be done reasonably to the tenants,” said Abu Judom. He added that the legislation as it stands places too heavy a burden on tenants. It is difficult to predict how the government will respond.

OUTLOOK: Given that the disputed law affects only contracts made prior to 2001, its significance for the commercial market is largely limited to older districts, such as the downtown area of Amman. Office space is likely to remain in oversupply, and as more buildings become available rental rates may fall further. Still, real estate agents believe that prices are fairly stable and that selling property in prime locations will not be difficult.

As for residential properties, the removal of subsidies is likely to depress activity, if the government is not persuaded to reinstate some form of incentive. Yet the basic demand created by population growth means long-term demand for housing is secure. If Jordan continues to remain stable, the outlook for increased foreign activity in the property markets seems promising.