Qatar Real Estate: Staying resilient through tough times
Despite the emergence of more challenging regional and global economic conditions, Qatar’s real estate sector performed reasonably well last year, and it appears to remain on course for the rest of 2016 and beyond. The Edge Property Review analyses the performance of Qatar’s property sector in detail, highlighting some of the key segments such as commercial, residential, retail and hospitality.
Amid challenging economic conditions that have impacted a number of regional property markets, Qatar’s real estate sector has managed to stay on course albeit some level of slowdown witnessed in commercial segment. The Qatari property sector’s minimal reliance on foreign investors – as only a handful of projects are open to non-Qatari investors – has possibly played a key role in subduing the impacts of currency weakening and economic slowdown in some of the source markets. However, the prevailing low oil prices have had an impact on Qatar’s commercial segment, which is mainly driven by occupiers from the government and hydrocarbon sectors.
“The Qatar real estate sector has historically been supply led, characterised by speculative development supported by a strong economy, readily-available finance, and an expanding expatriate population,” says Nick Witty, director, Real Estate, Deloitte & Touche, Middle East. He adds that the market performed strongly during 2015, and it has continued to do so into the first quarter of 2016.
Mihir Shah, director, Infrastructure Advisory, KPMG, Qatar, agrees, “The Qatar real estate market was stable in the past few quarters, and is expected to remain the same for 2016. We do expect some corrections in the land property transactions.”
Despite a strong performance to date, there are signs of a market slowdown as supply continues to increase across all market segments, and there is a significant pipeline of projects planned.
According to Mark Proudley, director, DTZ Qatar, there is a high risk of oversupply in occupational markets, particularly within the prime commercial and residential sectors due to the expected large increases in new stock, combined with suppressed demand on the back of lower oil prices.
Although the negative impact of lower hydrocarbon revenues is becoming more evident in the real estate market, experts consider that overall performance has remained relatively stable, underpinned by government intervention and the demand that is being created by government-backed infrastructure projects in the lead up to the 2022 World Cup.
Oil price impact
Qatar could be reporting a fiscal deficit for the first time in past 15 years, and it is expected to stay there unless oil prices recover to a respectable level, says Shah, adding that according to KPMG Estimates the lower oil prices for the next four to five years could mean a cumulative deficit of QAR200 to QAR300 billion. “However, markets are hopeful that oil prices would move northwards, and impact will not be severe,” he adds. Real estate markets, especially residential and retail, are highly dependent on government spending on capital and current expenditure accounts.
Given that Qatar is facing the 2022 World Cup deadline, Shah points out, major capital expenditure increased in 2015 over 2014, but the government was successful in bringing down the current expenditure level by a whopping 45 percent. “The government is expected to continue spending on the committed capital projects (although certain projects integral to the World Cup have been prioritised with increased efficiency), which should keep the market stable for a significant period, and hence would not bring any sudden impact on the real estate sector,” he says.
That aside, the government has started cutting back expenditure on some infrastructure projects, and the oil and gas and related industries have witnessed downsizing over recent months, a trend which will likely continue in the short term at least.
“Given the current realities, it would seem logical that with increasing supply and a potential reduction in demand, both rental and sales prices would soften in response,” says Witty.
The continued low oil price regime is going to impact the real estate market, and would also impact the banking sector, due to their high exposure. The ratio of non-performing loans to gross loans for Qatar stands at below two percent, which, Shah says, although better than its other Gulf Cooperation Council (GCC) peers such as the United Arab Emirates (6.5 percent) and Bahrain (4.6 percent), is much higher than advanced economies. “These advanced economies try to maintain it around 0.5 percent. Currently, real estate accounts for 25 percent of overall loan and hence any stress in the sector in the future, could have a significant impact on the health of the banking sector,” Witty adds.
The commercial sector has witnessed a reduction of new office acquisitions from the public sector, which, according to DTZ Qatar, accounts for 60 percent of office leasing in Doha’s West Bay area. There are four key office areas established in Doha – West Bay, the C and D Ring Roads, Grand Hamad Street/Airport Road and Al Sadd. However, West Bay alone has more than 1.6 million square metre (sqm) of purpose-built office space, which represents over 40 percent of the total supply of purpose-built office accommodation in Doha.
Proudley says, “The impact of this rationalisation and spending reviews has led to a slowdown in demand for commercial accommodation and the prime residential sectors with higher-paid expatriates being the main casualties of redundancy programmes implemented following the spending reviews.”
