A significant milestone in the history of Qatar's real estate sector was reached in May when the first residents of The Pearl were handed the keys to their new homes. The $14bn man-made island is the first real estate development in the country that is allowed to offer freehold ownership to foreigners.

However, the lavish party staged in June to mark the handover came in the middle of a global economic slump that has wiped up to 35 per cent off the resale price of units on the island.

In recent years, Doha has suffered an acute shortage of housing and office rental stock. As the booming economy drew expatriate workers into the country, residential rents increased by 154 per cent between 2005 and 2007, climbing a further 15-20 per cent in 2008.

But the supply-demand balance is now shifting. With more and more developments reaching completion, the market's capacity to absorb the new stock is being reduced. This has been compounded by the global financial crisis, which has prompted developers to reconsider their expansion plans, creating uncertainty in the country's real estate sector.

Distorted market

As elsewhere in the region, residential real estate developments in Qatar have in recent years concentrated on the luxury end of the market. The strong sales interest that greeted the initial projects was driven by one-off purchases by long-term residents and affluent expatriates, and by property investors and speculators. This generated a distorted impression of the strength of demand for high-end property in Qatar.

The reality is that the majority of expatriates want affordable housing and, now more than ever, are reluctant to live beyond their means.

Sales of new properties has slowed since the financial crisis began to hit the region last year, and prices have weakened as a result. Rental rates for luxury villas have dropped by up to 30 per cent since the fourth quarter of 2008 and off-plan residential sales have all but ground to a halt. Although developers have not reduced their prices, prices on the secondary market have fallen by 25-30 per cent. In contrast, rental prices for mid-priced accommodation have remained stable. Similar price drops have been recorded in commercial property. Rents for prime office space have dropped by 10-15 per cent since the start of the year on the back of slow demand. Some landlords have responded by being flexible with payment schedules and willing to rent out individual units.

"Commercial activity and take-up of premises has been slow since late 2008 because of subdued confidence," says David Oayda, regional manager at property consultant Asteco. "But there remains opportunity if landlords are willing to be flexible and meet the changing needs of tenants."

After years of chronic shortages, Qatar now faces the prospect of an oversupplied property market. According to UAE-based property consultant Landmark Advisory, Doha was still undersupplied by 1,500 residential units in May 2009. But with 33,000 units expected to be delivered over the next four years, it predicts the housing market will become over-supplied in 2010, unless the country is able to maintain its annual population growth rate at 5 per cent.

The future of Qatar's real estate sector hinges on continued job creation and the arrival of expatriate workers. Without it, depressed prices and vacant properties could be here to stay. "Qatar is less established as an international destination than Dubai," says Ian Ohan, head of investment transactions at Jones Lange LaSalle. "For that reason, we predict it will have more supply and demand issues in the short term."

"The long-term outlook for Qatar is dependent on job creation," says Jesse Downs, director of research and advisory services at Landmark Advisory. "Qatar's traditional industries [oil and gas] are not big job creators. So it does not indicate that demand will bounce back quickly."

As in other regional markets, developers have slowed down, cancelled or reduced the scope of some projects in response to the downturn in the market. But projects such as Lusail, another man-made island in Doha, and the subsequent phases of The Pearl, are seen to be of strategic importance to the country's drive to position itself as a desirable destination. Although the timelines for their completion will undoubtedly be extended, the projects will go ahead in the long run.

However, it may have to be with some degree of government support, given the current lack of potential buyers.