"At five per cent annual population growth, demand and supply will reach an equilibrium. Likewise, if annual growth is sluggish at two per cent, then the market will be oversupplied by 10,000 units. Ultimately this oversupply is positive, as it will allow for a price correction in a market previously known for chronic undersupply and exponential rent increases," said Landmark Advisory in its second quarter report on Qatar real estate market.
Currently, Doha is undersupplied by only 1,500 units. The supply and demand fundamentals of Qatar property market are changing rapidly. After years of acute housing shortage, the supply-demand gap is narrowing in Qatar, a fact already reflected by market-wide price declines. During 2009 and 2010, new residential developments will increase the supply of housing units and, therefore, narrow the supply-demand gap.
Between mid-fourth quarter 2008 and end of first quarter 2009, average freehold sales prices fell 25 to 30 per cent. These declines heavily weighed towards The Pearl, whose average unit prices dropped 35 per cent, indicating a sharp decline in demand from foreign investors. Average prices for units in the Zig Zag Towers and Lusail, however, declined only 10 to 15 per cent.
Sale prices for freehold property in Qatar are likely to continue falling. Short-term declines, however, will be less severe than those witnessed between fourth quarter 2008 and May 2009. The fundamentals of Qatar's property market are changing rapidly, but aggregate supply has largely been controlled and aggregate demand is stable.
In fourth quarter 2008, agreed rents fell five to 10 per cent, but in the first two months of 2009, average villa rents [new contracts] decreased another 15 to 20 per cent, while apartment rents remained stable.
"Even if rents fall 20 per cent and sale prices decrease a further 10 per cent, yields are likely to stabilise at eight to 10 per cent [current yields are about 9-11 per cent]. However, the high-end segment is currently the most vulnerable to the changing supply/demand fundamentals," the report said.
Landlords' relative financial security allowed them to prefer vacancies over accepting lower rents. However, Qatar's recent stock market collapse left many landlords vulnerable to cash flow concerns, while new supply is shrinking the demand surplus, thus increasing competition, especially in the villa segment. These factors are causing a sharp decline in the villa leasing market.
Along with prices, the structure of leasing market is also changing, as landlords are moving away from leasing exclusively in bulk to corporate clients. Landlords are now letting single units directly to end-users and are flexible in negotiating prices.
Demand is more resilient for smaller units, with rents for one- and two-bedroom apartments remaining stable. Average apartment and villa rents in Doha are currently about QR9,500 per month (Dh9,588) or Dh115,000 per annum and QR22,500 per month or Dh273,000 per annum, respectively.
Qatar freehold property market was established in 2004, allowing non-Gulf Cooperation Council (GCC) nationals to purchase property in three areas – Al Khor, The Pearl and West Bay Lagoons. There are also 18 leasehold areas where non-GCC nationals can own property on a 99-year leasehold basis
Meanwhile, mortgage lending to expatriates has slowed, loan-to-value (LTV) ratios and loan periods have fallen and minimum salary requirements have risen considerably. In the year ahead, liquidity will be a problem for Qatari banks, whose loan-to-deposit ratios are close to 105 per cent. Deposits have fallen due to excessive lending, choked foreign direct deposits, repatriation of foreign funds and capital flight.
For locals and expatriates, LTV ratios and loan periods have fallen and minimum salary requirements have risen considerably," it said.
Peak oil prices in 2008 provoked a capital glut that caused extraordinary inflation and subsequent de facto negative interest rates. The result was an emerging real estate bubble at the centre of a positive feedback loop. Negative interest rates encouraged widespread borrowing for property investment, which caused inflation to soar and, therefore, worsened the negative interest phenomenon. This prompted even more borrowing and real estate speculation.
Despite frequent claims that Qatar is immune to the current global recession, the housing market is clearly showing signs of investor uncertainty, as secondary market prices continue to fall. Liquidity has evaporated, and Qatari lending institutions are reeling from losses caused by over-leveraging and exposure to depreciating assets. This situation, along with the uncertainty from a falling rental market, is pushing down demand levels.
Meanwhile, DTZ, a global real estate advisory firm, said no sharp decline in residential property rents is expected as Qatar's residential property market is expected to continue to experience relatively strong demand over the medium term with the economy remaining stable and the country's population continuing to grow.
Qatar's office space market has posted healthy growth in recent years, which has been sustained by both existing and new government institutions to support the country's development.
However, with substantial increase in new office stock, especially in the Diplomatic District, and reduced demand in response to the current global economic situation, the report does not anticipate any rental growth in the prime commercial sector until the end of next year.
Office buildings in the Diplomatic District command a premium over other locations as demand preference for Grade A offices in the new central business district continues to remain strong across all business sectors.
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