Mat Green, head of research and consultancy, CBRE Middle East, agrees, “The commercial office sector has been characterised by subdued leasing conditions, with low transaction volumes recorded amid a slowdown in the business environment for many of the country’s major office occupier groups.” However, he says, prime rentals for grade A office space in West Bay remain steady with monthly rates typically ranging between QAR220 and QAR280 per sqm.
Currently, there is approximately two million sqm of grade A office accommodation in Doha with most demand being for units of up to 250 sqm and serviced offices capable of accommodating two to four people.
Green says, “Softening of office rentals and rising vacancy rates seem inevitable with around 1.7 million sqm of new office accommodation potentially to be added over the next 24 to 36 months.”
DTZ’s research indicates that 300,000 sqm of new office accommodation will be completed in West Bay within the next 12 to 18 months, which will increase supply levels. However, more than 200,000 sqm of this is at the Qatar Petroleum District.
Under a medium growth demand scenario, it is estimated that the total take-up of that additional accommodation would not be until 2023 with demand coming from the public administration, defence, construction and administrative support services sector. “This would mean that if all of the pipeline projects were completed by 2018, there would be a significant oversupply for up to five years during which time the more functional, better managed buildings with the best car parking ratios would attract occupiers,” says Witty.
Despite the backdrop of ongoing economic uncertainty and a sustained period of low oil pricing, residential rental levels, according CBRE figures, have continued to expand unabated during 2015, rising by around seven percent year-on-year. This was down from the 14 percent annual growth achieved during the same period in 2014.
“Rental rate growth during the second half of the year was around five percent, although growth in the final quarter was measured at just one percent. Smaller apartment units, particularly those within central locations, remained in high demand, although rental growth was actually most evident for secondary and more affordable locations,” says Green.
“We see high captive demand for mid segment category housing,” says Shah of KPMG, “resulting in very high occupancy of more than 80 percent.” However, he adds, for the luxury apartments and villas, occupancy is significantly lower. “We foresee no major deviation in this trend until the supply in the mid-end segment matches the inherent demand. We expect the prices to grow marginally in the low- to middle-segment, given the continued demand supply mismatch,” explains Shah.
In recent years, however, the market has witnessed ongoing development of lower and middle income housing by both private and quasi-government developers. There has been a drive to increase the availability of good quality workers’ accommodation with the government setting aside large tracts of land across the country for the development of worker’s accommodation by the private sector on a build, operate and transfer (BOT) basis in response to the growing demand for accommodation.
Conversely, the high-end market has largely been supply led with the two largest, ongoing, mixed-use projects incorporating significant elements of high-end residential – The Pearl-Qatar and Lusail. When fully built out, these two developments will accommodate approximately 500,000 people. Of the 60 residential towers planned on The Pearl-Qatar, as of today, Witty says, only around 29 are near completion, and the majority are less than fully occupied. “In recent months, a number of partially completed towers, which had previously been put on hold or had stalled, have witnessed renewed activity, as has some of the low-rise, residential development, thereby adding additional pipeline supply,” he explains.
Lusail, on the other hand, benefits from improved access and egress with the opening of new roads permitting residents to take up occupation of some of the completed residential accommodation, predominantly in the Foxhills District of the development, which had previously been inaccessible.
Industry experts suggest recent redundancies in the hydrocarbon and government sectors, together with new building completions, have increased vacancy levels in many areas. According to DTZ, this has been most evident in the past three months, where it has been observed that rents in some areas were reduced for the first time since 2009.
Demand for apartments in areas such as Najma, Umm Ghuwailina, and Al Mansoura increased as tenants seek more affordable accommodation. “As a result, rents in Al Sadd, Bin Mahmoud and Al Mirqab have softened over the last three months in order to attract tenants. There has also been a fall in demand for corporate lettings of entire residential blocks and compounds. This has resulted in a number of residential apartment blocks remaining vacant,” explains Proudley.
On The Pearl-Qatar, DTZ estimates that new supply of apartments is likely to increase by between 30 percent and 40 percent in 2016 as up to 13 new towers in Porto Arabia and Viva Bahriya near completion. This will have a significant impact on the prime residential market, and has a potential to see rental levels reduce further if delivered as expected.
Qatar’s retail market has been driven by strong fundamentals in recent years, including increasing tourism visitor numbers, high levels of population growth and relatively high disposable incomes, with Qatar having one of the highest gross domestic product (GDP) per capita rates in the world.
“The retail market remains as one of Qatar’s brighter spots with close to full occupancy currently being achieved across major shopping malls in Doha,” says Green.
There is an estimated formal retail gross leasable area (GLA) of approximately 958,000 sqm in Doha (Q1 2016), comprising 17 principal malls and non-mall formal retail provision at The Pearl-Qatar.
