Real estate in Qatar – A growth story: The economic background

Real estate in Qatar – A growth story: The economic background

The Qatari financial services sector

A burgeoning real estate sector

In recent years, Qatar’s story has been one of breathtaking economic growth. Between 2003 and 2006 alone, nominal GDP growth averaged 24.6%, bringing GDP to $52.7 billion, meaning that in those four years the economy tripled in size. The result, according to a recent Standard & Poor’s report, is that GDP per capita reached $57,000 in 2007, compared with $27,000 as recently as 2002. That makes Qatar one of the world’s wealthiest nations, closing the gap on the leaders in the most recent ranking published by the IMF – which made Luxembourg the richest country, with a GDP per capita in 2005 of just over $80,000, followed by Norway ($64,193).

Other macroeconomic yardsticks paint a similarly impressive picture of Qatar’s recent economic development. The fiscal balance, which was in deficit throughout much of the 1990s, has recorded an average surplus of almost 8% of GDP since the start of this decade. The current account deficit has also swung from being in deficit in the 1990s to a surplus of more than 30% of GDP in 2006. That helped net foreign assets held by the Central Bank of Qatar (CBQ) to reach $5.4 billion by the end of 2006; external debt, meanwhile, fell from 58.3% of GDP in 2003 to 40.8% in 2006, according to World Bank calculations.

Qatar’s explosive growth in recent years has been underpinned by an unprecedented surge in inward investment. According to the World Investment Report for 2006 published by the United Nations Conference on Trade and Development, Qatar ranked third among Gulf Cooperation Council countries for inward foreign direct investment in 2006, attracting close to $1.5 billion of inflows.

Although abundant oil and gas, twinned with rising global commodity prices, have inevitably been the principal motors of growth over the past decade, it is a mistake to attribute the boom exclusively to Qatar’s natural resource wealth. “The country is enjoying the fruits of a development strategy set in the 1990s that combines economic openness with a clear economic diversification plan and institutional and democratic reforms,” explains research published in May 2007 by the National Bank of Kuwait. “That strategy, together with favourable energy prices and high investment spending, is likely to see the pace of growth sustained at high levels over the next five years. The size of the economy could double again by 2012.”

Ratings upgrades
The Qatari success story has been recognized by international ratings agencies. In August 2005, Capital Intelligence foreshadowed the ratings actions of the larger agencies when it raised Qatar’s long-term foreign currency rating from A– to A+. The agency explained at the time that “the upgrade reflects CI’s expectation that investment in the gas sector and other export-oriented industries will continue to deliver budget and current account surpluses over the medium term, thereby further enhancing already strong debt-servicing ability.”

Moody’s followed suit in October 2006, when it raised the ratings of all six members of the GCC. “The upgrade reflected the strengthening of the government’s balance sheet associated with the recent period of sustained, elevated oil and gas prices,” Moody’s explains, “providing a significant cushion against economic shocks.”

The macroeconomic strength of Qatar – and of a number of other GCC economies – raises the question of why these countries have been unable to secure optimum ratings on a par with a number of western European economies that have much weaker economic metrics. After all, as S&P observed in a report published in May 2007, Qatar’s “combination of high per capita income, an efficient public sector, market-oriented policies, and prudent fiscal policies are typical characteristics of countries in the ‘AAA’ and ‘AA’ categories”.

One of the factors holding back Qatar’s rating, says S&P, is the geopolitical risk profile of the region. “Qatar’s vulnerability, in the event of any potential conflict, is due to its large hydrocarbon industry and the presence of US military bases in the country, both of which could make it a target for Iranian retaliation if Iran were attacked by the US or Israel,” the agency explains. “A conflict would imply a possible interruption in production of some of Qatar’s main exports.”

S&P adds, however, that this risk is slim and receding, in part because Qatar’s strategic location in the region acts as a strong mitigating factor to external threats to Qatar and other GCC countries. “Moreover,” notes S&P, “domestic threats in GCC countries are diminishing as internal security is tightened, economic prosperity spreads throughout the population, and elements of democracy are introduced.”

There are other elements constraining GCC sovereign ratings, however. Moody’s cites, for example, the relative underdevelopment of Qatar’s political, administrative and legal institutions as decisive factors, together with “a lack of transparency regarding the public finances, and the poor quality and timeliness of official data.”

Oil and gas: the drivers of growth
According to data published by Qatar National Bank, in December 2006 Qatar’s oil reserves stood at 26.2 billion barrels, a substantial leap from the total of just 3.7 billion in 1999. That total is set to continue to rise in the coming years. According to the latest report on Qatar published by Moody’s, state-owned petroleum company Qatar Petroleum plans to raise Qatar’s total oil production capacity from the present level of about 850,000 barrels per day to 1.2 million b/d by 2009. The country’s crude oil and condensate reserves, adds Moody’s, are set to last for almost 70 years at current rates of extraction.

