Thursday, October 20, 2011

Construction's Disruption

Qatar's real estate sector is awash with potential and burdened by bad management

It has been a turbulent few years for the Qatari real estate sector in the wake of the financial crisis, with both rents and prices dropping, albeit to more realistic levels. While retail and commercial space may be on the uptick, all property-related developments have major infrastructure projects to contend with as Doha scrambles to build a metro and railway link, new roads, stadiums, port facilities and a new airport in time for the World Cup in 2022.

Indeed, much of the city and its outer reaches resemble a massive construction site, with cranes dotting the skyline, roads constantly diverted due to road works and roundabouts torn up to make way for overpasses to ease congestion. When major cement-laying is in progress, at one or other of the mega-projects, trucks laden with cement stretch across the country to the Saudi Arabian border. Such rapid infrastructure development will present problems for developers trying to shift office and real estate space, and cause a lot of re-locations until major works are finished.

“In June work started on the underground system in the West Bay area, 17 holes the size of football fields. It will be interesting to see how it will affect demand for office space. I think the port area will become more attractive for a period due to the disturbance,” said Edd Brookes, director and head of valuation at real estate firm DTZ-Qatar. It is a similar conundrum for salesmen at the Lusail development north of the capital, which is due to house 250,000 residents over the next 15 years. “Even if they finish the first phase by 2012, you’ll have to live next to a construction site for over a decade,” said a real estate analyst, speaking on the condition of anonymity.

While the massive infrastructure work to get Qatar ready for the World Cup is going to cause a great deal of noise pollution and traffic jams for Doha’s inhabitants, it does have a flip side. The major real estate and infrastructure projects — from the airport to the $5.5 billion Mesaieed Port – were all under construction prior to Doha being announced as the host of the 2022 event. The successful bid has given developers a much-needed push to meet slated targets. For instance, work on the $14 billion New Doha International Airport began in 2004 and the first phase was initially to be operational in 2009 and be fully completed by 2013. Yet work has still not been finished and the scheduled completion is ostensibly 2015. “The World Cup has given a time horizon, as otherwise things drag on and on,” said one analyst. “But they are going to struggle, it will be right down to the last minute, as it was with the Asian Games [in 2006].”

Ear plugs for the office

The decision to invest in a metro and rail system, while necessary for long-term transportation needs, has arguably come too late for Doha’s central business district (CBD), West Bay, with the above earth infrastructure developed before the underground work. The timing of such infrastructure work is equally problematic, as while Doha needed a CBD and an attractive skyline of shiny towers to present a modern image of the country for its brand publicity, the new office space has not been snapped up by private investors as was expected. The large number of empty office spaces led the government to stipulate that new businesses move to West Bay, but for many it remains too expensive. Instead, financial advisory and advertising agencies have shunned a more exclusive address to opt for larger, cheaper premises away from the business district.

A further issue is the size of the offices, at an average of 20,000 square meters (sqm), whereas 47 percent of market demand was for 1,000 to 4,999 sqm offices, and 32 percent for 5,000 to 9,999 sqm, according to real estate firm DTZ-Qatar. Developers have so far resisted requests to break office spaces into smaller units more conducive to commercial needs. This has left the state sector to take up the slack. “There is not that much space available now in West Bay, as people seem to think,” said Abbas Shafiei, managing director of real estate firm Engel & Völkers. “You don’t spend money for wonderful towers and then leave them empty. It is now Qatari Riyal(QR) 170-175 [$46-48] per square meter and all [empty space has been] taken by the government.” Last year, government offices accounted for 120,000 square meters, or 25 percent, of the West Bay area.

But while government intervention has prevented whole floors or buildings from lying empty, its actions have had a knock-on effect.

“The fly in the ointment is a government committee implemented rental caps for offices at below market rates of QR170 ($46) per meter squared. This sends a message to non-government occupiers that this rate is a normal rental level. That’s had an effect on the market,” said one real estate analyst.

Buy or rent?

