Oversupply of real estate possible problem for Qatar in its preparation for 2022 FIFA World Cup

The built environment of Qatar has seen some spectacular changes in recent years, with rapid growth and a range of iconic towers, malls, gated communities, hotels and luxury villas coming onto the market. Swift expansion has transformed the skyline and propelled the country into the top ranks of the global real estate market. However, the fast-paced build-up of various segments is beginning to show signs of outstripping demand, and the sector may face some challenges in the short to medium term as the rest of Qatar’s economy plays catch-up with robust real estate expansion.

Opportunities remain, however, as the need to fill out the housing, hotel and retail portfolios with more mid-range options persists, while a pipeline of major infrastructure projects reaching completion in the run-up to hosting the 2022 FIFA World Cup should see a revaluing of a great number of Doha’s neighbourhoods. At the same time, a shift to higher quality, lower cost developments is also being brought on by current market conditions, as tenants demand more for their money.

Building Blocks

Much of the real estate growth in recent years is attributed to strong GDP expansion, built on the back of major oil and gas reserves. Qatar was the world’s largest producer of liquefied natural gas in 2016, a position it has enjoyed for many years. The country also trades significant quantities of sales gas, crude oil, condensates and refined products worldwide, along with a range of associated petrochemicals and chemical products (see Energy chapter). This major source of revenue has been used by the government to finance a range of large-scale infrastructure projects, and with a steady rise in the country’s population, this has brought a number of effects to the sector.

According to World Bank data, Qatar’s nominal GDP expanded from approximately $7.83bn in 1980 to $17.76bn in 2000, $125.12bn in 2010 and $164.64bn in 2015. While this declined slightly to $152.5bn in 2016, $81.6bn was reached in the first half of 2017, according to the Qatar Central Bank (QCB). Meanwhile, the population has grown from 223,715 in 1980 to 593,453 in 2000 and 1.77m in 2010. As of August 2017 the population stood at 2.44m, according to the Ministry of Development Planning and Statistics (MDPS).

Labour Force

Much of this population boom is the result of mega-infrastructure projects commissioned by the state or by government-related companies, which rely heavily on temporary foreign labourers. Indeed, the national population currently numbers around 313,000, or 12% of the total, according to MDPS figures.

With Qatar hosting the 2022 FIFA World Cup, a number of related projects are under way: the Doha metro system; new neighbourhoods; a new city at Lusail; road expansion; Education City; the Qatar Science and Technology Park; The Pearl Qatar artificial island and mixed-use development; and many other residential, commercial, retail and industrial projects. All of these endeavours will require large numbers of manual workers, along with highly skilled expatriates to design, operate and manage them.

Rising Prices

These conditions have led to a dramatic surge in real estate prices from 2007 to mid-2017. According to the QCB, the real estate price index (REPI) rose from 88.5 in March 2007 to 192.1 in September 2008, staying below 200 until March 2014 and rising to 299.7 in September 2015.

Since then, however, falling oil and gas prices have gradually had a negative impact on the country’s revenues and growth, and with the government being the main driver of economic activity, this has led to a recent slowdown. Many companies have downsized – both in terms of staff numbers, and the size and grade of their office space – while high-salaried expatriates have sometimes been replaced by less costly labour. In all, these moves have had an impact on demand in the real estate market, as the QCB REPI fell to around 256.5 in January 2016, briefly rising to 295.3 in April 2016 before dropping back to 256 in September 2017.

A number of projects undertaken during periods of economic and population expansion are now nearing completion, adding supply to the market. As a result, recent times have seen some market correction across the board as demand responds to the new real estate offerings.

Plans & Populations

According to the most recent figures released by the MDPS, some 956,457 residents live in Doha Municipality, representing around 40% of Qatar’s total population. When the neighbouring Al Rayyan Municipality – which includes Doha’s outlying industrial area where some 364,710 people reside – is added in, and a number of suburbs such as Al Maamoura, Bu Hamour and Bu Samra are included, the dominance of the Greater Doha area quickly becomes apparent. Beyond the de facto city boundaries, the city of Al Khor had a population of around 96,200 in 2015, followed by Al Wakra (88,000), Dukhan (13,300) and Al Ruwais/ Madinat Al Shamal (5410).