It is the Qatari natural gas sector, however, that has been the most conspicuous motor of economic growth in recent years. The 6,000 square kilometre North Gas Field, originally discovered in 1971, is the largest non-associated gas field in the world, with proven reserves estimated at more than 910 trillion cubic feet, which is equivalent to 164 billion barrels of oil. “These reserves would translate into 20% of the world total and will be sufficient to support planned production of natural gas for over 200 years,” notes a Qatar National Bank report published in October 2007. It adds that in the Middle East, Qatar has the second-highest proven gas reserves after Iran.

Exports of liquefied natural gas are a relatively recent development in Qatar, with the country’s location limiting large-scale pipeline exports. As a consequence, it was not until 1997 that Qatar started exporting LNG. Since then, though, the country has rapidly developed into the world’s largest LNG exporter.

Global sales of LNG are the responsibility of Qatargas, which was originally formed to operate three LNG trains with a capacity of 2 million tonnes per annum each. Qatargas’s majority shareholder, with a 65% share, is Qatar Petroleum, with TotalFinaElf holding 20%, ExxonMobil 10%, and two Japanese partners – Mitsui and Marubeni – each holding 2.5%.

Today, Qatargas exports close to 10 million tonnes per annum of LNG from its three existing trains, with Japan continuing to be the main source of demand, accounting for 6.4mtpa of total exports in 2006. The balance is spread between Spain (2.6mtpa in 2006), the US (0.4mtpa) and others (0.1mtpa).

Global demand for Qatari LNG continues to gather momentum, driven in large part by growing concerns about climate change and the harmful environmental impact of fossil fuels. As a Moody’s analysis comments: “Based on capacity coming on-stream and already contracted volumes, LNG exports should almost triple by 2011.”

In June 2002, Qatargas II was set up by Qatar Petroleum (with a 70% share) and ExxonMobil (30%) in response to this growing demand. Calling for a total investment of almost $13 billion, the first train at Qatargas II is scheduled to start production in 2008, with the project ultimately expected to supply the UK with up to 14mtpa of LNG. Two more recently inaugurated projects, Qatargas III and Qatargas IV, will add capacity of as much as 15mtpa, with exports directed principally towards Europe, North America and Japan.

Another key initiative supporting rising exports of Qatari LNG was the establishment in 1993 of the Ras Laffan LNG Company (RasGas), which has increased its exports from 6mtpa in 2000 to 15.6mtpa in 2006. Asia is the principal market for the RasGas output, with South Korea accounting for 6.7mtpa of total exports in 2006 and India, which started importing Qatari LNG in 2004, for a further 4mtpa.

Also supportive of rising LNG exports is the Dolphin project linking Qatar’s North Field with the UAE and Oman, which is the first cross-border gas project in the Gulf region. Dolphin is 51% owned by Abu Dhabi’s Mudabala Development Company, with the balance held by France’s Total and US Occidental, and is expecting to increase exports to the UAE to 2 billion cubic feet per day by early 2008.

The non-oil economy
Although oil and gas have inevitably accounted for the lion’s share of economic growth in Qatar – as well as in the other oil-exporting Gulf nations – in recent years the non-oil economy has also expanded, with its share of GDP rising from 54.5% in 2004 to almost 62% in 2006. It posting a compound annual growth rate of 18% between 2004 and 2006. That growth has been underpinned mainly by electricity and water (27.9%), building and construction (26.2%), finance, insurance and real estate (26%) and transport and communications (18.2%). Manufacturing expanded by a more modest CAGR of 8.4% in the same period.

The government is eager to promote manufacturing as a source of economic diversification, and offers investors in this sector incentives including low-interest rate loans, subsidized electricity and water, low-cost land leases, and tariff and tax benefits.

However, more could be done to support the development of more industries aimed at further lessening Qatar’s reliance on oil and gas. For example, at a recent conference organized in Doha by the Gulf Organisation for Industrial Consulting, Qatar’s minister of state for energy and industry affairs, Dr Mohammed Saleh Al Sada, urged industrial development banks to step up their efforts to provide longer-term financing solutions for industrial projects to support accelerated economic diversification.

