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Gulf states need to take direct action to revive realty sector

09 April 2009
The Gulf countries have not taken too many direct or immediate supportive actions to revive their real estate markets during the economic slowdown, believes an industry expert.

"The primary stimulus has been via shoring up the banking system, so that liquidity can be extended to all market participants. As such, there has not been too many direct or immediate supportive actions with an impact on real estate sector," Martin Kohlhase, a lead analyst for Gulf real estate in Moody's Corporate Finance Group told Emirates Business.

However, as far as government-related issuers are concerned such as Alaqaria , Aldar , Emaar and TDIC , governments have been supportive by awarding government projects to these issuers and offering financial support (government loans), he said.

Although the rating agency has a negative outlook on the real estate sector, which reflects a tightening access to funding, declining demand and a need to preserve cash, it believes public/government spending for infrastructure projects and access to funding are among some measures that will help reignite market sentiments

"Change in consumer sentiment and continued influx of expatriates as well as foreign direct investments into the GCC (residential and commercial) will help reinvigorate the market," he said.

According to Moody's, access to global and local capital markets has been challenging, if not almost impossible, for realty developers.

"Given the current market sentiment local and international financing from banks for new projects is now more difficult to obtain as lenders face sector risk concentration and a nascent mortgage industry cannot fully make up for a funding shortfall from other sources," Kohlhase said in a report - 'Gulf Real Estate Market'.

Despite the significant capital injections from central banks and slowly falling inter-bank rates, lending rates remain indiscriminately high for both developers and home buyers.

The lack of funding in combination with tightening mortgage loan standards of banks (such as lower loan-to-value ratios), in addition to negative sentiment and lack of consumer confidence, mean the speculative element of some real estate markets has largely disappeared.

"The lack of funding has also kept away buyers who are no longer willing to acquire off-plan property (or the capacity) and, thereby, provide a source of funding through down payments."

In February, Dubai announced a $20bn (Dh73bn) bond programme to fund its various financial commitments, with the government emphasising that real estate companies will be the first beneficiaries of the fund. The emirate has also been aggressive on limiting speculators in the market by introducing new laws and restrictions on sales and purchase of "off-plan" properties.

Population growth
Moody's believe the long-term forecast of over five per cent population growth are no longer realistic in the short term, except for Saudi Arabia, which has a strong indigenous population growth rate, and may turn negative over the coming quarters as investments in commercial activities, including foreign direct investments, dry up. Foreign employees, who represent a significant share of the workforce in some countries of the GCC , are being laid off and are now returning to their home countries. This trend will hurt demand for residential properties, as some markets are over-supplied, the report said.

"Gulf government efforts to limit the property supply (via master developers) may be a crucial driver in restoring the supply/demand balance of the market."

In such an environment, most real estate companies have generally put the majority of planned, but not yet commenced, projects on hold, while completing or consolidating those where construction had already begun. This is likely to dry up future sales, as completed but unsold projects will have to remain on the balance sheet. Companies with (uncommitted) short-term bank lines, more common in the Gulf than in more mature markets, may face increased refinancing risk.

"We believe the developed GCC real estate markets (Dubai and Doha, and to a lesser extent Abu Dhabi) will be affected the most as expansion plans in these markets have assumed a steady influx of expatriates and have already witnessed a decrease in property prices."

Most of the large master developers, especially when (partially) government-owned, usually carry out a wider mandate that includes the development of public infrastructure by overseeing the construction of roads, bridges, public transport systems and sewage treatment plants. Some even have mandates that extend to providing basic municipality functions such as garbage collection or fire services with those based in Abu Dhabi are also tasked with the execution of the government's 2030 urban plan.

Expats hold key
More advanced residential markets that have relied on influx of foreign expatriates such as Dubai and Doha are likely to be vulnerable than markets with pent-up demand such as Abu Dhabi or those with traditionally more conservative cash buyers and more indigenous domestic demand (Saudi).

In addition, the anticipated economic slowdown will likely result in a higher number of unemployed expatriates who will, in most cases, have their residence visas revoked within a short period of time, with a consequential effect on property demand as they are obligated to depart the country.

Moody's anticipates that the population growth figures for those countries with a high proportion of expatriates (the UAE and Qatar) will become flat or even negative, depending on the severity of the downturn.

"Given the opacity in the GCC markets and the lack of reliable data on supply that has been held in inventory, it is difficult to assess by how much residential supply and demand could be out of balance in the mature markets."

About $263 billion worth of projects in the UAE have been put on hold, with three projects (Jumeirah Gardens City, Mohamed Bin Rashid Gardens and Nikhil Harbour and Tower) accounting for around 72 per cent of that total, the report said quoting Zawya.

The decline in global tourism is likely to affect new construction. Indeed, a substantial number of new hotel projects have been put on hold and rates for prime hotels have been substantially lowered. Occupancy rates in excess of 80 per cent are likely to be a thing of the past even in cases where rates are significantly lowered, as has been evident so far this year.

Estimates released by Lodging Econometrics show around one-third of the 266 hotel projects under construction in the Middle East are located in Dubai.

"More positively, the overall slowdown could actually benefit the public infrastructure of various countries, through the upgrade of roads, construction of power and district cooling plants, and addition of desalination and sewage facilities," said Kohlhase.

Spending will have to come from the public sector and Moody's believes given the considerable financial assets that have been accumulated in recent years during the period of high crude oil prices, most GCC governments have the resources to maintain, if not increase, high levels of investment expenditures.

"The falling costs of labour and raw materials are another positive factor. Therefore, our expectation for government infrastructure spending is positive throughout the region."

Governments across the region have announced classic pump-priming measures, which include increased spending for infrastructure projects, to stimulate their economies in the wake of the global recession. The government of Saudi Arabia, the largest economy in the GCC , is expected to run its first budget deficit in seven years to stimulate the economy with an announced budget of SR475 billion ($127 billion) and increased spending for public infrastructure.

The Qatari Government has announced a six-year infrastructure and real estate financing programme worth $130bn.

Dubai plans to boost its 2009 budget by 20 per cent from Dh135bn ($37 billion) in 2008 to cover the ongoing investments for the Metro, the new airport, bridges and roads, while Abu Dhabi plans to spend $275bn on infrastructure projects over the next five years.

Spending on infrastructure in the UAE is to increase by 24 per cent to $11.5bn in 2009. "Public infrastructure spending remains buoyant on the back of economic stimulus packages, which have been bolstered by government surpluses accumulated during the period of high oil prices. We expect such high levels of support to continue, Kohlhase added.

Low-cost land the best bet
Developers with access to low-cost land are in a better position to offset customer delinquencies as the cost of land has not been factored into the sales price, Moody's said.

The impact of delinquent customers at a later stage depends on the number of cancellations. If the number is low (as a percentage of the cash flow due), the developer would forego a profit today, hold on to the property and sell it at a later stage. But in a scenario of rising delinquencies, profit margins could turn negative or lack of funding could also squeeze cash flows.

"Consolidating and re-designing projects where feasible could offset delinquencies," Kohlhase said.

By Parag Deulgaonkar

© Emirates Business 24/7 2009