With Dubai’s debt restructuring approaching completion, the question is tentatively being asked whether the worst is over for the Gulf’s previously red-hot property market. In most cases, that is wishful thinking.
As other opportunities for investment thin around the world, it could be that stage of the market cycle where oil prices spike. Back in the Middle East, according to a recent report by Saudi Arabia’s NCB Capital, “a turnaround in real-estate prospects now appears imminent across the GCC region”.
Even in Dubai, residents are returning from neighbouring emirates, where they had been forced to move because prices in Dubai were too high. According to NCB, mortgage volumes are back to pre-crisis levels, with rates having halved. In Kuwait, sales volumes and values have shown small increases.
But oversupply continues to plague the region, especially in office space. In markets such as Bahrain, hundreds of thousands of units are being completed, at the same time as businesses remain hesitant or simply unable to set up even small operations in the Kingdom.
Government infrastructure spending in markets such as Kuwait might provide alternative revenue opportunities for some builders. But the off-plan sales model is dead in the Gulf and developers still find funding from banks to be scarce. According to a recent Moody’s report, the peak year for Gulf property firms’ capital markets maturities is 2012. There could be more shocks to come.
NCB is right to suggest that things will improve in the property market if infrastructure developments keep up with the pace of property development. Governments encouraging higher-quality, longer-lasting buildings will help.
NCB is also right to say that the extent of any recovery in the property market will be limited to particular cities or jurisdictions. Indeed, 80% of projects on hold in the region are in the UAE, according to Moody’s, although about 55% of projects under development are in that country.
Saudi Arabia has a bigger permanent population than other GCC states. But projects there are too focused on luxury housing. In the commercial segment, the towers of the King Abdullah Financial Centre in Riyadh will be completed over the next few years. Some of the most important areas of the Saudi property market may be subject to the same problems of oversupply.
It is going to be a long time before the region becomes attractive for truly long-term institutional investment in property. Over the past decade there has been a tidal wave of new supply. But overall the region has a tiny population. Because of this, and because of the amount of capital washing around the Gulf – and the lack of other options for investment – the market will bear the hallmarks of speculation for a long time to come.