Gulf Mall is the most recently completed retail facility, which added 160,000 sqm of GLA to the retail market in 2015. Villaggio is about to open a new 8500 sqm extension. Gulf Mall, City Center (West Bay), Villaggio and Landmark Mall together account for nearly 50 percent of formal retail GLA in Doha.
Across Doha, there are also a number of souks and secondary and tertiary strip retail spaces concentrated along central roads in the city (Salwa Road, A&B Ring Roads, Al Sadd, Airport Road).
“Close to 1.5 million sqm of additional future supply is at various stages of construction, and will be delivered in coming eight quarters,” says Shah. As a result, he adds, they foresee a significant price correction in the organised retail category with a shift towards partial transference of the business risk from tenants to developers, that is, from the pure rental model to a revenue share model in coming years.
“There are approximately 11 malls currently under construction in Doha, which are forecast to increase retail GLA in the city by approximately 1.1 million sqm by 2019, more than double of the existing stock,” says Witty, adding that nine retail projects are expected to be delivered by the end of this year, which will supply 836,200 sqm of GLA in total. “That said, experience shows that delays in opening are common, and in reality the current known supply pipeline may extend beyond 2019 for completion. Additionally, non-mall retail can be found on The Pearl-Qatar, at Katara and in Souq Waqif,” Witty says.
Major malls which are in the pipeline are Mall of Qatar, Doha Mall, Tawar Mall, Doha Festival City, Northgate Mall, Markhiya Mall (El Emadi Center), and Marina Mall, etcetera. Medium-term oversupply is predicted and it is likely that retailers will become more discerning, and over time, move from the less well performing malls to those that offer more of a family destination and better tenant mix.
However, Proudley says the positive aspect is that the new prime schemes such as Mall of Qatar and Doha Festival City are reporting high levels of occupancy and lettings prior to completion. “It is difficult to predict whether all the additional supply will be sustainable, but we anticipate that the malls that don’t meet shoppers needs in terms of tenant mix, layout, amenities and parking will suffer from vacancy in the future,” adds Proudley.
Green agrees that the huge pipeline of space, if completed, would totally transform the retail market, raising Qatar’s retail stock closer to Dubai’s levels, where there is currently around 2.7 million sqm of organised retail supply.
Qatar has experienced significant investment in the hospitality sector over recent years as the country has developed primarily as a business destination, and in 2015, according to the Qatar Tourism Authority (QTA) figures, Qatar’s tourism sector grew by 3.7 percent year on year with 2.93 million visitors.
“While visitor numbers are continuing to increase, Qatar’s hospitality market is suffering a slowdown with declining occupancy and average daily rates (ADR), resulting in a large decline in hotel revenues during the first quarter amid weaker corporate demand,” says Green of CBRE.
According to QTA, total room supply across Doha rose from around 8500 rooms in 2008 to approximately 20,700 by the end of 2015, representing an increase of 144 percent over the period and a compound annual growth rate (CAGR) of 13.6 percent.
Over the past 12 months, approximately 4800 rooms have been added to Qatar’s hotel supply, including both hotels and hotel apartments, with a further 4341 additional rooms due to be added to the supply in 2016 across Qatar, according to QTA.
“Assuming, 60-70 percent of this planned actually hits the market, downward pressure on occupancy and prices is inevitable. Signs of pressure in occupancy and prices are visible now, as occupancy in February 2016 was 16 percent lower than the occupancy during the similar period last year,” says Shah.
Qatar’s current supply is dominated by four-star and five-star accommodation, which accounts for 78 percent of room supply. Most of the new room stock in the market over recent years is centred around West Bay, West Bay Lagoon and Downtown Doha, and the development pipeline suggests that this trend will continue.
“Total demand, measured by the number of rooms sold, has grown over the last few years, but this growth has been outstripped by levels of new supply, which has led to an impact on average daily rate (ADR) performance,” says Witty.
As a result of increased competition, he adds, hotels have been forced to discount rates to attract guests and sustain occupancy levels. According to QTA’s data, this has led to a fall in annual ADR levels in Qatar from QAR557 in 2013 to QAR526 in 2015, reflecting a decline of 9.3 percent.
Historically, Qatar has not been a destination for significant external investment. “Given real estate markets are expected to be stable over the next few years, oil prices climbing back to comfortable levels, and also in view of maturing of Qatar’s legal and regulatory regime, we believe the investors would start to prefer Qatar. Based on our discussions with developers, we understand that property transactions and new purchases are happening, although at discounted prices. We believe the same would continue without any major impact in 2016,” Shah concludes.