Real estate occupies a special position in the Middle East’s business culture. Bricks and mortar have long been a favourite investment vehicle, a safe haven in comparison to the volatile stock markets of the region. The rash of shopping malls in the Gulf today reflects not only soaring consumer spending but also a growing tendency to plough savings into property.
The pace of growth during the past 20 years has been phenomenal. In the 1980s, shopping malls in the Gulf accounted for only 5 million square feet of retail space. Today, this has increased to about 55 million square feet. Real estate is now the fastest growing economic sector in Saudi Arabia, while Dubai’s construction boom has seen it take ownership of up to one-quarter of the world’s total supply of cranes.
Change is evident everywhere. The traditional vernacular style of local architecture is disappearing. Housing tastes are changing as younger Gulf citizens look for more affordable modern homes beyond the extended family nest.
The flow of populations from rural to urban centres will drive a long term shift towards middle-income mass housing. Riyadh’s SABB bank forecasts that duplex and apartments’ share of the Saudi housing market will increase to more than two-thirds by 2027, from less than half now. Traditional rural houses will account for just 6 per cent of Saudi housing stock in 20 years’ time.
Attitudes to land use are also changing. The streams of foreign investment that have poured into the property market in recent years have eroded resistance to foreign ownership. In 2001, Bahrain became the first Gulf state to allow a form of foreign ownership in local real estate. Other states followed suit. Dubai announced in 2006 that it would offer expatriates limited freehold ownership and formal 99-year leases.
Even Saudi Arabia is changing. A new real estate law allows non-Saudi residents to own real estate for their private residence – with the permission of the Interior Ministry – and affords ownership of real estate by foreign businesses.
Such changes will encourage the growing cosmopolitanisation of the Gulf. “The institutions in the Far East and Europe are cash-rich and looking for real estate assets,” says Nicholas Maclean, regional director of real estate group CB Richard Ellis. “They are going into new territories since there is not enough stock in traditional markets, so governments now have a great opportunity to capture this capital spend. It provides a wonderful opportunity for diversity and brings the region within the global investment markets – and that in itself will generate stability.”
But the pace of regulatory change will have to increase if the Gulf real estate sector is to realise its full potential. “The time is right to create an institutional investment market here and legislation is lagging behind the marketplace. Sooner or later, institutions will get tired of waiting and move on to competing markets,” Ellis adds.
Yet even without reform, the scale of development defies belief. Current spending on construction projects in the Gulf has crossed the $1 trillion mark. Girded by oil-driven growth, expanding populations and public investment in infrastructure, the growth curve will continue its upward trajectory in the next two decades.
Developers will continue to roll out plans for large multi-use developments, with a significant number exceeding the $500 million mega-project threshold, predicts PricewaterhouseCoopers. All sectors – commercial, retail, residential, hospitality and leisure – have huge potential for growth, often combined in large multi-use developments supporting residential populations in excess of 100,000.
This new supply will more than absorb current demand. In the UAE, more than 70,000 new hotel rooms are planned, with an expected doubling of commercial space to more than 2.8 million square metres by 2008. The big challenge for authorities is to ensure this supply does not become wholly speculative.
In the UAE in particular, the population will have to grow at extraordinary rates in order to support this increase. According to Cairo-based EFG-Hermes, after 2007 property prices will begin to slide, resulting in a cumulative 25-30 per cent fall in property values by 2010. Such a slump would dampen investor enthusiasm, but it is unlikely to have a significant long-term impact on investment levels. Developers are becoming more adept at timing the release of properties, while overall demand levels still look robust.
A market correction could also create a new price equilibrium that is far more supportive for stable long-term growth. A survey issued in November 2006 found Dubai had the eighth most expensive commercial unit rent rates among 20 surveyed cities, making it a more expensive place to do business than New York, Beijing, Toronto and Milan. The average rent in Dubai was $87 a square foot, compared with $59 in Toronto and $38 in Beijing.
Demographic trends will also underpin real estate growth during the next 20 years. Despite the influx of expatriates to the Gulf, the indigenous populations of the smaller GCC states are growing at less than 2 per cent a year. And about 50 per cent of the UAE population cannot afford to use the leisure, sport and retail facilities that are springing up around them.
This means some of the biggest schemes – the Dubai International Financial Centre, the Qatar Financial Centre and Bahrain’s Financial Harbour – will have to target immigrant populations with higher than- average incomes.
This, in turn, will create a new demographic trend. Expatriates “are going to spend a significant proportion of their working lives based in the Middle East – not just three-year stints, but full careers”, predicts Maclean.
What will the Gulf ’s property sector look like in 2057? Physically, the mid-21st century Gulf will bear little resemblance to its current self. Large housing developments will replace the organic stock of self-built homes where many Gulf citizens currently reside. Average house sizes will become smaller as middle-class attitudes spread and family numbers shrink. Growing demand for affordable middle-income housing will shape the entire region’s residential sector.
The massive residential complexes in the UAE, Bahrain and Qatar will grow even larger, becoming suburbs, while the Gulf’s bid for global retail dominance will ensure continued growth in this sector. By 2012, Dubai is expected to be home to five of the world’s largest malls. Rising tourism numbers will propel investment into big multi-use leisure complexes.
Dubai’s dictum, “build it and they will come”, has proved remarkably successful. The biggest question facing the next generations of Al-Sauds, Al-Thanis, Al-Nahyans and Al-Maktoums is how to deal with the social impact of the real estate boom, and ensure that local infrastructure will be able to support the new cities rising before people’s eyes.