M-E Property Boom Still Going Strong

Source : The Business Times, October 16, 2007

FAZLUR RAHMAN KAMSANI and COLIN TAN say markets in GCC nations are gradually primed for another growth phase

CONTRARY to perceptions in some quarters, the real estate boom in the Middle Eastern markets of the GCC (Gulf Cooperation Council) countries has yet to run its full course. While it is true that these markets are presently in a consolidation phase compared to the frothy days of explosive growth between 2004 and 2006, there are indications that the markets are gradually primed for another - more sophisticated but less volatile - growth phase in the not-too-distant future.

The much anticipated sharp correction - widely expected to occur this year - has not materialised. In general, prices and rentals have been very sticky downwards. The impact, if any, has been reflected in the market more in terms of slower sales and fewer transactions rather than on actual prices.

Instead, the strong upward pressure on housing rents in some of the GCC countries such as the UAE (United Arab Emirates) and Qatar has led them to resort to legislation to put a cap on the increases. However, given the strong demand, many in the real estate industry are not optimistic that these new rules will produce the desired result.

A major reason for the absence of any major correction in the real estate markets has been the booming economies of the GCC countries. While spiralling oil prices may have led to astronomical growth in nominal terms, what is often overlooked is the fact that there has also been real economic expansion. It has not been all hype and no growth.

After a robust performance by the GCC economies in 2005 and 2006, real GDP growth for the region is expected to grow by a more moderate 5 per cent this year. The GCC economies grew by 6.8 per cent in 2005 and by about 6 per cent last year. In nominal terms, the GCC economies have more than doubled to an estimated US$723 billion between 2001 and 2006. More importantly, for the next growth phase of the real estate sector, the GCC countries have recognised the need to diversify their economies and reduce their dependence on the energy sector. This has led to more development activity in other sectors of the economy and more demand for other types of real estate other than housing.

Given the small local population base, especially in the UAE and Qatar, the strong job growth accompanying the economic expansion has led to a strong continuous inflow of more and more people, inevitable if economic growth is to be sustained. Therefore it comes as no surprise that these two GCC countries have been leading the way in terms of real estate demand.

Overall population growth in the GCC countries has averaged 3.4 per cent per annum in the last four years, among the highest rates in the world. While this growth was led by the inflow of migrant workers to meet strong demand for labour, it was also supported by high fertility rates.

Rapid population growth combined with a rise in the participation rate, especially among women, has doubled the economically active population over the past decade. The population aged 15 to 60 years hit 23 million at the end of 2006 (constituting 64 per cent of the total). Of these, 12.6 million were employed.

Given the strong migrant inflow in Qatar and the UAE, they are also the ones to have experienced the highest inflation rates in the Gulf, particularly in the housing sector. According to industry estimates, the average housing rentals rose by over 80 per cent in Doha over the past two years and by about 60 per cent in Dubai, compared to just over 20 per cent in Riyadh.

Moreover, rent as a proportion of household income has reached 33 per cent in Qatar and 30 per cent in the UAE, compared to 19 per cent for Saudi Arabia. Inflation in the region now ranges between 2 and 12 per cent.

New Dynamism

Inflation in the GCC countries is also driven by higher government expenditure - and in the current boom by the private sector as well - besides the usual demand/supply imbalances. Unlike the previous oil boom in the 1970s, private businesses have boosted their investment across a number of industries, providing the GCC economies with a new dynamism unseen in the past.

Higher oil prices combined with increased production levels have resulted in a massive fiscal windfall for the GCC economies. Oil revenues tripled between 2002 and 2005, rising from 25 per cent of GDP to 38 per cent. In contrast, growth had averaged 18 per cent in the 1990s. Growth in oil revenues in 2006 remained firm despite some slowdown as a result of a drawback in oil prices later in the year and output reductions due to cuts in Opec quotas.

Post 9/11, GCC countries are putting the current windfall from higher oil revenues to good use by investing a large part of it in the domestic economy. Domestic spending by governments has accelerated, averaging 14 per cent over the past four years.

While increased capital spending benefited mainly the energy sector, governments have also increased their spending on infrastructure and projects. In particular, spending on infrastructure has greatly improved accessibility all around. As a result, real estate values have been boosted throughout the region. Such planned government expenditure on infrastructure is expected to continue to be a strong driver of the real estate sector in the years to come.

Aided by the private sector this time around, project activity in the GCC region has also boomed, with governments sponsoring more than half of the projects launched since 2003. Around 600 government-sponsored projects worth in excess of US$200 billion have been launched since 2003 throughout the GCC.

While much of such spending has come from government bodies and government-owned entities such as national oil companies, there has also been a surge of projects resulting from private-public joint ventures. Although a large part of the investment focused on strategic sectors linked to oil and gas, there has also been increasing investment in infrastructure and real estate projects.

It is estimated that less than 20 per cent of the initiated projects have actually been completed as a result of slow project implementation caused in part by the shortage of construction materials. The bulk of planned investment remains in the pipeline and is expected to be a strong driver for growth in the coming years. Indeed, project activity accelerated in 2006, with work starting on some 252 mega-projects. More projects have started or are scheduled for implementation in 2007 with 250 projects worth US$250 billion currently in advanced execution stages. Another 261 projects worth US$281 billion are at the early planning or feasibility stage.

Amid continued huge investments by both the governments and private sector, the GCC countries have also recognised the importance of proper planning and for more orderly investments. For example, Dubai is now counting the costs of the haphazard development of the early years. The city is now experiencing a growing traffic congestion problem. This recognition for proper planning will provide the basis for the next and more sophisticated phase of the real estate growth cycle.

Fazlur Rahman Kamsani is executive director of Middle East and Islamic finance at property consultancy Chesterton International. Colin Tan is Chesterton International's head of research and consultancy.