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Real Estate: A complex terrain What are the fundamentals of Qatar’s real estate market as it prepares for the FIFA World Cup 2022? What are the emerging trends in the four subsectors: residential, office space, hospitality and retail? The Edge deputy editor Farwa Zahra probes into the country’s fast-growing sector with insights from Doha-based real estate analysts Mark Proudley, Adrian Camps and Aziz Sharif.

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uided by Qatar’s National Vision 2030, Qatar’s real estate sector is currently going through a boom, recording a total transaction volume of QAR43 billion in all segments in 2012. While the World Cup 2022 demands large-scale infrastructure investments in terms of stadiums and transportation, the increasing number of expatriates joining the growing job pool is surging the country’s demand for residential units. Efforts to establish Qatar as a meetings, incentives, conferences, and exhibitions (MICE) destination has further increased the demand for hotel rooms and apartments. Consequently, there is rapid activity in all four subsectors of real estate: residential, office space, hospitality and retail. However, with the ongoing developments, there looms a concern: What will Qatar do with the extravagant infrastructure once the World Cup is over? A conservative approach, Mark Proudley, associate director of DTZ Qatar Properties, suggests, will look at the country’s ability to limit its permanent real estate supply by constructing stadiums, which can be dismantled, and gifted to other countries. Similarly, the option can be explored in hospitality subsector as well by the utilisation of cruise ships as hotel accommodations or by developing serviced apartments that can be converted into standard units once the tournament is over. On a more positive note, the legacy of World Cup 2022, Proudley believes, is what Qatar must have considered during the bidding process. The estimated investment of USD115 billion (QAR418 billion) on projects to host the World Cup will help Qatar “leverage the large investment being made in these areas to encourage and generate private sector investment in the future,” he says. The large-scale infrastructure, however, is not due to the World Cup alone. Much of the ongoing development is a reflection of Qatar National Vision 2030. The World Cup, then, becomes the means to a goal rather than an end itself. “The government is promoting Qatar to the world community in numerous ways, which will help increase awareness, from which it is anticipated that increased tourism and additional business will follow,” says Adrian Camps, a chartered surveyor and head of research, valuation and consultancy at Asteco Qatar.

Residential

At 10 percent, Qatar has the highest residential rental yield in the Middle East, which is further expected to grow this year. But the number of units in demand still outstrips the supply. The influx of expatriates – who according to the 2012 figures of Qatar Statistics Authority (QSA) occupy 94 percent of the country’s jobs – has resulted in increasing demand, thereby escalating the rents of residential units. Added to the demand is also the factor of construction costs, which has indirectly affected the rental rates. “Our ports are limited in capacity and yet most of the materials used in construction must be shipped in one form or another. This essentially creates a restriction in supply which leads to cost inflation and delays,” says Aziz Sharif, managing partner of Mannzili Real Estate, Qatar. These construction costs, according to Asteco analysts, are expected to decrease with the completion of Doha deep-water port’s first phase in 2014. “The necessity for the double handling of imported goods via other ports will be avoided, which may help reduce building material prices,” adds Camps, anticipating that the government may also step in to control the prices, considering Qatar’s aggressive construction programmes. While the demand for residential units is outstripping the supply, what has exacerbated the situation is the slow pace of construction of new units. “New developments under construction have been slow to reach the market, reducing the levels of new supply. Occupancy rates for prime apartments (Dafna, West Bay and the Pearl Qatar) are now in excess of 95 percent in most towers, creating rental increases as occupiers compete for units,” says Proudley, aligning with Sharif’s observation that the time-consuming process of construction cannot match the increasing population that is “four years ahead of the QSA estimate of a population of two million in 2016,” he says. Furthermore, the estimates of QSA for the coming year do not indicate the demographics and psychographic dimensions of the incoming population. This uncertainty about the features of prospective customers can further lead to incomplete fulfilment of demand in future, says Camps. For instance, the requirement of a customer living alone in bachelor-based employment would be tellingly different from that of someone moving to Qatar with their family (see box out). Similarly, the place of origin also plays an important role in determining the future demands of prospective customers.

Office space

Contrary to the residential market, the office market in Qatar is oversupplied with many office units unoccupied, thereby stabilising the rental yield. Though stable in rents, the office market has witnessed a changing trend over the last few years, says Camps. In the past, building owners preferred a single organisation to occupy the property in key locations, leaving small businesses to fill units in less preferred and more traditional locations. Recently, however, more and more landlords in West Bay have started to split up some of the finest buildings into suites for smaller organisations. The willingness to do so is primarily because there is little demand for full buildings by single private organisations. The division of buildings, however, has still not worked in the benefit of small businesses seeking a start-up in the country’s growing economy: “The availability of small suites in good quality buildings in West Bay is now not so much of a problem. The main challenge facing small businesses is the cost of fitting ‘shell and core’ units especially where they are contemplating short-term leases. Fit out costs are typically QAR600 to QAR1500 per m2, which is a significant cost for a small business.” The trend is reflected in Asteco’s report for the last quarter of 2012 which shows strongest demand for fitted suites of less than 500 m2.

