Qatar's infrastructure projects aim to consolidate growth story

In 2014 Qatar’s real estate market officially surpassed its 2008 highs, with rapid expansion driven by a growing population, shrinking average household sizes and a shortage of available units in the residential sector. This expansion has not been painless, with rental and land price inflation putting the market, and wider economy, at risk of overheating. Determined to develop the industry sustainably, the government moved in 2014 to introduce legislative reforms aimed at strengthening stability and market confidence, while sound economic fundamentals and a host of major infrastructure projects launched under the auspices of Qatar National Vision 2030 (QNV 2030) is expected to boost the office and retail sectors well beyond 2015.

ON THE UP: Qatar’s real estate market reached record highs in 2014. According to the Qatar Central Bank’s (QCB) June 2014 real estate price index (REPI), which measures cumulative growth in real estate prices, average prices for land, commercial and residential properties exceeded their September 2008 peak by 20%. The QCB reported the REPI rose 21.5% in the first six months of 2014, compared to an uptick of 6.2% during the second half of 2013. Between September 2013 and September 2014, the REPI expanded by 43.5% and closed the year at 255.6, up 35.7% from end-2013.

In an August 2014 analysis of the country’s real estate market, Qatar National Bank (QNB) wrote that this rapid expansion suggests a potential overheating of the sector, although detailed assessment reveals that these changes are still well within the fundamentals of the state’s booming economy and strong population growth. QNB reports that a combination of base effect, or population growth, and income effect, or income per capita, have driven the market’s expansion, noting that its growth was within the scope of the combined base and income effect. “While base and income effect combined have increased by 345% since 2006, the QCB REPI has only risen by 326%, suggesting that real estate prices continue to be justified by Qatar’s economic fundamentals. Real estate prices, however, are reaching what may be an upper limit based on this analysis, suggesting possible overheating,” QNB wrote in its August 2014 report.

FINANCIALS: Listed real estate companies have witnessed strong recovery in recent years. According to the QCB’s 2013 annual report, the net profit of real estate companies listed on the Qatar Stock Exchange rose by 31.6% in 2013 to reach QR2.9bn ($794.9m), up from QR2.2bn ($603m) in 2012. Lending to the sector is also growing. QCB reports that real estate accounts for the largest share of private sector credit, with commercial banks’ credit facilities to the real estate sector increasing from QR102.1bn ($28bn) in December 2012 to QR108.7bn ($29.8bn) in December 2013, jumping by a further 15.5% over the course of 2014 to end the year at QR125.51bn ($34.4bn).

LEGISLATION: A good deal of new growth can be attributed to the government’s ongoing reform process. In 2004 the state relaxed rules for foreign real estate investments, triggering a spate of new developments including The Pearl led by United Development Company (UDC) and Lusail City headed by Qatari Diar, the two largest real estate projects in the country today.

Further legislative reforms will help maintain stability. In April 2014 Qatar promulgated Law No. 6 of 2014, the Real Estate Development Law, which regulates developers. Article 7 of the law establishes a requirement to commence and complete construction works specified in sales agreement and purchase contracts, which should help the market avoid crashes like those witnessed in the wake of the 2009 financial crisis.

Under the new law, any entity carrying out real estate development must obtain a developer’s licence from a designated department within the Ministry of Economy and Commerce (MEC). Licensure is open to both Qatari nationals and incorporated companies and, in a significant departure from previous rules, any company incorporated outside of Qatar can apply for a developer’s licence, provided its activities are limited to areas in which foreigners are permitted to own property.

Licensed developers are only legalised to sell off-plan units with consent from the MEC’s licensing department, and they are also required to open an escrow account for money received from the sales of off-plan units, and to submit cash flow forecasts for project completion, including construction milestones.

ESCROW: The establishment of escrow obligations is significant. Under the new law, the purchase price paid by customers for off-plan units is required to be deposited directly into an escrow account. Withdrawal is only permitted when construction milestones have been achieved, and subject to approval from the Ministry of Municipality and Urban Planning. For example, withdrawals may only be made when 20% of the project has been completed and can only be used for payment of construction costs, land purchase and marketing expenses. The account may not be used by the developer as a security for financing, a regulation that has been met with mixed response by stakeholders.

“Previously, you would work with your client’s money on a project. If this opportunity is removed, you will have to borrow from a bank, which will be difficult and expensive. I agree that it is necessary to protect buyers, but this has to be done without reducing the manoeuvrability of the developer,” Thomas Jivung, general manager of real estate group First Qatar, told OBG.

