Is Qatar risking a property bubble?

With major investments and billions of dollar washing around the country, as well as highly publicised recent public sector salary rises, prices in Qatar are expected to increase both in property and consumer goods.

Two of the main costs of living anywhere are property/rent and food. And although the consensus view among the Gulf Cooperation Council’s (GCC) real estate agents is for property rental levels in Doha to remain broadly static this year, following a 4.9 percent decline year-on-year in 2011 in the rent, fuel, and energy component on the consumer price index (CPI), it is equally the case that these values remain considerably higher than most of Qatar’s neighbours.
Nevertheless, although in the lower-end segments of the Qatar’s property market, in which supply continues to outstrip demand, prices are not expected by the International Bank of Qatar to increase in the near-term, for the remainder of the property sector – and for day-to-day living expenses in general – prices are expected to spike higher in coming years.

A Foundation Of High Prices

The principal reason for the run-up in property and other prices over the past few years has been the extraordinary income generated by Qatar’s hydrocarbon industry, with the oil and gas sector still accounting for more than 50 percent of gross domestic product (GDP), around 85 percent of export earnings, and 70 percent of government revenues. Qatar’s position as having proven oil reserves in excess of 25 billion barrels (which should enable continued output at current levels for 57 years), and its proven reserves of natural gas exceeding 25 trillion cubic meters (more than 13 percent of the world total, and the third largest in the world) has resulted in its having the highest per-capita income country in the world more than US$100,000 (QR364,000) per annum, and the lowest unemployment (just under one percent).

A further lure to easing local Qatar and other regional monies back into the real estate market, has been the broadening and deepening of the Islamic real estate investment trust (REIT) market in the past three years in particular, thinks Roger Nightingale, chief executive officer (CEO) of RN Associates, in London. These are in accordance with the rules of Shari’ah finance, the central tenets of which forbid activities that can be deemed speculative, involve uncertainty, entail the payment of interest, or are connected to gambling, alcohol or adult entertainment. Therefore they offer investors the opportunity to own shares in a portfolio of real estate assets with a steady paid dividend from the income earned on those assets.
Aside from these eminently admirable investment parameters, Nightingale highlights, these Islamic REITs provide a highly attractive alternative investment in the Gulf Islamic finance industry as they inject more transparency and regulation into a property sector that has at times fallen victim to something of a mixed press. A key event in this context, he concludes, is likely to be the planned listing of the United Arab Emirates (UAE) first Shari’ah-compliant REIT, the ‘Emirates REIT’, aimed at medium-income investors and offering returns of six to eight percent annually.

Recent Pay Hikes

Against this backdrop, then, despite projections from the International Monetary Fund (IMF) that Qatar’s GDP growth rate will modify this year to six percent, it is unlikely that the net inflation trend in property and utility prices that has resulted from an average annual economic growth rate of 18.1 percent in every year from 2006 to 2011, with a regression in line with the global financial crisis, will be reduced substantively, he thinks.

One major reason for this is the knock-on effect from last September’s 60 percent hike in pay for Qatar’s public sector workers, thinks Jed Wolfe, managing director of Asteco Qatar, in Doha. Indeed, he adds, it may well be that this wage boost that lay behind an upsurge of investor enquiries for residential property in Q1 this year, as occurred in Q4 of last just after the pay increases (with the majority of interest coming from locals).

In this context, Wolfe says, about the only factor that has contained Qatar’s property market prices to current levels, be they private or commercial, rental or outright purchase has been the lack of new supply coming onto the market. This idea finds resonance in the QSA’s own projection for housing CPI to rise by 1.4 percent across 2012, with prices in the high-end residential property sector, and particularly the luxury villa segment (particularly in Qatar’s West Bay, and West Bay Lagoon area that have been given beach access, and the Pearl development), likely to bear the brunt of rising prices.

