Opportunities emerge in Oman's real estate market

Market pressures that have weighed on Oman’s real estate sector since oil prices fell from their historic highs three years ago continue to affect its performance, and the state has adjusted to lower revenues by trimming budgets and paring back some investments. Growth in public payrolls and jobs – a key driver of real estate demand – slowed in 2016 as the government reduced spending by 7.5% to tackle a fiscal deficit surpassing 20% of GDP, and weaker economic conditions have likewise constrained job creation in the private sector.

This deceleration has put pressure on both demand and property prices: according to Cluttons, a UK-based real estate consultancy, as of September 2017 residential rents in Muscat – a key sector bell-weather – were 20-25% below their 2014 peak and still falling, albeit at a much slower rate, and thus were widely considered to be stabilising.

Positive Points

Healthy demographics and high wealth levels point to a bright future for the sector, as population trends and a track record of stability fuel forecasts for a sustained pick-up in demand over the medium term. The median age in Oman is just 25, birth rates are high and an expatriate influx has pushed population growth to 5.9% in 2016, up from 4.1% the previous year, to 4.4m people. GDP per capita was double the MENA average at nearly $15,000 in 2016, according to the World Bank.

Meanwhile, economic transformation under the government’s Vision 2040 plan – encompassing infrastructure spending, legal and social reforms, and an increased role for the private sector – looks set to continue drawing the types of investment that can drive the property market forward. All of this contributes to optimism that the market will turn a corner in 2018 and pick up going into 2019.

Swing Factors

How soon it does may depend on oil prices – which were edging upwards in late 2017 and reached $65 per barrel in January 2018 – but also on the pace of reforms. The Ministry of Housing (MoH) is currently undergoing process centralisation that will oversee approvals end-to-end and streamline service-level agreements, easing the way for developers to pursue new projects. It is also issuing a steady stream of land grants and pioneering a new approach to housing for Omanis, which is capable of spurring the market for mid-range developments. Recent lobbying for routine publication of a sector-wide property index looks set to bear fruit in 2018 as well (see analysis). Officials have also long discussed passing legal frameworks for public-private partnerships and real estate investment trusts (REITs), although as of late 2017 progress on these was unclear.

If successful, such reforms could reinvigorate the market, especially the middle- and lower-tier segments. There are signs such maturation is needed in a market historically tilted towards the high end. Average rents for premium residences in places like Muscat Hills and Al Mouj fell twice as far (10%) as other locations in the 12 months to September 2017, according to Cluttons. Meanwhile, a report from local real estate agency Al Habib points out that, while expatriate numbers rose by 1.3% in the first half of 2017, to 1.87m, the number of degree-holding foreigners – the ones most likely to live in larger apartments and villas – actually fell by 3.1%, to 155,000, indicating a possible demand shift towards the lower tiers of the rental market.

However, there is consensus among market-watchers that rents are holding up best at properties with a good mix of amenities, as well as management and location. In the current down cycle, which has resulted in a buyer’s market, product quality is proving a key factor in decision-making. Offering good amenities is becoming increasingly important, and properties without them can lose up to 50% of their tenants. Therefore, in the coming year a priority for developers and brokers will be how to balance such perks with affordability in a way that aligns with the profile of future demand.

Organisation

The primary regulatory body in the sector is the MoH, which has a broad mandate to oversee the industry, set its priorities, propose and execute policies, issue directives, register and monitor transactions, administer social housing and provide land grants. It also coordinates with other bodies on broader urban planning goals, for example, by supporting the Supreme Council for Planning (SCP) with mapping, research and socio-economic studies to gauge future needs and propose ways to meet them. Born out of the Ministry of Land Affairs in 1985, the MoH has been reorganised numerous times, the latest being in 2007 when it split from the Ministry of Electricity and Water, and in 2014 when its terms were revised by royal decree.