RESIDENTIAL: Residential demand has led growth in the real estate market, though rapid inflation in rental rates and land prices pose considerable challenges to sustainable long-term expansion. Doha’s city centre had historically been the most sought-after housing locale, with suburban development expanding over the previous decade into areas around the C, D, and E Ring Roads. At the same time, the West Bay business district has grown to become a desirable location for high-end residential as well as office developments.

There are 18 designated areas in Qatar where expatriates can own property – three on a freehold basis and the rest on a leasehold basis. Freehold areas include The Pearl, West Bay Lagoon and Barwa’s Dara, located in Fox Hills in Lusail, while popular leasehold areas still under development include Al Waab City, Musheireb, Doha Jadeed and the large-scale Lusail City project.

THE PEARL: The Pearl Qatar, developed by one of the country’s largest public shareholding companies, is a mixed-use development comprising 10 themed districts that include beachfront villas, townhouses, luxury apartments, five-star hotels, marinas, retail areas and restaurants. Situated on a 400-ha man-made island off the eastern shore of Qatar, roughly 20 km north of the downtown central business district, The Pearl was Qatar’s first international luxury residential development offering freehold title ownership to foreign investors.

RISING DEMAND: One- and three-bedroom apartments are the most sought-after properties at The Pearl, with real estate consultancy DTZ reporting that across the broader residential market, three- and four-bedroom villas in well-located compounds are the most popular properties in Qatar. Colliers International has forecast that residential demand in Doha will continue to grow over the short and medium term, highlighting that occupancy rates across the city are roughly 85%, with luxury gated communities standing at 97% occupancy, indicating ongoing demand at the top end.

The company projects that an additional 22,000 units will be completed between 2014 and 2018, noting that despite the surge in new available housing, Doha’s real estate market is expected to remain considerably under-supplied during the next five years, in the wake of ongoing economic expansion and infrastructure projects that will attract thousands of new residents.

According to Colliers International estimates, Doha’s total residential supply stood at 129,000 units as of June 2014, while demand stood at 177,000 units, creating a shortage of 48,000 units, representing 37% of existing supply. Although the company’s projections exclude blue collar labourers from the population in its demand projections, as these workers are typically provided with company-sponsored accommodation on the outskirts of Doha, Colliers reported that macro factors including shrinking household sizes and an increasing population have created the existing shortage.

CHANGING DYNAMICS: Household sizes fell from 5.01 in 2002 to 4.4 in 2014, even as Doha’s population has tripled over the previous decade, expanding from 744,029 to 2.26m as of December 2014. Shifting demographics and population growth have had a tremendous impact on residential supply, with shortages in both the high-end and affordable segments leading to potentially problematic rental inflation in 2014. Rent, fuel and energy comprise the largest portion of the consumer price index (CPI) basket, at 32.2%. In its “Fifth Stability Review”, published in 2014, the QCB reported that between January and July 2013 the rentals fuel, and energy index rose between 4.4% and 6.7% each month, keeping headline inflation above 3%. “We have gone back to a scenario where we have pretty strong rental inflation, particularly in the residential sector,” Mark Proudley, associate director of DTZ, told OBG. “Rental growth kicked back around the start of 2011, it continued steadily in 2012 and 2013, and it has been speeding up quite a bit in 2014.” Inflation has since gained momentum, and the QCB reported in October 2014 that population growth had driven significant demand for new residential units, with the CPI showing an 8.3% year-on-year (y-o-y) rise in housing rents in October, following September’s 8.1% y-o-y increase, and a similar 7.9% jump in August. Colliers reports that average rental rates during the first half of 2014 grew by 4%, or about QR725 ($199) per sq metre annually, and in its September 2014 “Qatar Economic Insight” report, QNB projected rental inflation will accelerate to 7% in 2014, up from 5.8% in 2013, and continue rising to reach 8.5% in 2016. “The prices are getting out of control. For a one-bedroom apartment at The Pearl, people are paying between QR12,000 ($3289) and QR13,000 ($3563) per month, when a fair price is closer to QR5000-6000 ($1371-1645). Half the time, the housing allowance people get from their employer is not enough to cover rent, so people are paying out-of-pocket,” Khadija Jackson, project choreographer at real estate group Coreo, told OBG.

As a result, the sector is seeing increasing interest in segments outside the luxury market. “There has been a shift in the requirements from the government,” Salman Mohamad Al Muhannadi, Group CEO, Barwa Real Estate Group, told OBG. “There is a huge demand for low-income housing across the country.”

CONTRIBUTING FACTORS: Land prices also play a role in rising rents. Roots Real Estate director, Ahmed Al Arouqi, reported a 500% increase in Doha’s land prices between 2010 and 2014, according to an April 2014 report. Prices in West Bay hit QR2500 ($685) per sq foot, while land prices at The Pearl and Lusail City stood at QR2000 ($548) and QR1500 ($411), respectively.