Arising out of the country’s long-term development plan, Qatar National Vision 2030, the Qatar National Development Framework (QNDF) puts an emphasis on not just the development of the capital, but other municipalities as well. It also stresses a decentralised approach to the capital, with a series of local hubs envisaged, centred around the stations of the Doha Metro. This $36bn Qatar Rail project will see three lines completed by 2020 for its first phase, with 37 stations in total. The metro will radically improve transit times around the city and its suburbs, as well as shift settlement patterns and transport corridors. “The alternative to the car is the metro system as the catalyst for development,” Ali Alraouf, head of development, research and training at the Ministry of Municipality and Environment, told OBG. “Once you exit the station, you will be in a mixed-use development.”

With the metro stations forming the city’s new backbone, urban planners in Qatar are also looking to vitalise the spaces between them by encouraging the development of more pedestrian-friendly streets. Creating public spaces between towers, along with shaded areas, shops, pedestrian walkways and places for social interaction, is all in the pipeline under the QNDF. The municipalities outside of Doha are also looking to establish distinct city profiles.

Residential

With Qatar’s population continuing to rise, recent times have seen the increase in residents largely accounted for by manual labourers working on the country’s mega-projects. This segment of the population largely lives in workers quarters, usually outside of the city, or in low-rent accommodation within the city. Therefore, they have traditionally had little impact on overall real estate prices. At the opposite end of the expatriate spectrum, however, the loss of many higher salaried foreign residents due to downsizing, projects ending without new work and cuts in housing allowances has affected the luxury villa and apartment segments. These have traditionally been clustered in areas such as The Pearl Qatar, West Bay, Al Sadd and Al Waab. Changing employment conditions have also pushed many white-collar workers further out from the centre, with neighbourhoods offering lower rents – such as Ain Khaled, Bu Hamour and Muaithir – becoming more popular.

“Demand is still there, but key performance indicators have changed and developers can no longer expect the same excessive return on investment they were accustomed to during the peak years,” Nasser Al Ansari, chairman of Just Real Estate, told OBG. “Investors have become more realistic with their money, and as a result, developers have become more cautious.”

Rentals are also very important, as the residential market is shaped by regulations limiting foreign ownership. Expatriates are only allowed to purchase property – either freehold or on 99-year leases – in certain areas, with GCC citizens given slightly more extensive rights than other nationalities. The Pearl Qatar is one area where freehold ownership is possible, as is Al Khor, north of Doha, while special investment zones within Bin Mahmoud offer 99-year leases and the newly planned city Lusail has a 99-year usufruct for all nationalities.

It is also important to note that purchasing property in Qatar typically leads to the owner receiving a residence visa. In general, though, ownership restrictions have ensured that the majority of expatriates remain in the rental market.

Qatari Market

Housing and land benefits given to Qatari nationals are also shaping the residential market. Qataris generally prefer living in freestanding villas or houses which, given their space requirements, make them particularly costly in a country where land prices are some of the highest in the Gulf. The government does, however, assist citizens with land grants and interest-free or otherwise attractive loans. The search for extra living space has led to many nationals moving further out from city centres, leading to the creation of new villa suburbs. Many pay for their new quarters by renting out the older, more central family homes they leave behind to expatriates.

Figures from real estate consultancy DTZ show that the rent for a four-bedroom villa in Al Waab averaged QR15,000 ($4120) per month in 2011, rising steadily to QR20,000 ($5490) in 2015. Yet in the third quarter of 2017, the average rent had fallen to QR16,000 ($4400). A one-bedroom apartment in West Bay, meanwhile, has gone from QR9500 ($2610) per month in 2011 to QR12,000 ($3300) in 2015, but fell to QR10,000 ($2750) in the third quarter of 2017. Sales of existing freehold apartments in The Pearl Qatar have slipped from QR15,000 ($4100) per month in 2015 to QR13,000 ($3570) in the third quarter of 2017, equal to 2010 rates.

Top Of The Line

Prime apartment supply continues to grow. DTZ data shows major unit increases at The Pearl Qatar and the new Lusail City coming to the market in the next few years, with 2018 seeing the number of total units reach 25,000 in these two areas, along with the West Bay. The Diplomatic District and Msheireb, a new downtown development in what was Old Doha, opposite and south of West Bay, are other highly sought areas. In April 2017 local press reported that developer Msheireb Properties had announced that the fourth and final phase of the development would soon be under way, with a public plaza and 11 buildings for residential, office and retail use to be constructed.

Another prominent developer in Doha is Qatari Diar, an arm of the Qatar Investment Authority. The company’s first project was Lusail City, and it established the Lusail Development Company in 2008 to plan and construct the major project. Qatari Diar is also behind the Qatar Railways Development Company, helping to orchestrate real estate linkages with the Doha Metro transport project.