Another noteworthy player is the Oman Real Estate Association, launched by the MoH in 2012 to help improve the sector through the pursuit of best practices, transparency initiatives and reform proposals. The association organises an annual twoday event called the Oman Real Estate Conference under the auspices of the SCP, bringing together public and private-sector stakeholders to showcase new projects, attend presentations, review sector developments, discuss current and upcoming issues, and coordinate possible solutions.

Proposals emerging from the most recent conference, in May 2017, included establishing a real estate studies institute to train young Omanis in the profession; founding a new independent body to represent the sector; conducting an official performance evaluation of the MoH’s Directorate-General for Real Estate Development; easing the rules for companies wishing to register projects under their own name; and setting up an electronic application system at the MoH linked to brokers, municipalities and other official agencies. In 2017 the association also lobbied the government to start issuing a real estate index, and to reconsider reducing sale contract fees for certain kinds of property.

Private Arena

Private players in the sector include an array of local firms, foreign-domestic joint ventures and Oman-based branches of multinationals. Some of the main companies include Alargan Towell, a joint venture launched in 2003 between Kuwaiti holding company Alargan and local firm W J Towell, focused on mid-income and affordable housing; Al Habib, an Omani firm founded in 1978 serving as developer and broker, as well as a leasing and property management player; Al Qandeel, a local developer and consultancy founded in 1984; and Edara, a joint venture formed in 2014 between Tilal Development, Al Madina Investment and Al Madina Real Estate. Multinationals with branches in Oman include the UK’s Cluttons, Hamptons International and Savills, and Germany’s Engel & Völkers.

Land Rights

The primary law governing real estate in Oman, the Land Law of 1980, declares all land in the country to be property of the state unless otherwise specified in provable title deeds. Other relevant laws have since been passed on usufruct rights (1981), tenancy (1989) and land registration (1998). Omani nationals may own land on a freehold or leasehold basis, and at the age of 21 are entitled to receive a grant of land from the government for personal use, as well as a low-interest mortgage through the state-run Oman Housing Bank. A grant wait list is administered by the MoH based on age and need of the applicants.

Foreign individuals or companies may be granted a usufruct approximating freehold ownership, which allows them to benefit from land on a long-term, conditional basis. This is typically a period of 50 years and is restricted to activities seen as having a particular social or economic benefit, such as infrastructure or public utilities. Non-nationals are also permitted to buy a mortgage. In 2004 foreign ownership of land or constructed property on a freehold basis was granted to GCC citizens (and wholly GCC-owned companies) for both residence and investment, putting them on par with Omanis in this respect. In 2006 all other foreigners were extended this right as well, albeit restricted to purchases of property on plots specifically designated as integrated tourism complexes, or ITCs. Such a purchase entails the right to official residency for the buyer and his or her immediate family.

However, further opening up of the market may have its negatives. “Increasing ownership rights for foreigners is still under discussion, and something that would have to be implemented correctly when it is decided upon,” Nasser Al Sheibani, CEO of Al Mouj, a local real estate developer, told OBG. “If the real estate market were completely liberalised, high-earning foreigners could push up property prices and make it difficult for locals to buy land.”

Residential

The effects of recent market pressures are perhaps most evident in residential rents. These were dragged down by the oil price drop, but have lately showed signs of bottoming out. Average rental rates, having fallen by 10.1% in 2016, stabilised in 2017 with declines of 0.6% in the first quarter and 0.2% in the third, to sit at OR690 ($1790) per month in September 2017, according to Cluttons.

An area breakdown of Muscat by Al Habib shows the steepest residential drops in the year to June 2017 were in Wadi Kabir (32%), Amerat (19%) and Qurum (15%), and the shallowest in Ghala/Azaiba (2%), Al Khuwair (5%) and Ruwi/Al Falaj (7%). “It is very much a buyer’s market at the moment: demand is largely down across the board and supply is up, exacerbating price pressures.” Benjamin Cullum, general manager of Hamptons International, a global real estate consultancy, told OBG.

