Real estate prices soften in Oman, but market fundamentals remain strong

Sentiment in Oman’s real estate sector remains cautiously upbeat in the face of a downturn in the global price of oil and the consequent impact on government expenditure plans in the sultanate. Residential rental prices have softened in some areas, with landlords preferring to trim prices to avoid untenanted periods in their properties, but in new fashionable developments lettings and sales have been holding firm, according to estate agency records. This is particularly true in the planned communities known as Integrated Tourism Complexes (ITCs), which have been popular with Omanis as well as international buyers, who are allowed to purchase freehold properties in these developments.

In the retail and hospitality sectors several ambitious projects are either in the planning stages or under way, driven by optimism among larger corporate investors about the medium-term prospects of a country with a rapidly growing population and a long track record of peace and stability. A westward tilt in the axis of commercial activity in Muscat, away from the traditional Central Business District (CBD) in Ruwi and towards the areas around Muscat International Airport, coupled with a pipeline of new office space under development, appears to offer a good bargaining position for businesses interested in occupying new properties, or seeking a reduction in their rents on existing properties.

Underlying Strength

Among the key drivers of demand for housing in Oman is rapid population growth. World Bank statistics indicate that the sultanate’s population rose by an average of 8.5% per year from 2011 to 2015 – and in 2015 alone it grew by 5.8%, the highest rate of any country that year.

Projected demand from future generations is also strong at the end of 2015, with some 57% of Omani citizens under the age of 25. Younger Omanis keen to develop an investment portfolio were also credited with driving demand for newly completed apartments in 2015. Real estate services firm Savills estimated that 75% of apartment sales in central areas of Muscat in the second half of 2015 went to young citizens planning to rent the properties out.

Omani nationals have also been driving investment in the ITCs, partially on a buy-to-let basis, but also because many choose to live in the new communities themselves. “About 50% of our buyers are Omanis, and although they tend to prefer villas, among the people buying apartments are younger people and couples who have retired,” Nasser Al Sheibani, CEO of Al Mouj Muscat, told OBG.

Oil Price Impact

The global oil price has had a significant impact on government revenues and GDP in Oman, and the knock-on effects of this may take time to filter through to all areas of the economy. Data from the US Energy Information Administration (EIA) shows that the price per barrel for Brent crude averaged $98.89 in 2014, falling to $53.32 in 2015, and tumbling further still in the first half of 2016, with the EIA predicting an average price for the year of $41.60 in August 2016. Data from Oman’s National Centre for Statistics and Information (NCSI) show that oil and gas accounted for 84% of state revenues in 2014 but fell to 79% in 2015; as a share of GDP, it fell from 45% of GDP in 2014 to 33% in the same period. The government of Oman, having spent OM13.4bn ($34.8bn) in 2015, reduced its budget for 2016 to OM11.9bn ($30.9bn) in anticipation of continuing declines in oil revenues The impact of this abrupt change in the country’s income may take time to be felt on the sentiment of those interested in buying residential property. Almost half of all working Omani citizens are cushioned from the negative effects of the downturn because they have secure public sector jobs. In 2015 NCSI data showed 193,965 Omanis were working for the government or state companies, or 84.5% of the public sector workforce. However, in 2015, 209,620 Omanis were working in the private sector, with NCSI reporting that 11% of the 1.85m private sector jobs in the sultanate were held by citizens. The remaining workforce of 1.64m is made up of expatriates working on a visa. Job security may be more of a concern for Omanis in the private sector, particularly those employed in oil and gas or sectors reliant on public contracts, although a redeployment strategy put in place by the government has so far circumvented job losses for Omani nationals.

Home Loans

In its 2015 annual report the Central Bank of Oman (CBO) noted that personal loans, including housing loans, constituted 41% of all credit issued by conventional banks in Oman in 2015, representing a value of OR7.33bn ($19bn). Of this, 8.3%, or OR608m ($1.6bn), was for residential mortgages. The Oman Housing Bank, which was established to offer long-term loans to citizens, had a loan account of OR373.6m ($970.3m) in December 2015, up from OR334.6m ($869m) a year before. In the mid- to high-end of the market, many Omanis are cash buyers.

