Doha’s residential property market has seen increased activity levels since the start of the year, as the country’s economic growth continues to outperform much of the rest of the world. Unfortunately for developers and landlords, this improvement in demand has not translated into price rises; instead, new supply coming into the market continues to weigh down on them.

Key fact

About 5,000 new apartments will be completed in Doha within the next 12-18 months, adding to problems of oversupply

Source: Asteco

According to UK-based real estate consultancy DTZ, rental prices in Doha’s housing market have dropped by as much as 30 per cent since the start of 2009. The average rent for a standard two-bedroomed apartment in the Diplomatic Quarter was QR14,000 a month ($3,845) in the first quarter of 2010, 22 per cent lower than the same period in 2009, and down 33 per cent from the market peak in the latter half of 2008.

Prices for villas display a similar pattern. A four-bedroom villa in Al-Waab peaked at QR24,000 a month in mid-2008, and has since dropped by a third to QR16,000 in the first quarter of 2010.

“Qatar was certainly impacted in the downturn,” says Mark Proudley, DTZ’s associate director in Qatar. “A lot of supply came onto the market in 2009, mainly from developments started in 2006-2007 and launched as the market was booming.”

But he adds that since the beginning of 2010, there is definitely a sense that demand is picking up, buoyed by country’s sound economic fundamentals. Qatar’s economy grew by 9.4 per cent in 2009, outperforming regional rival Dubai, whose gross domestic product contracted by an estimated 5 per cent last year. The forecast for 2010 and 2011 is for Qatar to grow by 18.5 per cent, while Dubai is predicted to shrink by a further 0.4 per cent.

“There is a feeling here that more population growth and business activity is occurring now, which will fuel demand,” says Proudley.

“That is one of the differences between a market such as Qatar and Dubai. Qatar has a strong underpinning of oil and gas, which can prop up the market during leaner periods. I’d be lying to say Qatar wasn’t affected, but it has come through a lot better than some regional and international markets.” By comparison, rental prices in Dubai have fallen by an average of 47 per cent between the first quarter of 2009 and the first three months of 2010, and are down 60 per cent from the market peak in mid-2008.

But while the decreases may not have been as sharp as elsewhere in the region, the slump in demand has hit Doha’s property schemes hard, including the flagship Pearl development.

The Pearl is a $14bn offshore, mixed-use development being built by the local United Development Company (UDC) in an area
to the north of Doha. It is a four-phase project on reclaimed land, covering 4 million square metres.

Once completed, it is expected to comprise 16,000 residential units and accommodate 40,000 residents. Construction of the first two phases has been under way since 2004 and to date four towers, containing about 800 apartments, have been handed over to owners. But new sales have slowed sharply in the wake of the financial crisis and sales prices on the secondary market have collapsed.

“Projects such as The Pearl have certainly been affected,” says Proudley. “It was much harder for potential purchasers to get credit [in 2009]. There was also less demand as fewer people were coming in [to the country]. Consequently, there were issues over delivery and some developments were delayed. There were a limited number of transactions.”

Average sale prices on The Pearl stood at QR7,000 a square metre in 2005, when the project was launched. Prices soared in the following three years, peaking at QR18,000 a sq m in 2008. In the first quarter of 2010, the average sale price was QR12,500 a sq m, 31 per cent down on the peak, but still 79 per cent higher than the launch price. According to DTZ, prices on the secondary market are currently about QR10,000-13,000 a sq m, with a limited number of distressed sales below that level.

Such figures serve to put a sense of perspective on the size of the price decreases; while Qatar’s property boom is certainly over for now, sale and rental prices are nonetheless still relatively high, when compared with 2005 data.

The real problem facing the sector and undermining the potential for a recovery is that new supply continues to enter the market. Doha, which traditionally suffered a housing shortage, is now oversupplied with new high-quality housing stock.

According to property consultant Asteco, about 5,000 residential apartments will be completed over the next 18-24 months.

Since early January, average rental prices for high-end apartments have dropped by as much as 15 per cent, and this trend is expected to continue as the new supply outpaces the population growth required to absorb it.

“If you look at the number of real estate projects, it is not sustainable if they are just relying on the local population [to fill them],” says Nick Maclean, managing director Middle East with real estate consultants CB Richard Ellis.

“Last year saw a real slowdown in people moving into the region. The Qatari government is looking to attract foreign nationals to supplement the projects they are developing in the oil and gas, and education sectors. But in supporting that community, it is behind other centres in the GCC. They must improve retail and schooling, for example, to make it more attractive.

“The Doha market in the past year has suffered with a number of developments remaining in the pipeline. The significance is these developments were being built to appeal to non-Qataris. It is not just a question of providing real estate in Qatar, they must make changes to make it more comfortable for people from outside the Arab world [to live there].”

Despite its high-quality finish, one of the frequently heard criticisms of The Pearl development is that it is located far from the heart of old Doha. Plans are being made for an integrated transport system to connect the outlying developments, but until that is completed the feeling of disconnection will remain. It is, however, located close to the new central business district, where most office space is now being built.

According to DTZ, since 2008 office supply has increased 60 per cent in the Diplomatic Quarter, (which includes the new central business district), to reach 1.1 million sq m of gross leasable area at the end of March 2010. It estimates the occupancy rate for office space in this area currently stands at 78 per cent, but several more towers are nearing completion. By the end of the year, office space is forecast to rise by a further 18 per cent to 1.3 million sq m. In 2009, office rental rates in Doha fell by 20-30 per cent due to a wave of project completions.

But government departments have historically accounted for three quarters of rented office space in Doha. So if The Pearl and other residential developments around the West Bay area are to benefit from their proximity to the business district, Doha needs to attract more international companies to set up in the city.

It will not be easy to tempt firms away from other more established regional hubs, such as Dubai and Manama. Increasing the expatriate population also runs counter to the government’s long-term aim of replacing imported skilled labour with local talent. But continued population growth is essential, otherwise Doha’s new buildings could be left standing empty.