Bright prospects for real estate recovery

Government plans to push ahead with a range of large infrastructure and industrialisation projects are expected to trigger resurgence in Oman’s realty sector in 2014.

After a few slow years, Oman’s real estate market picked up pace in 2013 and enters 2014 with excellent prospects. Macroeconomic and demographic fundamentals, as well as a greater focus on property lending by banks and government support, are helping drive growth.

The total value of property traded in Oman grew by 21.5 per cent in the first 11 months of last year to RO 1.94bn, from RO 1.6bn in the same period of 2012, according to Oman’s National Centre for Statistics and Information (NCSI). Mortgages, which until quite recently were not widely represented in the market, also grew strongly, with their value rising by 18 per cent to RO 1.29bn for the 13,369 mortgage contracts signed between January and November.

These facts need to be seen in the context of recovery. In the last decade, the market enjoyed several good years, during which Oman’s tourism star rose, oil revenues flowed into the economy and the region as a whole rose in global prominence. But as the international economic crisis impacted the Gulf, Oman’s real estate sector was affected. A pullback from investment in the region, slower domestic growth and the debt crunch in Dubai in 2009 saw demand, and thus rents drop, though the decline affected some sectors more than others, with ITCs such as The Wave holding up better.

The past two years have seen the sector first stabilise – in 2012 – and then stage an increasingly strong recovery in 2013. There are several factors behind this resurgence, all of which should continue to play into sector growth in 2014.

Firstly, Oman’s economy is growing healthily, racking up 5.1 per cent expansion in 2013, according to the International Monetary Fund (IMF). While the Fund expects this to moderate to 3.4 per cent this year, others are more upbeat, with the government forecasting 5 per cent GDP expansion in the 2014 budget, Growth should be supported by factors including a robust oil price and continuing government investment. The 2014 budget foresees spending increases of five per cent – more if one factors in the effects of higher public sector wages – and over the coming years the government plans to push ahead with a range of large infrastructure and industrialisation projects.

Within the hydrocarbon sector, the $16bn development of the Khazzan gas field by BP is perhaps the most high-profile and important of a number of investments. On top of its catalysing effect on the wider economy, Cluttons reports that the Khazzan project will see hundreds of families relocate to Muscat and the surrounding areas, boosting demand for residential units.

Population growth is another important factor. Qatar’s QNB Group estimates that the increase in population will be 5.0 per cent in 2013-2014, and the young population – around a third are aged 15 or under – means that there will be a steady flow of Omanis looking to set up homes in the future. The population is also likely to be bolstered by the arrival of expatriates working on major public projects, and for the companies that service them.

As mortgage figures indicated, access to property finance is also improving. Competition between banks for a slice of the property market, as well as greater confidence in the outlook for the sector and the economy as a whole, has led to more attractive terms for both conventional products and sharia-compliant (“Islamic”) tools. The recent relaxation of requirements for interest-free loans for low-income households is expected to have an impact on the affordable end of the market, through broadening the buyer base. However, the immediate impact should not be exaggerated, as many Omanis still prefer to own property outright, developing homes incrementally over a number of years as income permits and family size demands.

One of the most important sectors for the diversification mentioned above is tourism, an industry that feeds directly into the real estate market through demand for hotel rooms and buy-to-let properties, including in ITCs. Tourism revenues grew 3 per cent in the first half of 2013, according to official figures. The World Tourism and Travel Council (WTTC), a global industry body, estimates that the sector will grow by 5.5 per cent per year to 2023. To meet this demand, investment in hotels and resorts is ramping up. Regional press reports suggest that there will be 14,400 rooms in the Sultanate by 2017, up from 8000 last year.

Finally, there is the effect of improving sentiment regionally. While some real estate experts dispute this, there is a widespread understanding that Oman’s property market is closely linked to that of Dubai. This is partly due to international investor confidence in the region, and partly due to the fact that, as capital values and rents rise in Dubai (and to a lesser extent Abu Dhabi and Doha), Gulf citizens have more cash to invest in Oman – and the more affordable investments in the Sultanate become more attractive.

The challenge of oversupply

Despite rising demand across the board, the thorny question of oversupply in some areas is still brought up by many of the professionals that OBG meets. Over the past decade, some less professional developers have put up poorly-planned and located buildings in all segments. As a result, there are more low-quality office units, in particular, than there are companies willing to occupy such space. Likewise, there are residential units standing empty, because demand is not sufficient to fill them. But demand for well-planned, well-located properties is strong, and this is how the best residential complexes and ITCs, and the top office and retail locations, continue to enjoy high occupancy, good yields and rising rents. Not dissimilarly, landlords who have refurbished older units tend to find tenants fairly quickly, whereas those who do not do this face either cutting rents or a long wait for take-up, Cluttons reports.

So what are the sort of units that are seeing strong demand, in terms of segment, type and location? The best ITCs, such as The Wave and Muscat Hills, have seen demand outstrip supply in 2013, and look set to continue to enjoy rising rents, despite a substantial number of new units in the pipeline. The offering of facilities such as gyms, swimming pools and golf courses, as well as restaurants, added to security, pleasant landscaping and a sense of community, make the complexes compelling.

Newer ITC developments may tilt more towards the buy-to-let tourist market, partly due to location, and if tourism continues to grow, can stand to benefit from this.

Cluttons identifies “a shortage of good quality, well designed stock suited to tenant expectations”, particularly for the growing expatriate market, to the extent that some employers are reportedly considering establishing purpose-built communities. Expatriate housing budgets have been trimmed considerably in the wake of the crisis, but with the economy recovering and a shortage of quality units, workers may start to press for higher allowances, to the benefit of the leasing market.

In the office segment, one of the most important factors is parking space, a long-running problem in Muscat, and indeed most cities the world-over. Experts say that there is an average of one parking place for every 250 sq m or so of office space, several times the 35 sq m that has been suggested as a rule of thumb by the authorities. Naturally enough, offices with ample parking tend to fare better in attracting top clients.

Most firms, particularly smaller ones, prefer fitted office space, and more and more are demanding better after-sales service, the latter trend likely to strengthen going forward.

Commercial property development is also moving westwards, towards and beyond the airport, where there is space for new, international-standard office complexes to be built. Bank Muscat’s move from Ruwi to Airport Heights in 2010 was a landmark in this westwards shift.

The retail market differs from that of many other Gulf countries in that high-street shopping is still popular in Oman and that average incomes are comparatively low by regional standards – factors shaping both the geographical arrangement and the type of retail development. With a number of major malls either already in existence or due to shortly come onto the market (including some extensions of existing complexes), the scope for large-scale mall development seems limited. Smaller neighbourhood malls have increasingly become a feature of other emerging markets, and may do as well in Muscat, particularly given the city’s spread-out nature.

Finally, the significant investments being made in the railway, in Duqm and in Sohar should stimulate demand for industrial and logistics-related property, particularly if Oman can use these projects to capitalise on its enviable geographical position.

After cautious optimism in 2012 and the first half of 2013, real estate insiders in the Sultanate have become increasingly confident about the outlook and strong macro fundamentals should benefit those developers which know what customers are demanding.

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