“Very few Omanis buying properties in ITCs are using mortgages, as there is a lot of liquidity in the Omani population,” Christopher Steel, managing partner of Savills Oman, told OBG.

Property Transactions

NCSI data for January-September 2016, the latest available, shows there were more than OR7bn ($18.2bn) in property transactions, a 130% increase on the same period the year before and surpassing the 2015 annual total of OR4.14bn ($10.8bn), which itself had been up 43.7% on 2014. In the January-September 2016 period there was an 8.1% fall year-on-year (y-o-y) in the number of sales contracts and a 20.3% drop in the value of sales contracts, down to OR756m ($2bn). In contrast, mortgage contracts rose in number by 5.1% and in value by 195% to reach OR6.7bn ($17.4bn).

The number of title deeds issued in the first half of 2016 stood at 138,5633, representing a y-o-y increase of 31%, according to local media reports. However, there was a marked 14.6% fall in the number of these issued to GCC citizens, who are allowed to own property outside the ITCs, from 1165 in January-May 2015 to 995 in the first half of 2016.

Of deeds issued in the first half of 2016, 45% went to Kuwaitis and 44% to Emiratis, followed by Saudis (4.3%), Bahrainis (3.4%) and Qataris (3%). The highest proportions of title deeds granted to GCC nationals were in Al Batinah North, with 30.5% and 303 owners, and Dhofar, with 29.2% and 291 owners. Salalah in Dhofar is a popular summer destination for many Gulf nationals from June to September as it enjoys cool, wet monsoon conditions, known as the khareef, in the summer months and has a lush green landscape. In 2016 almost 480,000 Gulf nationals visited Salalah between June and mid-August, approximately a 25% increase on 2015, according to NCSI data.

Foreign Buyers

It is thought that the opening-up of property ownership rules in Oman could help encourage more international buyers to follow the example of Gulf nationals and purchase plots of land in other regions of the country. Some within the real estate sector are also calling for further liberalisation of the investment climate in the sultanate.

“By liberalising regulations regarding investing in Oman, the country has the potential to become more attractive for companies and investors,” Ahmed Al Rahbi, CEO of Thuraya Muscat, told OBG. “New projects and developments would bring in additional expatiate workers and labourers, which would help reinvigorate the real estate market.”

Oman has chosen to concentrate foreign ownership in the ITCs, most of which are in the Governorate of Muscat. The ministerial and royal decrees that paved the way for ITCs were issued in 2007. Although developers were given the choice of selling properties on a leasehold or freehold basis, for the first time international buyers could buy freehold land and property with unrestricted rights of use and transfer. With encouragement from the Ministry of Tourism, which saw ITCs as a channel for inward investment and as a means to help diversify the economy, 14 ITC projects were licensed in 2008. However, the global financial crisis that began that summer stalled all but six of the projects, though in 2016 Savills reported that work on four other developments may go ahead.

Project Pipeline

Master planners for the projects that did proceed and are continuing to expand and sell include both Omani and foreign companies. Muscat Hills at Airport Heights is being developed by the Oman-based Badr Group, while another of the country’s conglomerates, Zubair, is behind the Bar Al Jissah Residences. Orascom, a conglomerate owned by a member of the Egyptian Sawiris family, is developing ITCs with Omran, a state-owned development company, under the Muriya brand, with the government holding a 30% stake. Their developments include the ITCs at Jebel Sifah just outside of Muscat and Salalah Beach in Dhofar. In addition, the Emirati retail, hospitality and property giant Majid Al Futtaim continues to develop Al Mouj, originally called The Wave, in Muscat. In Steel’s opinion the ITCs that have succeeded have had a value proposition for local investors rather than focusing purely on international buyers seeking a holiday home. “Muscat Hills and Al Mouj are in the correct place because they are close to the new downtown of Muscat and demand for housing is strong in urban areas,” he told OBG. “In comparison, ITCs aimed purely at the tourist sector outside the established urban areas are seeing lesser demand at present.” However, developments such as Al Mouj are continuing to market their properties at several niches in the marketplace, including international investors seeking a second or third home.