“Our ports are limited in capacity and yet most of the materials used in construction must be shipped in one form or another.” – Aziz Sharif, managing partner Mannzili. The Edge | 5


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Price is the foremost concern of buyers and tenants searching for residential properties. Though all four subsectors of Qatar’s real estate are controlled by the government, the supply and demand dynamics of the office market is exceptionally government-driven, perhaps a reason why the subsector has shown most stability over the years. The stable trend, however, cannot be translated into customer satisfaction. With 45 percent of the office space occupied by government organisations, small-scale businesses still seek to have affordable but good quality office units. “Small office units are not very difficult to come by. Unfortunately, decent small office units are very difficult to find at a reasonable price,” says Aziz Sharif. Good quality small units are mostly available in high-rise buildings located in West Bay, making them too expensive for small businesses. The overabundance of large-space A quality office units located in expensive areas, Sharif believes, is because of the owners’ preference to have their property leased out to bigger organisations with low risk of rental defaults.

Price

Location

Finish Quality

Facilities

Qatar’s Residential Market

Size

Hospitality

Amidst the efforts of Qatar MICE Development Institute to promote the business tourism sector in Qatar, the country will add 29 more hotels by 2016 to its current base of 94. Considering the short-term implication of these projects, the oversupply of hotel accommodation led to an occupancy decrease in 2012 from 61 percent to 58 percent. In the long term, however, these developments align with the establishment of Qatar’s new airport and increased Qatar Airways fleet. “Qatar is seeking to compete with other established Middle Eastern hubs, which will also help to stimulate investment in the real estate sector, with investors purchasing residential properties as a ‘pied-à-terre’ for occasional personal use,” says Camps, adding that there will be viable community and real estate market long after the World Cup.

Retail

In the retail market, Qatar’s current number of malls is estimated to increase from 12 to 22 in the next two years, which will help soothe the increased demand at present. Just like the office market, the supply is accompanied by high rental rate. Half the retail market is occupied by Villaggio and City Center malls, which also come with highest rental rate ranging from QAR225 to QAR250 per m2. Malls,

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Key considerations of Qatar's tenants and buyers looking for residential properties

“The government plays an influential role in Qatar’s real estate market as major owner, developer and occupier of real estate.” – Mark Proudley, associate director DTZ.


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Average office sizes in Doha Sq.M

700

600

500

400

300

200

Other

Airport Road

Salwa Road

Al Sadd

C-ring road

Diplomatic District

0

D-ring road

100

Source: AREDC Research.

however, only make a portion of the retail subsector as 77 percent of it is occupied by scattered shops and souqs. The rental trend in the retail market has also gone up, particularly in the malls. Considering the high rental yield in malls, the estimated supply comes out as a logical consequence. However, considering the nature of outlets featured in these malls – which oftentimes cater to the high-income group – there is a growing concern for the other income groups.

Qatar’s real estate is clearly facing escalation in all four subsectors: residential, office space, hospitality and retail. Hotel Keys by Rating in Doha

Foreign investment

There have been large-scale residential projects over the last few years in Qatar to meet the demands of customers with varying budgets. On the lower side of the spectrum are investments from Ezdan and Barwa Real Estate catering to the middle-income group. On the higher side are big budget projects such as The Pearl and Lusail City. This variation of supply, however, is not available for the foreign investors interested in real estate purchases. “There is less choice for expatriate purchasers of freehold or usufruct property as most of this is located in The Pearl or in Lusail, which are high-end locations,” says Camps. Amidst the concerns of low retail sales at The Pearl, the property’s master developer United Development Company (UDC) has recently rethought its upscale positioning to a more welcoming, flexible and balanced shopping retail identity. Another challenge of investing in Qatar’s real estate is the level of uncertainty. Though lucrative, the country’s market is not very stable. Hence, with the current legal requirements and uncertainty around the MENA region’s markets, foreign investment in Qatar’s real estate does not paint a very optimistic picture. The alcohol ban in The Pearl not only disappointed many foreign investors but also gave the impression that Qatar’s real estate is not a very certain market. To encourage foreign investment, hence requires the government to offer incentives to the property owners in Qatar. The provision of residence visas

2-Star 3-Star 4-Star 5-Star

Source: DTZ

The high number of four and five-star hotels in Qatar is reflective of the country’s efforts to establish itself as a MICE destination. (Image Arabian Eye)

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Available retail constructed space in Qatar 18% 5% 7% 70%

