Rent Inflation in Qatar: A problem to solve?

Rising rental inflation has become a hot topic in Doha over 2014, with data from the Ministry of Development Planning & Statistics (MDPS) indicating that Consumer Price Inflation (CPI) for rent and utilities rose by 8.1 percent over a 12-month period to the end of September 2014. That is the highest annual increase since the 19.7 percent recorded over 2008. 

DTZ’s own research indicates that rental rates for residential property have been rising steadily since early 2011. Prime two-bed apartments in the Diplomatic District or The Pearl-Qatar, that could be rented for approximately QAR 12,000 per month at the end of 2010, are now leasing at rates closer to QAR15,000 per month, equivalent to a 25 percent increase over a four-year period. It is worth noting that this is still well below the peak of the market in 2008, when rents for two-bed apartments in some prime towers reached as high as QAR21,000 per month.

In comparison, rental rates across the commercial office markets have remained relatively stable since the start of 2011, though the first signs of rental increases have been recorded in 2014. In particular, rates for international quality accommodation and small suites that are limited in availability have witnessed strong rental growth over the year.

The primary drivers of rental inflation are twofold. Strong economic performance and high levels of domestic investment continue to generate work and employment opportunities in Qatar. That creates inward migration and demand for real estate across all demographic levels and asset classes. In conjunction with high levels of demand, Qatar is also suffering from slow growth in new supply and limited availability of stock.

The expanding population is reflected in data produced by the MDPS, which indicates that the population in Qatar reached 2,216,500 by the end of October 2014, an increase of 516,000 people from the population of 1.7 million recorded at the end of 2011. That equates to population growth of 30 percent over a period of 34 months to the end of October 2014.

Stating that growth in supply is slow and availability limited is probably a surprise to many people, given the high level of construction activity, and also what appears to be numerous buildings standing empty.

DTZ’s research indicates that an additional 700,000 square metres (sqm) of prime office accommodation was completed and brought to the market in a three-year period between January 2009 and the end of 2011. In comparison, the level of prime office stock has only increased by 340,000 sqm from 1.38 million sqm at the end of 2011 to reach 1.72 million sqm over the last three years. That equates to 50 percent less new supply of prime stock than the preceding three-year period. 

Growth in supply for the prime residential apartment market is slightly more balanced, with 5000 new units completed in West Bay and at The Pearl-Qatar over the period 2009–2011, compared to 4900 units over the period 2012–2014. However, when population expansion is considered in conjunction with data on new supply, it becomes clear why rental inflation has been prevalent in this sector of the real estate market.

While new supply grew at a comparable rate over both three year periods, the population in Qatar only grew by 150,000 people in the three year period up to the end of 2011; in contrast, as outlined above, it has risen by more than 500,000 people in the following three years. 

Obviously not all of the additional 500,000 people that have arrived in Qatar over the last three years are looking to rent an apartment in West Bay or the Pearl-Qatar, but assuming an average occupancy of 2.5 people per apartment unit, only 12,250 people, or less than three percent of the population growth recorded, will be required to fill up all 4900 apartments added over the same period.

A statement that we hear frequently is, “there are a lot of empty buildings in Qatar, so there must be a lot of availability”. This is a common misperception and the reality is that most of these buildings are either not ready for occupation and are still awaiting final approvals from Civil Defence or for connection to utilities/other infrastructure, so are not technically completed; or they have already been leased out, but are not currently being utilised by the tenant.

DTZ research estimates that the vacancy rate for office accommodation has fallen from a peak of 21 percent at the end of 2011 to approximately eight percent in the current market. Availability of residential, while more difficult to measure, is even more limited with most towers in West Bay and the premium compounds across Doha running at full occupancy levels, with waiting lists in some cases. 

According to data produced by the Ministry of Justice, average land prices in Qatar increased by 52 percent in the first seven months of 2014. There have been a number of reports in Qatar recently, citing that the rising land prices are an additional factor driving rental inflation.

In our view, this is contrary to the way the market operates. The price that developers are willing to pay for land should be reflective of the end value of the completed development, which is usually determined by the anticipated rental income. Rents will continue to be primarily dictated by supply and demand for built stock. The current surge in land prices appears to be mainly based on speculation that rents and end values will continue to increase significantly into the future.

Land prices only impact on rental rates over the longer term if the price of land reaches a point that it becomes unfeasible to develop it and make a return to reflect the risk of development or because higher returns can be derived from continually selling the land in a rising speculative market. In these scenarios, commencement of construction is often put on hold and the land remains undeveloped, leading to a shortage of completed stock in the future. Most real estate projects in Qatar take at least three years from initial consideration through to completion. Due to the time lag of development, the potential shortage in new supply caused by excessive land prices now is unlikely to be felt in the market or impact on rents for several years.

Inelasticity of supply in the real estate market is partially to blame for the current rental inflation scenario. Few new developments commenced over 2009-2010, due to the downturn in the real estate market over this period. Rental rates being achieved at that time made anticipated financial returns from development unattractive, with developers uncertain of the future and putting projects on hold leading to the shortage in supply that is being felt now. The current boom in demand has increased rental rates but the significant time lag required to design a project, obtain permits and construct the development mean that supply is unable to react to meet this demand.

So besides the obvious increase in living and operational costs being incurred by residents and business, what other real estate trends are being driven by rental/price inflation?

Demand for apartment accommodation will remain strong with more people relocating to Qatar without their families due to the high costs of living, but also a lack of available school places. DTZ has witnessed an upturn in demand for three bed apartments from young professionals willing to share accommodation to reduce costs.

More low-to-middle-income housing will develop on the outskirts of Doha in locations like Wukhair and Al Kheesa as rising land costs make development of lower income producing property in central areas prohibitive.

In terms of the market outlook, DTZ expects the recent rental inflation trends will continue in the short to medium term, subject to population growth being sustained due to the inelastic characteristics of supply.

 This article first appeared in the January 2015 Edition of The Edge.

DTZ has just released its Q4 2014 report which is available here.