Global: GCC real estate sector buoyed by unhindered capital flows
In 2005, real estate continued to evolve as one of the important sectors in the GCC region, aided by high liquidity and increasing demand from various quarters. This was aptly reflected in the valuations of listed companies and the sheer increase in the number of them. Market capitalization of the sector formed 6.7% of the total market capitalization in GCC. UAE has seen the most action, with the sector contributing 18.3% of the total market capitalization in that country.
Growth pattern of the real estate companies in the region more or less followed the global trends with lesser dependence on rental streams and increasing focus on development, speculative property purchases and fund management. Owing to the enormous liquid assets that most of these companies possess, this trend could be expected to continue.
Very high liquidity was the single-most important factor to buoy the sector in the last two years. While the key driver continued to be high oil revenues, other factors such as high government capital spending, easy availability of credit and the establishment of real estate funds investing in the region aided the cause. Size of real estate funds invested in GCC increased to almost US$2bn in 2004 from a paltry US$42mn in 2002. At the same time, large chunk of GCC money (estimated at US$300bn) invested in the developed markets were repatriated back. Foreign capital too played a role, prominent being the Iranian investments in UAE.
The huge capital flow into the real estate markets was driven by the investor confidence in the sustainability of burgeoning demand. With 36% of the GCC population below 15, the region would continue to witness huge housing demand. The booming economies are attracting large number of expatriates too, which bolsters the rental market. In addition to this internally generated demand, there is also a large foreign interest in terms of tourism or to own holiday homes in places like Dubai.
In the face of very high demand, supply more or less lagged behind in the last two years, leading to drastic increase in property prices. This has been particularly true for the low and middle end housing market. Government initiatives to improve the landscape in places such as Doha and Abu Dhabi led to forced housing shifts, worsening the supply crunch in this segment. High quality office space continues to be in short supply, especially in Dubai, Qatar and Saudi Arabia. Shortage of hotels is acute in most of the places, more so in Dubai, Doha and Muscat. Industrial property is set to bring huge returns in the next few years, with the unwavering focus on manufacturing in countries such as Qatar and Saudi Arabia and places such as Abu Dhabi and Sharjah.
However, huge supply is set to come in a few segments promising to match or even outstrip demand in about 2-3 years. Dubai continues to see unhindered supply of high end property in anticipation of investments from abroad. Bahrain is set to enter an oversupply situation for high quality office space in a year or two. Per capita retail space has touched very high levels, even by global standards, in most of the major cities in GCC.
Absurdly high land prices would continue to be a major factor in the years to come. Land prices as a proportion of the total project cost on an average increased to as high as 25% in Kuwait and Qatar. This is very high compared to the international norm of 10-15%. However, land prices continue to be relatively low in few other countries such as Oman, which could see more investment, speculative and opportunistic demand in the years to come.