Qatar is hedging itself against a Dubai-style real estate bubble by restricting foreign ownership to three districts — West Bay Lagoon, The Pearl and Al Khor resort — and 18 other areas on a 99 year lease, most notably high-end projects like the $4 billion Lusail city and Musheireb.

There has been growing interest in real estate but legal complications still abound, with residency visas for foreign property buyers only being granted for the first time this March to two individuals, and based on the real estate developer being the sponsor of the residency permit. “That is not a whole lot of (residency permits) if you consider 35,000 expatriates are expected to live at The Pearl,” said an analyst. Some 70 cases of non-Qataris seeking ownership of properties are still pending with the government.

“On the residential freehold side, each plot has a title deed issued which the owner is supposed to get, but the issuing structure still needs to be sorted out. This is an important issue, especially with regards to funding from banks, as they can take over a property without a deed. Without a clear structure, this puts people off purchasing,” said another real estate analyst.

Although interest is set to spike in the run up to the World Cup, real estate developers have not sold as many units as expected. The causes for this are primarily the high costs of properties and the perception that Doha is not as attractive a market as Dubai was prior to the 2008 crash. Equally, banks have made it difficult for non-residents to access credit, with interest rates at 8 to 9 percent.

“The principle [aim] of all the developers is to sell to foreigners, but in reality not that many have sold, especially as Qatar is not looked at as a [favorable] destination. It is difficult to sell to foreigners, even Europeans and Americans. It is much easier to sell to Qataris and to Arabs,” said Engel’s Shafiei.

As a result of such market dynamics, there has been a greater propensity for people to rent rather than commit to buying, particularly expatriates working in the country.

“The trend for new developers is to lease, not sell, as it will drive up prices as the market is more restrictive than people think. Expats are less tied to buying as they have only a two to three year commitment to Qatar,” said DTZ’s Brookes. Indeed, analysts estimate around 90 percent of the real estate sector is for rent.

“If you had a QR15,000 [$4,120] a month rental allowance you have two options: rent or buy at, say, The Pearl. Logic would tell you to buy, but unfortunately people don’t see it as 100 percent safe to buy, especially now with the problems globally and in the region, in Bahrain, Syria and so on,” said Shafiei.

Real estate sales have also been affected by delays in project completion and unexpected changes in the management of government-connected firms. Barwa City, for example, a project to house 25,000 people developed by state-run Barwa, went through three chief executive officers this year, with the last CEO only staying in the job for three weeks. He was let go over his attempts to restructure the mother company as three companies were essentially overlapping, but this required firing locals. “He did what was needed and normal, but here you can’t fire 90 Qataris without repercussions,” said the real estate analyst. With the Barwa project floundering, the state-owned Qatar Airways came to the rescue in June by agreeing to rent the entire city for QR7.1 billion ($1.95 billion).

The heavily publicized real estate development The Pearl, a $20 billion self-contained residential city built on man-made islands by the United Development Company (UDC) outside of Doha, has also faced problems. Most notably its overly high prices per square meter have warded off potential buyers in the non-secondary market, but there were also problems with cash flow due to run-away construction costs. Indeed, prices at certain developments at The Pearl have gone from QR8,000 ($2,200) per sqm in 2006 to QR22,000 ($6,040) per sqm.

“UDC only gives you fantasy. It is like an ostrich with its head in the sand as it has not sold many units for two to three years because the developers have not lowered prices while the secondary market is now 30 percent cheaper,” said a real estate analyst that wanted to remain anonymous. “And UDC is stuck in the Pearl project. While the figures announced in the newspapers all look good, the reality is that they (UDC) are starved of cash and failing to finish the project. Real estate firms have even faced legal action from UDC due to less than glowing market reports.”

But while the real estate sector is facing certain issues that need to be ironed out, analysts do stress the medium to long-term potential of buying property now, and have noted an uptick in sales following a slump in 2008 and 2009.

“Qatar really is a good place to invest,” said Shafiei. “Our figures are way over my expectations for 2011, and this is not just to do with the announcement of the World Cup. Sales have picked up across the board and there’s good value to be had across Doha. This year is good and next year things are really going to take off.”

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