The premium residential segment saw the greatest decline, with average rents dropping by 10% in the 12 months to September 2017, per Cluttons data. This is partially due to a relative saturation at the market’s top end, and partially because of a large share of highly paid expatriates leaving the country when oil prices declined. “In the short to medium term the outflow of skilled foreigners and the inflow of unskilled foreigners will continue to put downward pressure on residential rents,” Sudhakar Reddy, CEO of Al Habib, told OBG.

However, it is not just expatriates shifting away from higher-end properties. “Although young, middle-class Omanis prefer living in traditional villas, they are sometimes too expensive,” Rashid Saleem Al Masalti, CEO of mid-market developer National Mass Housing, told OBG. “As this demographic group starts families, their budget constraints will lead to an increase in the demand for more affordable housing, such as apartments.”

Trading Activity

Even with rents under pressure, activity in some areas has held relatively steady or even grown. According to the most recent data from the National Centre for Statistics and Information (NCSI), the total number of planned land plots – whether it be for residential, commercial, industrial or agricultural use – rose by 28% in 2016 to reach approximately 63,600, reversing declines of the previous two years. Plots registered for the first time numbered 55,100, up 4.7% on 2015, while plots granted by the MoH fell 7.4% to about 39,700.

Alternatively, the latest MoH data, covering the first half of 2017, show the total value of traded property falling by 70% compared to the same period a year earlier, to OR1.4bn ($3.6bn), with the number of sales contracts shrinking by 24% to around 30,600. “Oman had something of a time lag with the oil price drop,” Christopher Steel, managing director of Savills, told OBG. “For the first two years, officials said Oman would not be affected.”

Ongoing Projects

Nonetheless, supply continues to grow apace, with some 18,000 residential units in the pipeline for delivery over the next two years, according to CBRE (see Construction chapter). Among the largest projects is Al Mouj (The Wave), a 6000-unit development in West Muscat encompassing villas, apartments, hotels, a golf course and marina, which had sold 2300 homes as of July 2017.

In March 2017 Malaysian developer BRDP signed a deal to build a similar ITC project adjacent to Al Mouj. The OR400m ($1bn) Naseem A’Sabah will have 1200 units surrounding a mixed-use complex with hotels, retail outlets and a yacht club.

Another development is the Sur Gate Project, a OR120m ($311.6m), 146,000-sq-metre integrated complex with residential villas and apartments alongside a hotel, mall and leisure centre. Its developer, Al Sharqiya Real Estate and Investment, said it was 70% complete as of October 2017, having opened its first phase, a OR10m ($26m) entertainment centre called The City Walk, the previous April.

In 2016 National Mass Housing completed phase one of Areej Residential Community near Muscat International Airport, which has 69 turnkey villas targeting the mid-income segment (monthly incomes ranging from $1800 to $5000) that have all been sold. It began phase two in March 2017.

Alargan Towell has five projects in the works: phase two of the 78-unit Beyout Al Faye mixed-use development; phase one of Al Waha mini-city, where it has launched 112 of 817 planned units; the 956-unit Barka Resort ITC, to be finished by 2019; the eight-building Telal AlQurm apartment complex; and the Naseem Salalah luxury beachside housing development. In September 2017 Savills began pre-selling units at its Boulevard Tower ITC under way in Muscat Hills, and Barr Al Jissah announced the 169-unit Al Mina Residences in April 2017, with construction to start in early 2018 and finish by 2020.

New projects have the opportunity to set themselves apart from the competition, and niche housing targeting certain demographics may be one way developers try to get an edge, while working within the housing laws. “Oman’s real estate sector has an unmet demand for certain categories of specialised housing,” Said Nasser Al Rashdi, CEO of Sandan Development, a new local player established in 2016, told OBG. “For example, there are regulations that do not allow bachelors to live in commercial housing. Developing units for this demographic would improve compliance with current regulations.”