Cosmopolitan Living

The template for most of the ITCs has followed a roughly standard model: residential villas and apartments, retail and food and beverage outlets, hotels, a golf course and a marina. For potential investors, a deciding factor when considering a purchase can be the extent to which the ancillary components of the community have been delivered. There is ongoing and planned development at the main existing ITCs in Oman, but some are more complete than others. At Muscat Hills, two residential phases and an 18-hole golf course are complete. The 270 apartments in its Links development sold quickly in 2015, and homes in the Pearl Muscat part of the complex have also been released onto the market. Construction tenders were being invited for the 250-room Hotel Intercontinental Golf Resort and Spa at Muscat Hills in August 2016, with the facility due to open in September 2018. At the two Muriya developments at Jebel Sifah and Muscat, the first hotels are operational, with the Sifawy boutique hotel at Jebel Sifah offering 52 rooms plus 12 one-, two- and three-bedroom hotel residences, while the three hotels at Salalah Beach include an 82-room boutique establishment, a 400-room Rotana, and the Al Fanar Hotel and Residences, which opened with 218 rooms in December 2015.

Al Mouj Muscat is being developed to include 6 km of seafront. With the first 10 residential phases of 1600 homes already completed and handed over, Al Mouj is home to more than 4000 people, with 70 nationalities represented in the community, which has a 400-berth marina, an 18-hole championship golf course, a retail complex and a kindergarten. A number of new residential phases are currently under construction at the site, along with a 309-room seafront Kempinski Hotel, which will also offer 68 hotel apartments. In addition, a new contract for 200 serviced apartments was being signed in 2016.

New Markets

Although the downturn in the oil and gas sector is a concern for the developers, they are looking beyond the Arabian Peninsula and targeting growing numbers of affluent consumers from India and East Africa. “We decided to introduce this new strategy of going out of the country to market our products, to reduce the risk of relying on the local market, and we have an advantage in that we have completed many properties, and have showhomes and villas for people to visit,” Al Sheibani told OBG.

Raising The Bar

Developers working with a more modest budget than the ITC master planners are facing challenging times, with an increase in supply of residential properties coinciding with a reduction in demand. The downturn in the oil and gas industry has seen the composition of expatriate professionals living and working in the sultanate change. NCSI data released in August 2016 showed that while overall numbers of expatriates has grown, the number of people from overseas with qualifications above a secondary school diploma decreased by 1234 from December 2015 to July 2016. At the same time tenants continuing to work in the sultanate are being offered discounts by landlords to renew their leases, with industry observers reporting a drop of 25% in rents for some two-bed apartments and as much as 10% on villas. Savills has noted a change in the type of white-collar expatriate tenants looking for properties, with the number of executives on longterm contracts and accompanied by families falling, and the number of younger employees working for international firms on shorter contracts rising.

The result is that clients are increasingly looking for apartments with shorter, more flexible leases and facilities, such as swimming pools and gyms. Mohamed Al Kindi, CEO of the Majan Development Company, told OBG, “We see a lot of growth potential in the hospitality sector. Many of the hotel offerings are at the high-end, whereas there exists a huge unmet demand in the three-star range.”

The demand for furnished apartments is also on the rise, a trend partially reflected in the construction of new branded hotel apartments at Al Mouj, which may appeal to business clients on short contracts as well as tourists. From 2014 to 2016 a number of apartment buildings came onto the market as smaller private developers delivered projects on plots of land granted by the government in 2010 and 2011. Many were built with limited parking and before utilities had been connected to the sites. In a market favouring tenants, the landlords of these properties are facing significant challenges in achieving a return on their investment. In contrast, agents have seen much better occupancy in buildings that have facilities such as swimming pools, health clubs or gyms and shaded parking areas.