Middle East Financial Hub

Similarly supporting prices in Qatar has been its increasing profile among foreign investors as a major financial hub in the Middle East as a whole, thinks Sam Barden, CEO of SBI Markets in Dubai. In this context, he says, although Dubai or Bahrain had traditionally been regarded as the two principal claimants to being the centre for international finance in the region, a swathe of recent initiatives from Qatar has seen it move quickly to challenge this view.

An early move in this respect, for example, was the announcement in late 2010 that the Qatar Exchange would commence general bond trading utilising the NYSE Euronext Universal Trading Platform, and would offer trading in Shariah-compliant sukuks shortly thereafter. Finally, concludes Barden, as the world’s biggest producer of liquefied natural gas (LNG), and holder of the third-largest gas reserves, Qatar remains ideally positioned to benefit in the broader geo-political scheme of things by dint of its membership of the ‘Gas OPEC’ troika with Russia and Iran.

“Qatar is already at the centre of the GECF [Gulf Exporting Countries Forum], with the headquarters being in Doha; it has enormous funds at its disposal from gas; and, under the Al Thani ruling family, it has the will to traduce business away from Bahrain and Dubai over time,” he says, “so, really, it is the one to watch over the next three to five years.”

This said, an influx of foreign money into Qatar’s property market – and into its economy as a whole – has also resulted from changes in the regulations relating to foreign ownership of property in the Emirate, adding to the already short supply of rental accommodation there, highlights Matthew Green, head of UAE research and consultancy for CBRE, in Dubai. Until the enactment of Law 17 in 2004, in fact, non-Qatari nationals were not allowed to own or have long-term leaseholds on property in Qatar.

Since the passing of the snappily-named law ‘Regulating Ownership and Usufruct of Real Estate and Residential Units by Non-Qataris’, though, foreigners have been permitted to invest in property for either their own use, or as a pure investment to rent to others. Although, as it currently stands, only three areas are available for freehold purchase (The Pearl, West Bay Lagoon, and the Al Khor Resort Project), there are another 18 areas in and around Doha that have been designated for foreigners to acquire the ‘right of usufruct’.

This law allows the tenure of the initial lease for up to 99 years, and to be renewable, with the leaseholder also retaining the right to sell his lease or pass it on to his or her heirs.

The longer-term future for Qatar’s housing and other daily living costs also looks increasingly expensive. Quite aside from the ongoing effects of all of the aforementioned factors, inflationary pressure across all aspects of local business landscape is likely to come from a massive US$100 billion (QR364 billion), according to the IMF boost in infrastructure spending up to 2016 initially, as part of the government’s stated priority of fully financing its budget from non-hydrocarbon revenues by 2020, and further spending in the run-up to Qatar’s hosting of the 2022 World Cup football tournament, highlights Green.

According, though, to a statement last year by HE Sheikh Abdul Rahman bin Khalifa Al Thani, the Minister of Municipality and Urban Planning, Qatar will actually spend at least US$160 billion (QR582 billion) in the lead-up to 2022 on developing various elements of Qatar’s infrastructure, principally on upping the number and quality of available accommodation in the country, and on investing in the improvement of its major roads, port, airport, and metro system. Already, in fact, at least ten towers on the vast manmade island, The Pearl, has been either re-started or are likely to resume again, and Lusail, the 35 square kilometres city along the northern Doha, is also an example of renewed construction.

Additionally, Damac is now pressing ahead with ground works, ready for its nine buildings in the Foxhills development. This is entirely understandable in light the embarrassment caused by a severe shortage of suitable housing in advance of the 2006 Asian Games that were held in Doha. “The problem with this type of spending is that it has to go somewhere, and in many countries – China is the most notable recent example – it tends to ultimately find its way into property, either through people up-scaling their rental living arrangements, or through buying outright at increasingly high prices, both of which are then passed onto the consumer,” says Nightingale. “The consumer, in turn, then has to place increased pressure on employers to fund this new cost, and this fires the flames of cost-push inflation across the board,” he adds. This said, the question of whether such housing will be sustainably suitable for other high-powered foreigners and locals to inhabit – rather than the sub-standard offerings which still languish unoccupied in Greece after its Olympics (before the current crisis hit), for example – seems to have been addressed to a degree with the recent creation of Qatar’s Urban Planning Department.