Hospitality

Hotel supply is set to rise substantially as Oman pursues its goal to host 7m tourists per year by 2040. To this end, it is investing some $1.2bn by 2025 in upgrades to Muscat International Airport, malls, tourism complexes and conference space, according to the World Travel and Tourism Council (see Tourism chapter). Hotel rooms, having more than tripled between 2005 and 2016 to 9600 keys, are set to rise by 3400 through 2018 and by another 9000 before 2021, as construction continues on several well-known brands, including the Westin, W, JW Mariott and Kempinski, according to CBRE. When complete, these could put further pressure on average room rates, which fell 8.9% year-on-year in the first half of 2017 to OR65.40 ($170) per night, and on average revenue per available room, which sank 6.9% to OR42.80 ($111), per CBRE data. Average occupancy, however, rose 1.5 percentage points to 60.9% in that span, according to STR Global, a hotel market data firm.

Office & Retail

Office supply is also growing despite price pressures, with a host of projects under way – especially in the capital city’s districts of Azaiba, Ghala and Al Khuwair. Office rents in Muscat’s central business district (CBD) had dipped by 14.3% in the 12 months to September 2017, according to Cluttons. However, this is partially a function of the city’s expansion westward – something that is creating new opportunities for investors and developers. “At one time, nearly everyone had offices in the CBD,” Reddy told OBG. “Now, as more Omanis join the workforce and build homes, there is no more land there and many are moving down the coast to places like Azaiba, which was quite undeveloped 20 years ago but is now prime property.” Such suburban migration is fuelled in part by local tastes: “Generally speaking, Omanis prefer villas to apartments,” Reddy said. “Often they will commute 30 minutes to their job in the CBD to live in a villa on the outskirts.” However, because much of the current supply has inadequate parking or deteriorating quality, CBRE expects monthly rents for grade-A space to stay stable in the short to medium term, at around OR8-10 ($21-26) per sq metre, until newer supply is completed.

Retail space in the capital, meanwhile, has grown to 345,000 sq metres as of end-2016 after several new shopping centres opened in 2015, including Avenues Mall, Panorama Mall and Oasis Mall. This is set to grow further with the coming opening of the $234m Palm Mall (105,000 sq metres) in late 2018 and the $715m Mall of Oman (137,000 sq metres) in 2020. These options illustrate the concentration of retail space in the sultanate, which is far from exhausted in other cities. “Oman’s demand for shopping malls and retail space has not yet been fully met, especially in areas outside of Muscat,” Abdulrahim bin Sulaiman Al Abri, group general manager of Amjaad Holding, told OBG.

Financing & Subsidies

Due to the legal land entitlement and a high savings rate, most Omanis purchase property with cash rather than financing. Already low, the number of mortgage contracts fell by 19% to around 10,500 in the first half of 2017, while their value shrank by 81% to OR798m ($2.1bn). Housing loans made up 9.8% of bank credit in 2016, according to the Central Bank of Oman, with the average interest rate at 5.1% as of early 2017. Moreover, few Omanis have the need for social housing: 88% of them own their own home, according to the latest household survey by the NCSI in 2012.

As for expatriates, who make up around 45% of the population, half of them live in employer-provided accommodation; 49% rent, as they are not permitted to own freehold property except in ITCs, where rents are often prohibitive; and less than 1% owned their own home, according to the survey. On average, Omanis spend less than one-tenth of their monthly income on housing, compared to more than one-third for foreigners.

The government has reduced the scope of assistance programmes as part of recent cost-optimisation measures. In 2016 alone it slashed total subsidies – on fuel, utilities and housing – by 64% to OR400m ($1bn). Consequently, the number of state-subsidised housing loans approved that year was just 26, down from 710 in 2015, with their total value falling from OR21m ($54.5m) to OR780,000 ($2m), according to the NCSI. Cases of housing assistance, meanwhile, fell from 1957 to 115 in that span, with their total value dropping from OR48.4m ($125.7m) to OR2.8m ($7.3m).

