Reports that state carrier Qatar Airways has agreed to rent the entire Barwa City real-estate development from the local Barwa Real Estate Development Company in a deal worth an estimated QR7.1bn is the latest sign of government support for Doha’s ailing real estate sector.

Although the deal is not yet confirmed, the duration of the rental agreement is expected to be five years. Barwa City consists of 128 buildings with 6,000 residential units. The development can accommodate up to 25,000 people in total. The development is expected to be finished by September 2012.

This is not the first time that a state-backed firm has agreed to take over large-scale real estate development. Qatar Petroleum (QP) recently signed a framework agreement with Barwa that will see its Barwa Financial District becoming QP’s headquarter complex.

The state has been forced to step in to help developers due to a current oversupply in Qatar’s real-estate market. Such agreements are expected to become more common in the next few years.

“Qatar is likely to see more of that type of activity in the future where semi-government organisations leasing large real-estate developments that have been built by large government-backed developers. I’m sure we will see more of this over the next couple of years,’’ says Mark Proudley, associate director, DTZ Research, Qatar.

Despite a lot of international exposure as a result of its successful bid to host the World Cup in 2022, Qatar’s real-estate market is currently facing a number of challenges.

“’There generally seems to be a theme of oversupply, too much stock and not enough demand,’’ says Ian Gladwin, chief executive, Cluttons Middle East.

In Doha’s Diplomatic District, the city’s main commercial centre, there has been a 92 per cent increase in supply of office units in the area since the end of 2008. There is currently approximately 1.2 million square metres of leasable accommodation in the district. This is expected to grow to 1.7m sq m in the next 24 months, according to data from DTZ Research.

After rents increased between 2005-08, office rental prices dropped by 20 to 30 per cent in 2009, according to data from DTZ. The government was the most active occupier in the commercial district in 2010, occupying 60 per cent of recorded demand.

The residential market is also currently suffering from oversupply. A prime example of this can be found in Doha’s luxury apartment market, which increased by 75 per cent in 2010 despite the population remaining stable over this period. As a result of oversupply, rents in the residential blocks in the Diplomatic District have declined by 30 to 40 per cent since the market peaked in 2008.

The supply-demand mismatch is expected to reduce in coming years as preparation for the World Cup in 2022 World Cup is expected to boost demand in the medium to long term.

‘’We expect to see a sizeable increase in demand in five years time as more construction and engineering firms move to Qatar to work on projects for the World Cup,’’ says Gladwin.