Similarity To China?

China’s example could prove to be highly pertinent for Qatar’s inflationary outlook, given that already, with just a moderate rise in Qatar’s government spending last year on non-hydrocarbon infrastructure projects, a study conducted by Saudi-based Samba Financial in early January of this year predicts that domestic credit growth in Qatar could hit 20 percent this year, well clear of any other GCC state.

In China’s case, highlights Barden, the 11th and 12th Five Year Plans galvanised around CNY10 trillion (QR5.4 trillion) in new infrastructure project spending, designed at the time to avert the worst ramifications of the then global recession. While this money was notionally intended for suitably sober-sounding initiatives (‘improving rural conditions’, ‘upgrading technology’, ‘energy saving efforts’, and ‘improving healthcare and education’), much of it ended up in less socially-beneficial activities.

“Money supply in China rose at a 40 percent rate in 2009 and the first half of 2010 as Beijing tried to maintain its stellar growth ambitions,” says Barden, “but a large proportion of this leaked into speculative activities, with domestic property values soaring by around 70 percent, and the domestic stock market jumping by about 80 percent in just the first six months after the first CNY4 trillion (QR2.2 trillion) extra economic stimulus package in March 2008 was announced.”

The fact is, he adds, that such growth nearly always tends to militate into an environment of rising housing and food prices, just like that which presaged the Tiananmen Square protests, when food inflation in the month prior to the massacre was running at just over 18 percent year-on-year (yoy).

In this context, in November 2010, although the overall Chinese CPI edged up to 5.1 percent yoy (against a government target of three percent maximum), food prices shot up by 11.7 percent. Additionally, like the worst sort of hangover, housing prices still continue to rise inexorably, with Lombard Street Research, in London, estimating that property prices in China are still around 22 times the level of disposable income in Beijing, and 18 times that in Shenzhen.

This compares to eight times in Tokyo during its 1980s bubble, and to 6.4 times in the United States (US) at the time of its own housing bubble prior to the sub-prime catastrophe. Even rental prices in China’s eight key cities presently stand at 39.4 times average salary levels (this figure was 22.8 times in the US just before its housing crisis).

Further Revenues and Inflation

In Qatar’s case, concludes Wolfe, although headline inflation remains subdued, inflation risks appear to have risen recently due to an increase in public sector wages, and going further forward, the authorities in Qatar acknowledge that the economy could face potential inflationary pressures over the medium term from two extra channels.

These are, as highlighted as well by the IMF, the expansionary effect of the major Barzan gas project that will start in 2012, and the implementation of major projects in the non-hydrocarbon sector as mentioned. Having said this, the Qatar government maintains that the newly formed High-Level Committee on Prices would contain monopolistic price pressures, while the recently introduced limits on retail lending by banks against salary assignment will serve to pre-empt further leverage of the salary increase.

Additionally, there is a possibility, thinks Wolfe, that any excess supply in real estate would gradually converge with demand as Qatar’s infrastructure projects are completed and the temporary transient construction workers are replaced by a white-collar workforce. This neatly aligns with the Qatar government’s viewpoint that the completion of the construction of the new airport would entail additional jobs for about 30,000 service-oriented and skilled workers to run the facility, and that such new workers would be expected to migrate with their families, which would generate demand for other services such as hospitals, schools, entertainment, and so on. The multiplier effect of additional job creation in any service industry on other service industries would generate additional demand for housing, and so a virtuous cycle would be born. That is the theory at least, though how this current inflationary risk will be curtailed in practice remains the ongoing challenge.