Malls Hyper Markets Souqs Un-Organised Retails

Source: AREDC Research

Qatar’s real estate brokerage

Playing an important role in the real estate sector are brokers facilitating the deals for the owners. These agents can be generally divided into two categories, namely registered and informal brokers. Those from the former group come on visa sponsorship of real estate companies. According to one such agent, these brokers have an option to make commission-based or salary-based income. In the first instance, there is an agreement between the agent and their company on the percentage of commission allocated for every deal closed by the concerned broker. This may range from 40 to 60 percent depending on the success record of the agent. On the other hand, a salary-based income exempts the agent from any commission and instead provides a fixed salary, regardless of the number of deals completed in a month. Considering the low average salary which is somewhere around QAR3000, many agents prefer to work on commission basis. While this may seem to be risky alternative, the seasonal nature of real estate business (particularly in residential subsector) allows the brokers to earn more than the fixed salary. December and January mark a period of low activity due to most expatriates being on vacation. The months of March and April, on the other hand, show a high level of real estate activities. Similarly, because of the short work timing in Ramadan, many people make residential decisions in this month thereby making it a period of high yield in the residential rental market. This seasonal drop was also seen in the land market for the fourth quarter last year. During the last three months in 2012, there was a 21 percent decrease in the value of transactions and a 24 percent decrease in the number of transactions. The latter category of brokers involves informal agents. Operating illegally in Qatar’s market, these individuals have visa sponsorship from Qatari citizens to whom they must pay a fixed amount every month. Because of no strict measure taken against them by the state’s law, these agents operate freely with ads posted in daily classifieds. The increasing number of informal agents, Mannzili’s Aziz Sharif believes, is due to the lack of price transparency: “Property managers like to maximise their revenue by eliminating as much consumer surplus as possible through price discrimination. The informal agents are a tool towards this goal.”

for property owners is a large incentive, believes Camps, highlighting that the availability of mortgage finance from local banks further endorses property purchases. This, however, is just a part of bigger attractions offered by the state. “The largest incentive”, says Camps, “is the government’s commitment to infrastructure spending and the huge amount of investment in tourist attractions and facilities, which will increase the attractiveness of Qatar as a tourist destination.”

Qatar’s real estate – a complex terrain

Whether it is for the World Cup 2022, Qatar’s National Vision 2030 or MICE development, the country’s real estate sector is clearly facing escalation in all four subsectors. According to Al Asmakh Real Estate Development Company (AREDC) analysis, the demand for real estate is expected to surge by 20 to 25 percent this year. However, with opportunities come a number of challenges. In the residential market, it is the increasing rental rates. In the office market, the A quality offices remain unaffordable for smaller businesses. In the hospitality and retail subsectors, the increasing costs of construction will add to the price hike, affecting the overall real estate industry. Being a major source of supply and demand, will the government step in to control these trends? If not, what will a further increase in real estate prices translate into?

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Most of the malls in Qatar cater to the high-end income group. (Image Corbis/ Arabian Eye)


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The government controls supply and demand on a macro level in Qatar’s real estate market, says Camps. On the supply side, it is done by promoting and approving new projects while on the demand side, it is achieved by passing expansionist policies. “The government plays an influential role in Qatar’s real estate market as major owner, developer and occupier of real estate,” says Proudley who believes that if the increasing prices do lead to rising inflation in future, the government will have a number of tools to regulate it. The last major period of inflation in 2007 and 2008, recounts Proudley, was accompanied by government’s strategies to stabilise it. During this period, Qatar’s government passed a legislation to prevent landlords from implementing excessive rental increases. Similarly, the level of commercial space occupied by the government was reduced. The real estate supply was boosted by government-backed projects such as Barwa Village, Barwa City, Barwa Commercial Avenue, Barwa Al Sadd and Barwa Financial District. In some of the subsectors such as the residential market, the prices have already outpaced the inflation rate: “I believe that any reader who is renting will experience this first-hand during their next rental rate increase,” says Sharif, who adds that it will be a challenging feat for the government to protect inflation from running rampant which can damage the National Vision. His expectation on rising rents aligns with AREDC’s estimates for 2013, which show that there will be 2.5 to 3.5 percent increase in housing and eight percent increase in office rents. The increasing rents and prices in Qatar’s real estate market are partly because of the shortage of supply and partly due to the preference for a limited area. The country’s real estate development is highly imbalanced across the major cities. On a country-wide level, the development in concentrated in Doha. Similarly, within Doha, most business activities are limited to the areas such as West Bay. The trend has left the scope of peripheral areas unexplored, with demand concentrated around only a part of the sector. Undoubtedly, Qatar’s future real estate strategy can benefit from shifting the focus from the current cynosures towards the growth of other cities and less-focused areas within the cities.

10 trends in Qatar’s real estate market 1. 2. 3. 4. 5. 6. 7. 8.

Improvement in purchaser demand. Split-up of large A quality buildings into smaller office units. Demand for affordable small office units. Demand for smaller apartments. Concern for facilities such as swimming pool and gym. Owners’ preference for fully furnished apartments. Growth of hotel apartments. Organisations giving accommodation allowance instead of company accommodation. 9. Accommodation sharing by tenants. 10. Growth in the number of informal real estate agents.

Average Freehold and Leasehold (Usufruct) Sales Price QAR/Sq.M 14,000

12,000

10,000

8,000

6,000

4,000

Najma

Al Mansoura & Bin Dirham

Diplomatic District

-

Al Sadd

2,000

The Pearl

“It is anticipated that increased tourism and additional business will follow after the World Cup 2022.” – Adrian Camps, head of research, valuation and consultancy Asteco.

Source: AREDC Research

Real estate statistics provided by the quarterly reports of Al Asmakh Real Estate Development Company, DTZ Qatar Properties and Asteco Qatar.

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The Edge Supplement Property Review May 2013