Special Report Contents

• GCC real estate sector struggles with low oil prices

• UAE leads the region’s developers

Falling oil prices have affected almost every sector in the GCC during 2015 and real estate is no exception. Property prices have slumped as public spending has been limited, bottom lines are affected and overall investor sentiment is causing concerns for several markets in the region.

There has been a correction in the UAE, with property prices and transaction numbers declining. Saudi Arabia’s property market has also endured a lacklustre 2015, with government spending being relied upon to meet the growing demand for social and affordable housing.

Bahrain’s private sector real estate projects have suffered simultaneously with the government’s efforts to push through the country’s ambitious public-private partnership (PPP) housing scheme. While the region is not faced with a real estate crash, the correction may turn into a prolonged slowdown if the current economic climate continues.

Bahrain affected

Despite its limited energy reserves, Bahrain’s economy has been arguably the most affected by lower oil prices. Recognising this, the government has urged the private sector to invest to boost economic growth. While this has stymied a sharp downturn, the market has cooled, reflecting the kingdom’s uncertain economic landscape.

Bahrain’s office market remains subdued following a 6 per cent rent decline in prime locations such as the Diplomatic area and Bahrain Financial Harbour in 2014. Although no further contractions have been recorded this year, rents remain stable as weakened oil prices and reduced government revenues start to affect commercial occupancy across the kingdom.

According to UK real estate firm Cluttons, activity in the commercial segment remains generally limited to units that are smaller than 250 square metres.

Twin slowdown

In the short term, Bahrain’s commercial market is set to slow down as occupancy stagnates, with companies unlikely to expand operations in light of an uncertain economic landscape. Cluttons also predicts a slowdown in the residential segment, with declines likely in the run-up to the end of the year as demand starts to weaken.

It identifies the areas most at risk as the ones dominated by Western expatriates, such as Amwaj Islands and Reef Islands, where rents at the end of the first quarter of this year were down 2.2 per cent and 3.6 per cent respectively on last year.

In a preemptive move, Manama introduced mandatory tenancy agreements protecting the rights of both the landlord and the tenant in April.

“The government is clearly making positive strides to increase the level of confidence and to heighten investor interest,” says Harry Goodson-Wickes, head of Bahrain and Saudi Arabia at Cluttons. “A lot of that is tied into the regulation; for example, making sure leases are registered and [ensuring] rent protection.”

Rent caps

The authorities also took steps to limit rental increases to once every two years, with a maximum cap of 5 per cent for residential units and 7 per cent for the commercial market. “This offers a greater sense of security to investors eyeing the residential market as the move is likely to negate the chances of any exceptional periods of volatility,” according to Cluttons.

Government initiatives to ensure the resumptions of many stalled projects have also given developers confidence that the authorities are committed to supporting the real estate market. Projects such as the Villamar development as well as the Amwaj Gateway Towers, Marina West and Riffa Views have all been earmarked for accelerated completion.

Abu Dhabi slowdown

Abu Dhabi’s real estate market has also experienced a slowdown, with a period of stabilisation in the first half of this year, according to US real estate firm JLL.

Demand has slowed across the emirate as declining oil prices continue to affect the hydrocarbons industry itself, leading to a reduction in government spending and general market sentiment.

The expectation is the market will continue to slow down as a strong dollar continues to affect capital inflow

Jesse Downs, Phidar Advisory

The office segment has been the most affected due to the slump in the oil sector and government investment. Despite this, JLL says that grade A rents have remained stable due to limited supply in quality stock.

It estimates that total office stock across the capital reached 3.2 million square metres by the end of the second quarter. An additional 140,000 sq m is expected to enter the market by the end of the year, with a further 315,000 sq m by the end of 2016.

With a slowdown in the oil sector and a short-term dampening in government spending, the market is dependent on new economic development initiatives to grow demand, says JLL.

Stable rents

For the residential segment, rents have remained stable despite a continued decline in transaction volumes, which is mostly fuelled by dampened sentiment. JLL says no new major deliveries took place during the second quarter, but 6,000 units are expected to enter the market by the end of the year. This will be dominated by the delivery of units at the Views in Saraya, Hydra Avenue and The Wave on Reem Island.

Further to this, new Dubai-like regulations, which are due to be formally implemented by the end of the year, will have a big impact on the market.

“The new laws will require all real estate developments and sales transactions to be registered with the government, and will

provide new mechanisms to protect consumers and investors,” says JLL. “The new laws will place obligations on developers, which may slow down supply, particularly for small developments.”

Dubai market

Dubai’s real estate market has weakened across all asset classes in the first half of this year, with the hotel and residential segments witnessing the biggest slowdown, according to JLL. Rent and sales prices have been depressed by a decline in residential activity as well as the large number of units due to be delivered in the next couple of years.

More recently, foreign buyers have been concerned over geopolitical effects on real estate markets

Jesse Downs, Phidar Advisory

“Rents have contracted again by 2.4 per cent in the past quarter,” says Jesse Downs, managing director of local real estate firm Phidar Advisory.

JLL says the residential market in Dubai continues to face downward pressure as rents and sales prices register quarter-on-quarter declines. “While the general rental index [compiled by local reail estate information provider REIDIN] remained flat year-on-year in June, the sales index dropped 8 per cent for the same period, with declines in apartment sale prices exceeding that of villa prices.”

Residential transactions recorded by the Dubai Land Department show a 66 per cent contraction in sale values and a 69 per cent decline in the number of transactions in the first half of the year compared with the same period in 2014. The first six months of 2015 saw 7,400 deals completed compared with 23,800 in the same period last year.

Overheated market

The correction in the market can be attributed to the overheating of the market in early 2014, when property values were high and investor sentiment strong. “Moving forward, the expectation is the market will continue to slow down as a strong dollar continues to affect capital inflow and foreign investor interest,” says Downs.

The office segment is also weak following the delivery of 162,000 sq m of space in the past quarter. These completions include eight buildings in the Dubai Design District, four buildings at Arenco Business Park, and The One Tower in Tecom.

Further to this, current geopolitical issues in the region are dampening interest from foreign investors.

“Declines have continued because of the ongoing strength of the dollar, but more recently, foreign buyers have been concerned over geopolitical effects on real estate markets,” says Downs. “Investors are split over this, but some are concerned. The dollar is also only getting stronger and therefore the key foreign currencies are getting weaker against the dollar. We expect this to go on for 18 months or longer.”

Saudi Arabia

One of the main features of the real estate market in Saudi Arabia will continue to be the large-scale redevelopment of existing city centres, often under the responsibility of the government in partnership with the public sector.

One such project is the Qasr Khozam development in Jeddah. Developed by the local Dar al-Arkan with Jeddah Development & Urban Regeneration Company, the estimated $13bn scheme will involve rejuvenating Jeddah’s historic Qasr Khozam district.

The scheme is similar to the Al-Shamiyah redevelopment of Mecca. Developed by a local joint venture of Saudi Binladin Group, Al-Oula Real Estate and Dallah al-Baraka, the estimated $9bn project aims to redevelop a vast residential area north of the Masjid al-Haram in the holy city.

Overall, the outlook for hydrocarbons prices remains uncertain, with many oil majors already cutting jobs and capital spending. At the same time, a currency linked with the strengthening dollar continues to make many cities in the region much more expensive to live, work and invest in.

Analysts have said it is difficult to project when growth will return to these markets, with weak oil prices and supply and demand economics proving to be longer-term issues that are difficult to alleviate