Residential Prices

New developments in the residential market are affecting the sales and rental prices estate agents are seeing in different parts of the market in Muscat. In the first quarter of 2016 Savills reported sales prices from OR48,000 ($124,700) for a one-bedroom apartment in a higher-density apartment building in Muscat Hills to OR1.3m ($3.4m) for a villa with more than five bedrooms fronting the beach or marina at Al Mouj. Beyond the ITCs, Savills reported new off-plan onebed apartments starting at OR33,000 ($85,700) in Bausher, OR30,000 ($77,900) in Ruwi and OR25,000 ($64,900) in Al Mawella, with three-bed apartments in each of those districts achieving maximum sale prices of OR75,000 ($194,800), OR65,000 ($168,800) and OR40,000 ($103,900), respectively. In the rental market, ITC rents in Muscat Hills and Al Mouj have remained firm, ranging from OR725 ($1880) per month for two beds to OR2300 ($5970) per month for four beds in Muscat Hills and from OR850 ($2200) to OR2500 ($6490) per month in Al Mouj for comparable properties. In Bausher, Ruwi and Al Mawella, monthly rents for two-bed properties start at OR600 ($1560), OR300 ($779) and OR350 ($909), respectively, rising to maximum rents on four-bed units of OR2000 ($5914), OR500 ($1299) and OR800 ($2078).

Middle-Income Homes

The developer Alargan Towell, which targets its developments at middle-income citizens, has built 123 homes at its Beyout Al Faye development in Al Khoudh and 112 units at Al Waha in Barka, a site that will eventually accommodate 817 homes. Also under development is a mid-market ITC complex featuring a lagoon and a sea frontage due for completion by the end of 2018, comprising three hotels with 530 rooms in all, 259 villas, 55 townhouses, 266 apartments and three buildings containing 476 serviced apartments. Hisham Moussa, CEO of Alargan Towell, told OBG that he believes property targeting middle-income families has a bright future in Oman. “Given strong local demand for real estate, and that as an asset class it tends to be viewed as a safe haven investment, a bubble in the market is unlikely, though the market will stumble,” he said. “The government might consider reviewing the regulations which govern who can buy property as, with proper regulation, allowing non-Omanis to purchase property outside of ITCs would help reinvigorate the market.”

Office Space

The migration of some banks and government departments from Ruwi to new commercial areas in West Muscat has freed up office space in the capital. At the same time the slowdown in the economy means clients are able to demand more for their money, with high-quality developments able to command much better prices. Commercial tenants are looking for finished interiors rather than core and shell, and are attracted by well-managed office buildings with security and reception desks. Parking remains a major concern for any commercial tenants. Multinational firms typically require one parking space per 25 sq metres of office space, but a survey at the end of 2014 by Savills found that only four commercial buildings in Muscat met this criteria.

“The demise of Ruwi as the CBD was caused by a lack of parking,” Steel told OBG. “We caution private landlords not to make the same mistake if they want to persuade tenants to rent their properties.”

Retail

The level of investment in Oman’s retail sector earned Muscat a place in the top 25 of real estate consultancy CBRE’s global shopping centre development report in 2015, ahead of any other city in the Middle East. Its ranking came as a result of the 100,000 sq metres of new gross leasable area (GLA) added to the capital in 2015, which comprises the 72,000-sq-metre Oman Avenues Mall, owned by LuLu Group International, the Emirati firm behind LuLu’s supermarkets and hypermarkets; and Panorama Mall, which has 21,000 sq metres of retail space and is owned by Allied Real Estate.

However, there are more retail facilities to come, with Dubai’s Majid Al Futtaim pledging to spend OR515m ($1.3bn) in the sultanate by 2020, bringing its total investment in the country to OR705m ($1.8bn). In 2017 it is set to open a OR15m ($39m) community mall, My City Centre Sur, with a GLA of 16,500 sq metres, followed a year later by the OR45m ($116.9m) City Centre Sohar with a GLA of 40,000 sq metres. The OR275m ($714.2m) Mall of Oman is due to open in 2020, featuring 350 retail outlets with a GLA of 137,000 sq metres.

Furthermore, in 2016 Omani firm Tilal Development Company invested OR50m ($129.9m) in expanding its Grand Mall Muscat, commencing a new development, which stands to add 100 new stores on 30,000 sq metres of GLA. Overall, major shopping malls in Oman had 358,540 sq metres of GLA in 2016, with an additional 511,008 sq metres announced or in the pipeline before 2020.

Outlook

Although the macroeconomic climate may have given tenants and buyers an opportunity to demand more value for their investment, prices and rents for high-quality homes and offices appear set to remain reasonably buoyant in the short term. At the same time major retail developers are calculating that Oman’s rising population will result in ever-increasing footfalls and returns in shopping centres.