Key fact

In the first half of 2010, 63 per cent of new demand for office space in Qatar was from government bodies

Source: DTZ

The global economic crisis threw Qatar’s real-estate market into a state of imbalance. Supply of properties has increased, while demand has fallen. As a result, the luxury residential market has become saturated and across the property portfolio rental rates have plummeted.

As in other cities in the GCC, this change has been welcomed by leaseholders, who have long had to endure high rents, due to strong demand and limited availability.

“We are seeing more activity […] but it is not back to pre-downturn levels. It is a return to stable demand”

Mark Proudly, DTZ

During the peak period of inflationary pressure in mid-2008, the government acted to cool the market. It capped rents for two years and gave land to developers at rock-bottom prices to build low-cost housing. In the office sector, government clients, which account for as much as 75 per cent of demand, stopped acquiring new space.

Then came the downturn, and, although the easing of inflation was a welcome side-effect, the reduction in demand and lack of finance were not. Just as the government acted to stabilise rising prices in 2008, it has now intervened again. But this time it has taken a more subtle approach in order to prevent a complete freefall in rents and a surge in vacancy rates. Measures include taking on additional office space to absorb new stock coming onto the market and encouraging businesses to move out of villas into commercial property through the business licensing regime.

Recovery in demand

As a result, figures from UK-based property adviser DTZ show a significant recovery in demand for office space in Qatar during the first half of 2010. New demand registered in this period totalled 162,000 square metres, compared with 137,580 sq m during the whole of 2009. This pales in comparison with the third quarter 2008 peak of 180,000 sq m, but is still a healthy increase of almost 18 per cent.

“We are seeing more activity now than we did in 2009, but it is not back to the levels that we witnessed pre-downturn. It is a return to stable demand,” says Mark Proudly, associate director at DTZ’s Doha office. DTZ’s research shows that 63 per cent of new demand for office space in the first half of 2010 was from government bodies.

“Another trend we have witnessed in the past few months is that the government sector has been more active in acquiring office accommodation,” says Proudly. “They leased a number of premises in the prime commercial district, which soaked up a reasonable amount of the oversupply in the market.”

“Who is to say that next week the government won’t go out and rent another 100,000 sq m to maintain the balance?”

Mark Proudly, DTZ

The main transaction undertaken by the government was the leasing of three tower blocks in Doha’s Diplomatic District, accounting for 100,000 sq m of office space. The new stock that has come onto the market in the past 18 months is estimated to be about 500,000 sq m and DTZ says there is 1.15 million sq m of office stock available in Doha, with more expected to be released into the market later this year. By taking an additional 100,000 sq m, the government has prevented vacancy rates climbing even higher. From just 5 per cent in the third quarter of 2008, the vacancy rate for offices in Qatar stands at 15-20 per cent today.

The three towers are not yet fully occupied by government departments and property analysts say it is unlikely the space will be utilised as efficiently as it would be were a private entity taking over the premises.

Experts also say government clients typically pay lower rates and take less luxurious office space, leaving the very high-quality stock to the private sector. “Landlords are willing to do deals [with government clients] that are significantly lower than the market average would suggest,” says Proudly.

Forced to move

A further lift is being given to the commercial real-estate sector by private companies transferring from residential properties into office space. Many were forced to operate out of villas when demand for commercial facilities outstripped supply during the past five years or so, but they are now having to move out.

“Occupiers who are using residential villa accommodation for their commercial practices are finding it more difficult to renew their commercial registration and their licence to operate from that type of premises,” says Proudly. “They are therefore looking at changing to more traditional commercial premises.”

It is common for companies to operate from residential facilities in markets where high-quality office space is hard to find. Many businesses in Abu Dhabi, Riyadh and Kuwait City also chose to base themselves in villas. But there is now a push in Doha – and in other cities around the region – to use force businesses out of residential property and into new, widely available office towers.

Understandably, the move has not been welcomed by those affected. Companies in Doha contacted by MEED confirmed that they have been notified that their licences might not be renewed if they continued to operate from a residential property. Small businesses pay much less to operate from villas than from commercial tower blocks. In Qatar, monthly rental rates for office premises vary from QR150 ($41) a sq m for lower-end facilities up to QR250 a sq m for prime space. Villas can be rented for about QR50 a sq m. Moving into office space will almost always increase a company’s overheads.

Office rents

“The rent is double, but the facilities are better,” concedes one manager at a construction-related business, operating from a villa just outside Doha. His company was unable to find affordable office space in the centre of the city in 2005 and instead rented a two-storey villa, which he says costs QR30,000 a month. In order to keep costs down, he says the firm will take less space in one of the newly available office towers than it currently occupies.

Other businesses are less able to adapt by reducing their space requirements. Some complain they must pay triple the rent for the same space and, in many instances, less car parking.

Another way that the government is supporting the real-estate sector is through investment in improving Doha’s transport infrastructure. The benefits of better connections, both within Qatar through road and rail schemes, and internationally with the New Doha International airport and the proposed Qatar-Bahrain Causeway, are manifold for the property sector.

Improved accessibility has a positive impact on real-estate prices, especially for areas near stations on popular transport routes. In total, the country has committed to investing $50bn in transport schemes by 2022, but the pace of investment is partially dependent on the progress of the country’s bid to host the football World Cup. Staging the event would accelerate some schemes and act as a catalyst for other infrastructure projects.

Some are already set to go ahead. Germany’s Deutsche Bahn has been working with state developer Qatari Diar on a rail masterplan that alone is expected to be worth $25bn. As part of this, consultants are currently being sought for Doha’s proposed 300 kilometre metro network, which will connect Lusail, the new airport, Education City and the West Bay area. In addition to making real-estate developments more desirable, the planned transport projects will also increase demand for offices as a host of international firms will be brought in to work on the schemes.

Market oversupply

Despite the government’s efforts to boost demand for office space, Doha’s commercial real-estate sector is expected to remain in a state of oversupply for several years yet.

“There is still a lot of new supply due to come onto the market in the next 12 months,” says Proudly. In total, DTZ predicts some 142,000 sq m of new office space will enter the market by the end of the year. This could prompt the government to intervene again. “Who is to say that next week the government won’t go out and rent another 50,000 to 100,000 sq m to maintain the supply and demand balance?” he says.

For now, the government is able to support the sector through its absorption of excess supply and by forcing firms to move out of residential property into offices. But Qatar’s commercial real-estate market is maturing. New stock coming to market will push up vacancy rates and, unless there is a sudden major upturn in demand, there will come a point when developers will have to stop building.