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Real-estate developers in the Gulf Cooperation Council (GCC) region will likely resort to mergers and unit price cuts as the huge downturn caused by the coronavirus pandemic continues, an industry source said.
The COVID-19 outbreak has impacted the property market through lockdown measures, safety protocols, infection fears and income declines, resulting in low demand and cash flow.
One of the biggest hurdles the industry is currently facing is delayed payments from buyers and this is threatening the sustainability of developers, particularly those with limited capital, according to Marwa Murad, an engineer and managing director of Maximiliano Development Management Services (MDMS).
“The risk facing the real estate market is the inability of customers to pay the instalments, thus causing a delay in the construction work. As a result, developers may require a shorter period for the instalments which eventually leads to an oversupply of units, thereby creating a negative business cycle,” Murad said in a statement.
“Developers are eyeing a reduction in unit prices by as much as 25 percent and company mergers to minimise business risks and significantly increase the ease of doing business,” he said.
Murad’s Saudi-based development management service company works closely with developers by providing engineering, design and construction services for real estate projects in the Gulf, and its portfolio includes large-scale government-funded ventures in the kingdom. The firm had won a contract with Saudi Arabia’s National Housing Company for the “sale work” of the Murcia project, one of the largest projects in Riyadh that includes the construction of more than 5,000 villas and apartments.
Challenges
The property market is one of the major economic contributors in the Gulf region. In Dubai alone, real estate and construction constitute 6.6 percent and 6.3percent, respectively, of the emirate’s nominal gross domestic product (GDP) as of 2018.
Consultancy firm Altios said in its report that payment delays are indeed at the top of the list of challenges faced by the real estate and construction sector in the GCC region.
It said that companies with high levels of debt and low cash reserves may face a liquidity crisis as a result of the financial fallout of the pandemic. This is being compounded by low oil prices.
“[The] decline in oil prices will have a negative impact on investments in major public-funded development projects. [For example, the] Dubai Department of Finance has ordered a 50 percent cut in capital spending and has called for a freeze on new public construction schemes,” the report said.
Recovery
However, Murad said he is confident that the industry could start to recover by next year, when an effective vaccine becomes available.
“In the event that a right vaccine is found, it will take a certain period before a complete return of the industry to the pre-COVID-19 levels, but we are optimistic that it will recover soon,” Murad told Zawya.
In the meantime, as the uncertainty continues, companies in the real estate sector are implementing a range of measures and policies to address the challenges.
“Strategies must be adopted, such as the reduction in unit prices by 25 percent in the event of cash sales and small developers who may face the risk of bankruptcy might consider merging with another developer to protect their business,” said Murad.
“The depth and breadth of the coronavirus outbreak’s economic impact on the real estate sector are still uncertain but real estate players will be well served to take immediate action to improve their business and also keep an eye on a future that could be meaningfully different,” he added.
As of June 2020, the housing market continued to plunge, with Dubai alone seeing sales activity fall by more than half. During the second quarter of the year, Dubai’s developers sold 4,459 homes, down by 48.8 percent compared to the first three months of the year, according to ValuStrat.
Solutions
Altios said residential real estate developers will need to invest more in digital sales and leasing processes, do more virtual house tour or video walkthrough and produce digital brochures to boost sales.
As for construction firms, it is vital that they adopt standardised contracts across all projects and improve off-site software capabilities to enable remote working.
And if they want to remain relevant, they can focus on the development of structures with designs that may act as preventive measures in the future and explore contactless technologies, such as automatic sliding doors, voice-activated elevators and heat map detectors to scan temperatures of building occupants and visitors.
(Reporting by Cleofe Maceda; editing by Seban Scaria)
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© ZAWYA 2020
