Qatar: Construction boom risks slump

Analysts estimate the size of Qatar’s sovereign wealth fund at some $100 bn

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Qatar’s ambitious economic policies have sustained double-digit growth rates while much of the world has struggled over the past few years. But the state may now be overreaching, as a building boom threatens a glut in its property market. State-owned property developers Barwa Real Estate and Qatar Diar are set to spend QR100bn ($27.5bn) over the five years to 2016 on commercial and residential projects, according to a national development strategy unveiled last March for the country of 1.7mn people.

The government is backing that with promised public investment worth $95bn during the period, over $65bn of which is expected to be on infrastructure. The construction frenzy has led to a jump in lending to the real estate sector. But much of the property market is weak, with rents and prices falling. Lending into such a weak market could hurt banks’ balance sheets while worsening the real estate slump by increasing supply of new homes and offices.

Raj Madha, regional banking analyst at Rasmala Investment Bank, said it was becoming increasingly important for investors to know exactly where real estate loans were going - but that detailed information was not available. “We are seeing some increase in non-performing loans for example and we are seeing property prices generally going in the wrong direction,” he said. Behind Qatar’s building boom is its desire to diversify away from energy resources, which account for over half its economic output, and become a finance, trading and tourism hub in much the same way as nearby Dubai has done. Qatar’s successful bid to host the 2022 soccer World Cup is part of this strategy, and should provide massive demand for accommodation and retail space. For now, however, the real estate market is oversupplied.

A review by consultants Jones Lang LaSalle in November showed that office space vacancies were around 20% in the capital Doha, and would continue to increase as new supply appeared. The picture in the residential sector appears similar. The rents component of Qatar’s consumer price index, which includes utilities and housing services as well as rents, fell 4.8% on average in 2011, though that was a slower drop than a 12.8% slide in 2010. The International Monetary Fund predicted rents would stay depressed for some time. As the impact of two decades of expansion in gas output fades, Qatar’s economic growth is expected to slow from an estimated 17.5% in 2011 to a still-high 6.2% this year, according to a Reuters poll of analysts.

The question is whether growth will be high enough to absorb property supply created by last year’s surge in real estate lending. Annual growth in such lending was 95% last October, the fastest pace since at least 2008; in December it was 49%, central bank data show. Overall private sector credit growth in Qatar hit a 30-month high of 22.3% in November, before slowing to 19.2% in December. In the eyes of some analysts at least, the concern is that Qatar could come to resemble Dubai not just in its diversification strategy, but in overextending itself in real estate. Dubai operated on a “build-and-they-will-come” model for most of last decade, only to suffer a property crash in 2008 and 2009. This forced a $25bn debt restructuring at state-owned Dubai World.

Doha is starting to boast spectacular architectural designs rivalling that of flamboyant Dubai, such as the al-Bidda Tower, a 215m-high commercial building with a shape that twists as it rises. “The similarity (with Dubai) is that there are potentially too many properties with not enough people to occupy them, leading to a build-up of capital in the residential property sector, and consequently potentially a liquidity squeeze for developers or investors down the road,” Madha said. Qatar has some major strengths which Dubai lacks. Its banks have a very low ratio of non-performing loans at just over 2%, well below roughly 6% for the UAE, banking sources said. Qatari banks’ average capital adequacy ratio, a measure of their ability to cover any losses on their loans, rose to 22.3% in mid-2011 - a very high number by global standards — following injections of government funds into the banks in 2009-2011, according to the IMF. And in contrast to Dubai, which had to seek a bailout from Abu Dhabi during its crisis, the Qatari government appears to have plenty of spare cash with which it could intervene during any property crisis. Analysts estimate the size of Qatar’s sovereign wealth fund at some $100bn, while the central bank’s net foreign reserves were over $16bn in December.

“Unlike Dubai ...the government itself has the resources to provide liquidity to the system, should it decide to do so, and that offsets risk for the banking sector, provided they have good reason to believe that backstop is in place,” Madha said. Qatari Central Bank Governor HE Sheikh Abdullah bin Saud al-Thani told Reuters this week that he was satisfied with the rate of property credit expansion, though he declined to comment on the outlook for the future. Nevertheless, Qatar’s room to maneouvre is not unlimited. It would find it difficult to use the traditional tool of interest rates to cool the building boom because its riyal currency is pegged to the US dollar; this means an interest rate hike could attract speculative fund inflows into the country, destabilising markets.

The central bank might instead have to use other tools to manage liquidity in the banking sector, including raising banks’ reserve requirements and absorbing excess liquidity through issuance of Treasury bills or local government bonds. In a statement released last month after routine consultations with Qatar, the IMF warned commercial banks and the central bank that they “need to ensure that the overall credit quality does not weaken, particularly in the real estate sector in view of the prevailing excess supply, and the precarious global economic outlook”.