In September 2014 QNB reported that land prices rose 52.7% during the first six months of the year. According to the bank, land is the main cost in expanding housing stock, resulting in land prices that are highly correlated with future movements in rental prices, and reporting a six-month lag between a rise in land value and an uptick in rental rates. This makes land one of the most important factors of overall rent inflation.

DELAYS: The market’s ability to meet demand has also been hindered, in part, by delays in receiving necessary permits from the Civil Defence Department, a challenge that has extended across multiple segments. In January 2014, for example, developers at The Pearl told local media that 1200 units in its Medina Centrale were ready to be occupied, but were still awaiting final approval from the department. In the same month, developers of the Dragon Mart shopping facility, which had planned to open in December 2013, reported that the delayed launch was caused by licensing issues.

“It is confusing; people say there is a lot of empty space in the office segment and some residential developments, but there’s not actually a lot of availability. One of the primary reasons for this is that the stock is built, but not ready for occupation because the approval process has been delayed. You also have cases where government entities or corporations have rented space but not yet taken occupation,” Proudley told OBG.

LUSAIL: Moving forward, a significant amount of long-term residential demand will likely be met by Lusail City, a 38-sq-km development across four islands comprising 19 mixed-use residential, entertainment and commercial districts. The city is expected to house 200,000 residents, 170,000 employees and 80,000 annual visitors on completion, with officials estimating the city’s population will eventually reach 450,000 people.

“The basic infrastructure in North and South Lusail will be finished in early 2015, alongside the portion of Lusail Expressway in Lusail. By 2017 all of the other associated works are expected to be completed. Construction in Fox Hills is starting up, and Lusail is now issuing building permits for construction in this area,” Essa Mohammed Ali Kaldari, CEO of Lusail Real Estate Development Company, told OBG.

MSHEIREB : In the more immediate future, the first three phases of the $5.5bn Msheireb Downtown Doha development, which will add new residential, retail and office space, are slated to open in 2016 (see Construction chapter). “About 50% of the project is expected to be completed by 2015 and the entire project up to Phase III will be finished by the end of 2016,” Abdulla Hassan Al Meshadi, CEO of Msheireb Properties, told OBG.

FINANCING & SALES: Colliers International reports that 2012 marked a turning point for housing sales following a three-year slump, with average prices increasing steadily in the years since. According to the firm’s Q2 2014 report, residential sales prices grew by 4% during the first half of 2014, with average prices now approaching QR15,000 ($4111) per sq metre. DTZ, meanwhile, reported in September 2014 that residential sales at The Pearl dominate the freehold market, with prices averaging between QR12,000 ($3289) and QR14,000 ($3837) per sq metre, while townhouses and select luxury apartments can command up to QR17,000 ($4660) per sq metre.

With the introduction of freehold property for non-nationals commencing in 2004, the mortgage market has also shown steady expansion, as the government encourages commercial banks and home-financing firms to improve their offerings. Notwithstanding, there is still plenty of room for growth, with the state’s mortgage market valued at just 14% of GDP as of January 2014, according to a report by Global Property Guide.

OFFICE MARKET: Much like the residential sector, Doha’s commercial real estate segment has historically been concentrated in the city centre, on the A and B Ring Roads, as well as Grand Hamad Avenue. Since the 1990s, however, demand has increasingly shifted towards the West Bay and Diplomatic Districts, and while some firms have reported an ongoing oversupply of office space, availability is shrinking fast as the state welcomes an influx of foreign firms in the wake of large infrastructure projects under QNV 2030.

Colliers International estimated grade-A office supply in Doha at 2.5m sq metres at the end of 2013. DTZ reports that an additional 300,000 sq metres of new stock will come on-line in West Bay and the Marina District in Lusail in 2015, noting that the market also offers 134,000 sq metres of vacant prime accommodation. Still, many stakeholders agree that commercial oversupply is not as extensive as visibly empty office floors would indicate; Colliers International projects cumulative demand to rise to 3.4m sq metres by 2019, while DTZ projects that average office rental rates will continue to increase into 2015, from present levels of around QR250 ($69) per sq metre.

OUTLOOK: With the market now officially recovered from the financial crisis, real estate in Qatar is poised to remain on an upward trajectory well beyond 2015. Although rental and land price inflation pose challenges to future growth, legislative reforms aimed at avoiding the pitfalls of an overheated market should help keep the industry on a steady path.

New segments such as property management services like those requested by Lusail’s developers, are also expected to expand. “For facility and property management firms to truly thrive in Qatar, building owners must recognise these services as investments that prolong building life spans and add value to the project,” Abdulla Jobara Al Rumaihi, CEO of Waseef, told OBG.