Plenty Of Choice

Data from DTZ show prime apartment supply multiplying to just over 25,000 units in 2018, approximately 30,000 units in 2019 and around 35,000 units in 2020. This will come to represent considerable oversupply in the segment, largely due to the fact that the majority of demand is now stemming from lower- and middle-income earners. As a result, prospective tenants have been able to leverage low demand to secure advantageous rental arrangements on higher quality, more energy-efficient apartments.

New buildings with good maintenance and services are proving very popular and increasingly more affordable, with older areas suffering as a consequence. A local press report in February 2017 estimated that rental prices could decline by up to 30% over the course of the year. Indeed, there has been a general decrease in rental rates across most areas as landlords have attempted to maintain headline rents by offering one to three months of rent for free in many instances.

At the same time, there is continuing demand for mid-range properties. This is particularly so as Western expatriates receiving higher salaries are being replaced by less costly foreign employees, while overall housing allowances for foreigners take a hit. The concentration on building high-end luxury apartments and villas has left this middle-income segment often underprovided for. However, 2017 saw the completion of the first phase of Ezdan Oasis in Al Wakra – a project of 9000 apartments upon completion ranging from QR4500 ($1240) per month for one bedroom to QR6500 ($1790) for three bedrooms. This development is expected to set the bar for quality, affordable housing in the capital.

Office Space

Doha’s office demand has suffered from the same macroeconomic conditions as the residential segment, but faces an even greater level of oversupply. In the third quarter of 2017 DTZ estimated that total purpose-built office supply in the capital was in excess of 4m sq metres, with 1.63m sq metres of that in West Bay. This district, famed for iconic buildings such as the Tornado Tower and Burj Doha, has also been home to a variety of state offices. Yet these ministries have recently started to leave West Bay as part of a government scheme to relocate departments to the newly built Lusail City. The Ministry of Economy and Commerce and the Qatar Tourism Authority (QTA) had already moved out of West Bay by the end of 2016, but the Ministry of Justice still occupies 15,000 sq metres in the area.

According to DTZ, between 2008 and 2014 around 70% of all prime office leases in West Bay were signed by oil and gas companies or government-related entities, demonstrating the potential impact of government relocations. At the same time, the fall in global hydrocarbons prices may also affect the tenancies of some oil and gas firms, although North Field Oil – a joint venture between Total and Qatar Petroleum – did expand in 2016, seeking an extra 15,000 sq metres of office space. This was likely a result of its takeover of the Al Shaheen oilfield concession from Maersk Oil, which consequently announced plans to withdraw from Qatar, vacating its offices half-way through 2017.

In addition to government offices, Lusail City is likely to offer more work space to private sector outfits in the lead up to the development’s expected completion in time for the 2022 FIFA World Cup, as will associated areas such as Energy City and Lusail City’s Marina District. The Msheireb development is similarly beginning to come on-stream, offering still more corporate facilities. The Qatar Financial Centre (QFC) announced in September 2016 that it would move there, becoming the anchor tenant of a new Msheireb financial city, with QFC-registered companies also expected to begin moving over to this new location in the years ahead. In total, DTZ estimates that the next decade will see some 2m sq metres of new office space come on the market, subject to all proposed projects being delivered.

Changing Needs

The type of office space in demand has also been changing as larger companies downsize and smaller firms seek more room. DTZ reported three requirements for office space greater than 5000 sq meters in 2016, with 50% of all enquiries for spaces of less than 500 sq metres.

Office rents in West Bay were down 15-20% at the end of 2016, with grade-A offices renting for a maximum of QR200 ($54.93) per sq metre per month – mostly for smaller fitted spaces – although the average was more in the range of QR130-170 ($35.70-46.69) per sq metre in 2017. Further out of the capital’s centre, around the C/D Ring Roads, rentals were fetching QR100-120 ($27.46-32.95) per sq metre per month in the third quarter of 2017.

Retail

Recent times have also seen a significant expansion in new retail space, with the latest being the QR6bn ($1.6bn) Doha Festival City. This facility had its soft opening on April 5, 2017 and will eventually house some 500 stores, the world’s largest Monoprix hypermarket, 100 food and beverage outlets, and Snow Dunes – Qatar’s first indoor snow park – making it a significant addition to the capital’s retail scene. Located next to the city’s IKEA store, Doha Festival City is a 10-minute drive north of Landmark Mall and close to the North Gate Mall, which is currently under construction. The soft opening came a few days before the official debut of the Mall of Qatar, a 500,000-sq-metre shopping centre off the Dukhan Highway in Al Rayyan, with 195,000 sq metres of net leasable retail area.