A progressive political environment
Striking progress in Qatar has been achieved beyond the macroeconomic level. Qatar is also generally regarded as one of the most progressive political regimes in the Gulf in general and the Middle East in particular. Although political reform began in the mid-1990s, the process has recently been accelerated, with a new constitution drafted in July 2002. One of the most notable provisions of this constitution is the establishment of an elected parliament – the majlis al-shura – to replace an advisory council appointed directly by the emir. In the planned new unicameral parliament, the emir will still appoint one third of the 45 members; the remaining 30 will be directly elected by universal suffrage.

Following a referendum in April 2003, in which the new constitution won overwhelming popular support, it became effective in June 2005. Elections that were to have chosen the first parliament have been delayed. However, as S&P observes in its recent analysis, “now that the registration process for voters and potential parliamentary candidates is complete, the election seems more likely to happen than before.”

Political reform has been recognized and welcomed by overseas commentators, with S&P advising in its recent analysis that “the new Constitution, along with greater independence for the judicial system, will strengthen the quality of Qatar’s governance and enhance its transparency”. Other positive indications of the warm international response to political reform in Qatar include its number one ranking among Arab governments in the United Nations Development Programme Human Development Index for 2005, and its position at number two among Arab countries in Transparency International’s Corruption Perception Index.

The drive to diversify
For the foreseeable future, there appears to be no immediate danger of Qatar’s oil and gas reserves running out. A report published in October 2007 by Qatar National Bank explains that “given an average production of 740,000 barrels per day over the past five years, proven reserves would last approximately 97 years. ” Indeed, today’s proven resources are projected to continue to rise over the next few years: Qatar Petroleum’s current five-year plan (2007-11) calls for a total investment of just over QR300 billion ($82.4 billion), with an ambitious range of onshore and offshore projects helping to lift production from 745,000 b/d now to 1,025,000 b/d by the end of 2010.

Nevertheless, the Qatari government is well aware that the Gulf states failed to capitalize on the opportunities presented by previous oil windfalls. This time around, Qatar is resolutely determined to ensure that the benefits arising from rising oil and gas output and high global commodity prices are maximized to ensure that future generations need not rely purely on natural resources. Economic diversification has therefore been the mantra among all GCC governments in recent years, with Qatar no exception.

Internationally, perhaps the most striking manifestation of Qatar’s single-minded pursuit of that diversification has been the ambitious global acquisition strategy of the Qatar Investment Authority, which until 2005 was known as the Supreme Council for Economic Affairs and Investment. QIA is a sovereign fund whose prime objective is to achieve revenue diversification for the state of Qatar over the next 15 years in support of the government’s objective of loosening its dependence on commodity exports. Its principal focus is therefore on assets outside the immediate GCC region as well as on local opportunities in sectors other than oil and gas.

In the real estate sector, for example, QIA set up the Qatari Diar Real Estate Investment Company in December 2004 “to support Qatar’s rapidly expanding economy and to provide structure and quality control for the country’s real estate development priorities”. Capitalized at $1 billion, Qatari Diar started operations in March 2004 and now has 18 projects under development. As well as showcase domestic initiatives such as the Lusail Project north of Doha, Qatari Diar has become increasingly active overseas. Its first international project was the Al Houra development in Morocco, a $600 million complex spread over 2.3 million square metres on 2.5km of coastline close to Tangier, which includes a five-star hotel and a championship golf course. Since that initial venture overseas, Qatari Diar has added key projects in the real estate markets in Oman, Egypt, Syria, Sudan and the Seychelles to its portfolio.

In other sectors and geographical regions, QIA has acquired four of the largest nursing homes in the UK for approximately $5 billion, as well as property interests in key locations ranging from Canary Wharf in London to Kuala Lumpur. Other international investments include stakes in the London Stock Exchange, the Nordic Exchange (OMX), French conglomerate Lagardère, Jordan’s Housing Bank for Trade and Finance, and Raffles Medical Group in Singapore. QIA is also a co-investor in Dubai International Capital’s 3.12% stake in the European Aeronautic, Defence and Space Company (Eads), the group that includes the Airbus manufacturer.

For the QIA – which in 2006 had assets estimated at $40 billion, which some analysts believe had risen to $60 billion by late 2007 – the acquisition of blue-chip assets in a range of diversified industries has not always been plain sailing. In October 2006, the QIA lost out to a group led by Australia’s Macquarie Bank in its bid for UK-based utility Thames Water and more recently it abandoned an ambitious $21.6 billion bid for J Sainsbury, the UK retailer that was established in 1869 and owns 769 stores.

The failure of those two high-profile bids is generally regarded as little more than a temporary setback; a recent report published by Standard Chartered Bank forecast that the QIA’s assets would double to $120 billion within the next three years. It is certain, then, that the QIA will not let the failure of its Thames Water or Sainsbury bids derail its international acquisition strategy.