Gulf real estate changes direction

12 May 2010

After years of building luxury villas for foreigners, developers and governments now focus on citizens

Despite the backdrop of the worst economic downturn in decades and declining property prices, developers still managed to launch more than $5bn of projects at this year’s Cityscape real estate exhibition in Abu Dubai in early April.

But unlike the resorts, waterfront developments, and high-rise towers that have been the hallmark of previous years’ events, in 2010 the big announcements were all aimed at a new, emerging market – locals.

“We are building for local people’s requirements, for what they need,” says Fahad Saeed Alketbi, chief commercial officer of one of Abu Dhabi’s largest developers, Sorouh Real Estate. “They are not looking to live in apartments, national citizens prefer to live in their own villa.”

Sorouh has been a key player in developing Abu Dhabi’s property market since 2005, and in previous years it has launched projects such as the emirate’s tallest tower, the 83-storey Sky Tower, that is part of its new city on Reem Island – the $6.8bn Shams Abu Dhabi – that catered to local and also expatriate investors.

Social housing

Sorouh’s focus this year is more local. It announced the signing of an agreement with Abu Dhabi’s Urban Planning Council (UPC) to develop two large-scale residential developments for nationals in the emirate.

The first project is the AED15bn ($4.1bn) Shamkha development on the UAE mainland, close to the city on Abu Dhabi island. It involves building 6,453 residential units that will house 60,000 people when it is completed in 2014.

The second scheme is the AED5.4bn Watani development, located next to Abu Dhabi Golf Club, which will involve the construction of 1,372 residential villas and 40 apartment buildings to house 17,000 people when it is completed in 2012.

The driver behind the change in priorities for developers such as Sorouh is the region’s changed economic landscape as a result of the global financial crisis. The sudden drying up of low-cost credit means expatriates are no longer prepared to buy properties off-plan, and banks were reluctant to expose themselves any further to a market that was seen as risky and over-supplied.

“The interest from international investors has certainly waned at the moment, as we are on the back of the economic crisis,” says Matthew Green, head of research and consultancy, at New York-based CB Richard Ellis.

It is important that governments look after the needs of their people … it gives them legitimacy

Eckhart Woertz, Gulf Research Centre

The lack of enthusiasm is particularly evident in the UAE, where many of the large-scale residential and commercial projects planned during the boom are on hold or have been cancelled. According to regional projects tracker MEED Projects, there are now $421bn of projects on hold in the UAE, the vast majority of which are real estate.

But not all real estate projects have suffered the same fate. Ambitious projects that required billions of dollars of investment from expatriate buyers have been worst hit by the credit crunch, but at the same time, schemes based on more stable and long term demands of the local housing market, have moved ahead.

“It probably seems for these developers that the local market is a lot more low risk, and it is something that they are looking to exploit in the market at the moment,” says Green.

Developers are not the only ones looking at housing for locals. Politically, the issue is a contentious one as governments across the region are expected to provide housing for their people, and that role is particularly important during times of economic hardship, as many people will not be able to afford to build homes for themselves.

“It is important that governments look after the needs of their people, they have a political and social responsibility for their welfare. It gives them legitimacy in the eyes of the citizens,” says Eckhart Woertz, economic programme manager, the UAE-based Gulf Research Centre. Governments around the region do acknowledge their responsibilities. A key part of Abu Dhabi’s urban masterplan, Plan Abu Dhabi 2030, is to ensure the provision of housing for the growing local population at prices it can afford, with the middle-income segment of the Emirati society, earning AED5,000-15,000 a month, being identified as the group with the greatest demand for housing.

Abu Dhabi is not the only state in the region suffering from a housing shortage. Bahrain, and Saudi Arabia are both facing similar problems.

The shortfall of housing in the Gulf is most severe in Saudi Arabia. According to the Economy & Planning Ministry, the Kingdom will face a shortage of two million homes by 2015. Much depends on the kingdom’s long awaited mortgage law, which will give low-income people access to the funding they need if they are to build their own homes without government support.

The draft law has been in the planning stages for almost a decade, but officials say it is likely to be passed in the upcoming year.

Experts say if the law is finally put into place, it could usher in a new boom period for mortgage financing in Saudi Arabia – an area traditionally avoided by financial institutions due to a lack of proper regulation.

Bahrain is adopting a different approach. The Housing Ministry is working with the Economic Development Board on the country’s first public-private partnership (PPP). It involves building 20,000 new homes across the kingdom over the next 10 years.

The PPP model involves a contract between the government and private company, in which the private company builds a project, but the financial, technical and operational risks in the project are shared. Many involved in the Middle East property real estate sector see PPP as a long-term solution to the housing problem.

“I think PPP is the way forward for the region. Why spend all of your own money when there is a good case for using others?” says Steven Coates, head of UAE for UK-based Davis Langdon. “PPP is a good vehicle that has worked around the world, and there is no reason why it cannot work here.”

However, it may be a while before the method gains more prevalence in the Middle East. PPP is a complex arrangement that requires careful research and co-ordination before it can be put into practice.

“There are some emerging examples of PPP in the region, and there is some political will, but it is still in a very nascent stage,” says Woertz.

The government’s responsibilities do not stop at housing. It also needs to provide social services and infrastructure for local citizens, such as schools, hospitals and universities.

Unlike previous years when real estate projects accounted for the majority of the contract awards, this year, the big deals have been in social infrastructure projects, such as hospitals and universities.

Social infrastructure

In Abu Dhabi, a joint venture of the local/Belgian Six Construct Abu Dhabi and South Korea’s Samsung Corporation won the $1.3bn contract award to build Cleveland Clinic hospital, the local/Australian Al-Habtoor Leighton Group won the $163m contract to built the Arzanah Medical Centre, and the local Al-Futtaim Carillion won the contract for New York University for an undisclosed sum, together with the $122m contract to build the third phase of the UAE University Campus in Al-Ain.

Similarly, in Doha, South Korea’s Hyundai Engineering has been selected for a contract to convert the athletes village from the 2006 Asian Games into a new hospital, which will be called Hamad Medical City.

The willingness of regional governments and developers to invest in schemes for their people show the ambition for growth still remains even in a downturn.

But the boom years of sky-high returns from speculative real estate projects are over. Developers are now focusing on local housing and infrastructure needs; and although these schemes will produce only modest returns, they are more sustainable and stable in the long run.

For a private sector that is now looking for real investment opportunities, this should be an attractive proposition, and there is the added comfort of support from the state. Governments across the region have been quick to distance themselves from projects developed by state-backed firms for foreign investors, but they cannot afford the political cost of walking away from their people by abandoning social housing and infrastructure schemes.

“The locals are the constituency, expats are here only for a certain period of time, and are not long-term stakeholders,” says Woertz.

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