Last year’s collapse of share prices on many Gulf equity markets prompted fears that booming real estate values would be the next to suffer. These fears may well prove to be unfounded because, unlike the bourses, many of which saw local retail investors pouring in money on a highly speculative basis, the real estate sector is underpinned by an economic logic. Rents are rising, accommodation is in short supply, and with predicted annual GDP growth rates of 11% in Dubai and 9% in Qatar, the region anticipates extremely fast population growth as initiatives such as Internet City, Media City, Dubai International Financial Centre, Qatar Financial Centre and Pearl-Qatar expand and create jobs. To meet expected demand, developers such as state-owned Dubai’s Nakheel and majority state-controlled Emaar, together with private construction company Arab Tech, are building property to house people for new and expanding businesses.
For Dubai’s growing population of expatriate workers, owning a freehold property provides a real stake in the society; for some people, buying a property means buying security too. A non-UAE national who buys a finished property in Dubai obtains a residence visa. An influx of Iranian entrepreneurs – already a sizeable community in Dubai – has been reported since August 2005 when Iran’s president Mahmoud Ahmadinejad assumed power. If Dubai meets its ambitious economic growth targets, officials anticipate that 885,000 workers, many of them in skilled, higher paid jobs, will be required to join the workforce. They will need somewhere to live.
Nevertheless, Roy Cherry, real estate and construction analyst at Shuaa Capital in Dubai, is expecting supply to begin to catch demand from early 2008 onward. “We expect a minimum of 125,000 units to hit the Dubai market alone between 2007 and 2009, of which the majority is due in 2007 and 2008. Supply-side effects of the present pace of development activity will likely soften rents, by as much as 25% in certain key developments.” However, this does not constitute a crash, so much as a return to sustainable levels, given that rents have climbed by 20-25% per year since 2002.
Moreover, Tristan Clube, managing director of Tethys Advisors, consultant to a number of Gulf investment funds, notes that across the region, property market trends are becoming very localized, as certain commercial developments are more successful than others, and transport bottlenecks are becoming increasingly severe, especially in Qatar. “There are tremendous traffic problems building up in Doha City, and travelling from there to the Pearl development is not practical. This means residential development in Pearl near the new central business district has very good potential,” he tells Emerging Markets.
By contrast, there are risks on the contractor side: Dubai Multi-Commodities Centre, one of the emirate’s most high-profile initiatives, suffered construction delays in 2006 due to materials price inflation and labour shortages. Standard & Poor’s estimates that these hold-ups could cut profitability by 20% as rental streams are set back. In response, the Centre’s management dismissed Nakheel as project manager, and took direct control.
Clube notes that these difficulties can be even more severe in Qatar. “Those developers that are able to deliver the project on time and on budget are going to be the successful ones. On some projects, there seem to be nationality quotas for workers’ visas, so there are fewer people working on these projects in Doha than in Dubai.” In Dubai, the contractor and sub-contractor market has developed further, helped by clearer government regulations. “This has allowed companies like Arab Tech to be extremely successful, because it is well positioned to expand in line with demand for its services,” says Clube.
Bahrain presents a contrast, because supply from projects such as the World Trade Centre and Financial Harbour looks set to outstrip demand for the next two to three years, according to Bryan d’Aguiar, head of research at Sico Investment Bank in Manama. “But commercial space in Dubai and Qatar is clearly very difficult to get, with some projects filled two years before completion, so there should continue to be a trickle-down effect into Bahrain,” he tells Emerging Markets. (For more analysis on the Bahrain economy, see "The financial centre that's ahead of the game.")
The residential market is better supported in the short term, as most major projects cater for the expatriate community, including from other Gulf states. In this regard, plans to complete a causeway connection to Qatar by 2010 could transform the market, says d’Aguiar. “Qatar is one of the world’s wealthiest countries, and companies such as Dubai’s al-Futtaim real estate and Singapore’s Capital Land are already developing projects designed to meet demand from Qataris for holiday homes in Bahrain.”
The Gulf property markets therefore look set to become increasingly interdependent, even as the prospects for developments within each state start to diverge.