The Mall of Qatar’s soft launch in 2016 brought total organised retail space in the capital to 838,000 sq metres by the end of that year, according to DTZ, with the total reaching 1.3m sq metres in the third quarter of 2017. This figure shows no sign of slowing, with Place Vendome and Marina Mall scheduled to open in 2018 and 2019, respectively, in Lusail City alone. By the end of 2018 DTZ estimates that around 1.8m sq metres of total organised retail space will be on the market, crossing the 2m sq metre threshold by 2022 (see Retail chapter).

Rents & Spending

In Qatar shopping centres are an important part of social and family life, as well as commercial activity. Recent malls have added a range of entertainment facilities to their retail options, and most of the new space being added is of higher quality than many of the malls built in recent decades. However, retail sales have been falling, as the impact of the oil and gas downturn and government budget cuts is felt. DTZ reported a decline in retail spending of 10-15% in 2016 alone, and noted an overall reduction of more than 20% between 2015 and the third quarter of 2017.

Despite this and the concern of potential oversupply, retail rental rates have generally remained stable. Existing standard shop units in prime malls rent for around QR260-300 ($71.40-82.39) per sq metre per month, while larger spaces go for QR170-220 ($46.69-60.42) per sq metre. There has been a trend of vacancies in showrooms and strip retail, whereas previously occupancy was very strong. The country’s older, smaller malls are also likely to see increasing vacancy and declining rents in the future.

Hotels

Ahead of the 2022 FIFA World Cup, Qatari authorities continue to promote the country as a tourism destination. Still, the number of hotel keys available in Doha is of central concern to development plans, and not only for those of the tournament itself. Qatar’s National Tourism Sector Strategy 2030 forecasts that total visitor numbers will swell from 2.32m in 2012 to between 4.3m and 5m by 2022 and 7m-9m by 2030. The forecast also states that the proportion of business to leisure travellers will reverse over the same period, from 73:27 in 2012 to 46:54 in 2022 and 36:64 by 2030. The number of days spent in-country is also expected to increase over the 2012-30 period, from an average of 3.2 days to 4.3 days, with a tripling of annual tourism spending from $4.75bn to $17.8bn.

With this major expansion in mind, hotel real estate has been a booming segment in recent years. Between the end of 2013 and the close of 2015 the number of hotel rooms and hotel apartments jumped around 30% to 20,700, and the total stood around 24,000 keys in September 2017. With 20,000 additional units in various stages of construction, the room total should hit 47,000 by 2020, according to DTZ. This is still short of the 60,000 keys Qatar is obliged to provide for the 2022 FIFA World Cup, but with the mass arrival of tournament participants and spectators unlikely until kick-off in November of that year, this target is expected to be achieved.

More than 85% of hotel rooms and 70% of establishments in the segment are currently classified as four or five star, according to DTZ, with the QTA forecasting that 43% of all upcoming projects will also fall into these categories. This may lead to a shortage of three-star and budget hotels.

Visitors

The QTA’s figures for the first half of 2017 showed a 1% increase in visitors over the same period of 2016, largely stemming from a strong increase in cruise line passengers, the introduction of a 96-hour transit visa and the launch of +Qatar, a QTA and Qatar Airways initiative to promote the country as a stopover destination. These trends also led to a 10% and 7% year-on-year (y-o-y) increase in visitors from Europe and the Americas, respectively, in the first half of 2017. Hotel occupancy rates had declined by 2.8% y-o-y in June 2017, but this is attributed to new supply entering the market.

Outlook

The potential of oversupply seen across the board presents a challenge for the current real estate market, which is likely to experience continuing downward pressure on rents and prices over the course of 2018. Economic challenges facing the country and adjustments’ resulting impact on labour force salaries and demand may lead to a shift towards more mid-range property development. The pressure will also be on landlords to provide greater service provision to tenants, who are able to exercise increased leverage in an oversupplied market. Features such as green building technology, proximity to metro stations and overall quality will likely become more important selling points.

Further down the line, the market could see some rental rate and occupancy recovery if, for example, oil and gas prices rise, government investment increases or high-salaried expatriates return to the country. For the time being, however, Doha’s real estate sector looks set for a period of price correction as supply continues to grow across segments.