Rule Change

Among recent regulatory changes that have impacted the sector, perhaps the most significant came in January 2016 with the MoH’s decision to raise the real estate transaction fee that it and municipalities charge to register sales and leases, from 3% to 5%. The change, unannounced to prevent people from upfronting transactions to avoid the fee increase, is waived for transfers of property to a next of kin, but does apply to title deeds on government land grants. The reaction from sector players was mixed. Many industry stakeholders who spoke with OBG expressed fears that rather than pay the higher fee, many people would either understate the value of deals; pass the increase on to tenants, making prices less competitive; or let leases simply go unreported.

While such activity is hard to gauge, wide consensus exists that some combination of these factors has likely exacerbated the sector’s recent fall in transaction values. Steel of Savills told OBG that a reduction in the rate rather than an increase would be more reasonable and encourage transparency, while Salim Al Ghammari, a member of the Muscat Municipal Council, told local media in 2016 a 1% fee would boost the transaction reporting rate to 95%.

Upcoming Reforms

Other changes with potentially large impacts are on the horizon. One is the introduction of a 5% value-added tax (VAT), a measure agreed upon across the GCC. While Omani authorities announced in late 2017 that they will implement VAT beginning in 2019, it is yet not clear whether the tax will apply to real estate sales or leases on top of the 5% fee already charged by the MoH, or to related consultancy services. A survey of 140 financial analysts conducted in autumn 2017 shows that the tax will likely raise the costs of real estate investment, and that some of the extra cost may be passed on to investors, albeit without substantially deterring activity.

A second debate concerns expanding foreign freehold ownership beyond ITCs, which the MoH proposed to Parliament in March 2017, submitting new draft rules for consideration. If enacted, these could “boost the real estate market by allowing foreigners to absorb unused capacity”, Hisham Moussa, CEO of Alargan Towell, told OBG. Also backing the legislation is Mohammed Al Ghassani, deputy chairman of the Shura Council, who told a conference in May 2017 that it could play a big role in developing the real estate sector. “There are at least 60, 000-70,000 expats living in Oman who can spend around OR30,000-50,000 ($77,900-130,000) each to avail this option,” he said. Others worry it could drive up prices and make it harder for some locals to buy property, including National Mass Housing’s Al Masalti, who told OBG this might “inflate prices and have negative effects on real estate business.”

Reit

The government is also working on a legal framework for REITs, as one of 121 initiatives in the government’s Tanfeedh diversification plan, spanning 2016-20. In December 2016 draft regulations were presented to stakeholders, whose feedback is now being incorporated into amendments at the MoH before approval by Parliament and the Cabinet.

If the framework materialises, this could open an entirely new trading market for Oman, following the examples of the UAE, Bahrain and Saudi Arabia. “We have already seen some appetite from the market,” Sheikh Abdullah bin Salim Al Salmi, executive president of the Capital Markets Authority, told local media in March 2017. Savills’s Steel, however, told OBG, “It will take 2-3 years at a minimum for REITs to become fully established.”

Macro-Level Challenges

Alternatively, several broader factors could constrain the sector’s growth in the next few years. One is the country’s budget: in 2017 the government boosted foreign borrowing by 133% to help cover a OR3bn ($7.8bn) deficit and keep spending cuts low, at just 1% – a tack that will continue in 2018, as 84% of its projected deficit, stable at OR3bn ($7.8bn), is to be covered by foreign and domestic borrowing.

Another is the price of oil, which would have to sustain its late-2017 rally to avoid putting further pressure on spending; hydrocarbons still make up over one-quarter of Oman’s economy, down from close to half in 2014. The country’s peg to the dollar has also pushed up the rial lately, overvaluing property and denting Oman’s competitiveness – a trend that may continue as the US Federal Reserve unwinds its balance sheet per its September 2017 announcement and further raises interest rates, which would strengthen the dollar.

Outlook

Prognosis for the real estate sector is unclear given the host of contingencies affecting its future, not least the direction of oil prices, and the pace of reforms and supply growth. Yet, as the population and national wealth increase, and Oman further improves its reputation as a stable place to do business, it would appear to be only a matter of time before the sector regains much of the momentum it enjoyed in the decade leading up to 2014.