The emirate of Dubai remains a safe haven for property investment despite ongoing political turmoil in the Middle East and North Africa (MENA), with demand in some sectors gaining pace, a key Saudi bank said on Thursday.
While the real estate sector in general has started to show signs of recovery in the six-nation Gulf Cooperation Council (GCC), it is still in a state of uncertainty because of the global financial upheaval, National Commercial Bank said.
“Even as the GCC real estate sector is beginning to see a growing number of pockets of strength, its overall recovery looks likely to remain uneven and potentially discontinuous,” NCB said in a study sent to Emirates 24/7.
It said Dubai, which in many ways remains the epicenter of the regional real estate story, continues to struggle to digest a significant excess supply with up to 15,000 new units due to come to the market by the end of the year.
“Nonetheless, demand in some segments is clearly now recovering, further helped along by perceptions of Dubai as a relative safe haven after a period of political turmoil in parts of the Middle East,” NCB said.
“Even as much of the Dubai real estate sector remains soft, select market segments have begun to see actual price growth… the overall price and rental declines are now in the low single digits. Apart from prime residential property, the demand for high quality office space is increasing.”
In neighboring Abu Dhabi, the large pipeline of new supply is now translating into rental deflation of up to 10% in the weakest market segments, the study said.
By contrast, the office market has shown greater stability, although a large pipeline of new supply looms as a potential risk, it added.
The report said rents in Oman are also still falling at double digit rates with prime office space now the most resilient market segment due to shortages.
But the situation in Qatar and Kuwait is more mixed, the report said, adding that the Qatari market appears to have bottomed out with residential rents more or less stable in recent months and weakness largely confined to the commercial real estate space. In Kuwait, the residential market has in fact rebounded vigorously with volume and price gains but the commercial segment is still weighed down by vacancy rates of up to 25%.
Bahrain now likely faces some of the toughest challenges in regional real estate as it experienced its own powerful housing boom in the pre-crisis days and the effects of the cyclical correction have been amplified by political uncertainty following open protests in February-March, according to NCB.
It said oversupply is likely to prove an enduring challenge, although the Bahraini market has also become increasingly “dichotomous” with some prime areas showing considerable resilience.
The report said it believes Saudi Arabia, the largest Arab economy, is increasingly establishing itself as the most robust housing market in the Gulf region, in large part due to a significant shortage of housing, estimated at around 200,000 units a year in the near to medium term.
It noted that sizeable government spending commitments are seeking to address this problem, led by SR250bn allocated to the new Ministry of Housing in the spring for the purpose of constructing 500,000 new housing units over the coming 5-10 years according to a Royal decree.
Also the possibility of taxing undeveloped land under consideration, while the implementation of the mortgage law is seen as necessary for addressing the affordability gap that currently exists, the report said.
“Looking forward, although the contours of a recovery are now emerging in the GCC housing market, the outlook is both uncertain and mixed. For many of the coastal markets, the global economic environment is likely to have implications for office and prime residential demand,” it said.
“Renewed global weakness will almost certainly delay the stabilization of these markets and even the prospect of further price corrections cannot be ruled out. The limited availability of mortgage finance in many markets will contain residential demand….but beyond this, it is increasingly obvious that any recovery will likely prove fairly uneven virtually across the region. As investors seek value in what remains an uncertain environment, they are likely to veer towards attractive developments in good locations.”