JEDDAH: The global financial crisis, the fall in oil prices and the spiral into deep world recession have hit the GCC (Gulf Cooperation Council) real estate sector very hard. The drop in capital flow, assets prices and oil revenues severely dented investor confidence and forced a substantial scaling back of the large number of infrastructure and construction projects, according to a monthly report, released last week, by the Samba Financial Group entitled “Real Estate in the UAE and Qatar: A Correction After Rapid Growth”.
Real estate sectors in the UAE and Qatar have boomed over the past three years, boosted by rapid economic growth, rising incomes, abundant liquidity and growing expatriate populations. Property prices have more than doubled, and continued to rise strongly through the first half of 2008 before suffering a major correction as the global financial crisis hit hard.
However, prices have fallen by 20-40 percent in both Qatar and the UAE since their peaks in mid-2008, with the Dubai property market particularly hard hit. “The absence of historical housing price indices makes it impossible to predict reliably how far house prices will fall. “Until the global recession and financial crisis hit home in the second half of 2008, the real estate markets in the UAE and Qatar were typified by an acute housing shortage as increasing demand, spurred on by rapid economic growth, outstripped supply. These demand pressures caused prices to rise strongly,” Howard Handy, chief economist at Samba Financial Group, said.
According to indices calculated by mazayindex.com, between 2005 and the first half of 2008 real estate prices doubled in the UAE and tripled in Qatar. Key to the increase in demand has been the rapid increase in the expatriate populations, abundant liquidity with easy access to cheap finance, large government diversification and infrastructure investment programs, and enhanced incentives for foreigners to invest in real estate, including access to residency visas.
“The collapse in oil prices and the sudden curtailment of international credit have led to a sharp tightening of liquidity in the region. The lack of available financing has had a major impact on the demand for real estate. This has also been hit by a surge in negative sentiment as it became clear that the Gulf economies have not decoupled from the global economy, and were exposed to the sharp correction in asset prices worldwide,” Handy said.
The Samba said in its May report a slowdown in economic activity had led to expatriate redundancies, adversely affecting previously strong demographic support for real estate prices. Given that most expatriate visas in the GCC are tied to specific jobs, redundancies are more or less synonymous with emigration. Projecting population trends in such circumstances is very difficult, but the severity of the global recession and credit crunch is expected to have a substantial impact on non-oil sector activity.
While governments are expected to pick up some of the slack, the postponement and cancellation of projects in the region will reduce the demand for labor, and there is a risk that expatriate population levels will stagnate, or even decline.
This will affect demand at a time when large new supply is due to come to the market, particularly in Dubai.
Handy said there were four key factors — falling demand, a lack of funding, worsening consumer sentiment and a risk of oversupply — which were driving the current correction in real estate prices. However, the short-term outlook is clearly not promising as all the elements that worked to drive the real estate boom have currently reversed.
In addition, the world economy has slumped into a deep recession, with global financial sectors still under stress and world growth is projected to decline by over 1 percent this year, with only a small recovery expected in 2010. Handy said: “Prospects for real estate markets in Qatar and the UAE will depend both on the timing of a global recovery, and country-specific economic, demographic and supply side developments, as well as government efforts to stabilize financial and real estate markets.”