Saudi Arabia, Dubai top yields in realty market

Average yields in Saudi Arabia's real estate market in the range of seven to 15 per cent are the highest in the GCC followed by Dubai's yields of nine to 14 per cent, new data has shown. Abu Dhabi property comes with a yield ranging between eight and 12 per cent while Qatar is between seven and eight per cent, Colliers International research has revealed. "The real estate sector in Saudi Arabia is expected to recover the fastest among all other GCC real estate markets due to higher liquidity position than others," said Ian Albert, Regional Director, Colliers International. "Saudi Arabia is currently resisting the real estate downturn more than other GCC markets," said Albert. John Davis, Chief Executive Officer Middle East, Colliers International, said within the UAE, the Abu Dhabi market would recover faster than the rest of the emirates. Dubai, for a long time taken as the measure of the Gulf's real estate market, experienced the first signs of the downturn in post-summer 2008, which was then firmly established during the fourth quarter of 2008 into the first quarter of 2009," said the Colliers report on the GCC Real Estate Overview for the second quarter of 2009. "Abu Dhabi has a better liquidity position than the rest of the emirates and hence will recover faster than the other markets. From an investment perspective, Dubai's real estate sector is perceived far more risky than other GCC markets," said Davis. The impact of the global liquidity crisis on demand in the GCC's most advanced real estate market has been two-fold. On the one hand, transactions have slowed to a trickle due to negative investor sentiment and a lack of available financing. On the other hand, additional supply that was scheduled for delivery in 2009 has been met with a downturn in end user demand, due to corporate downsizing and visa regulations. The extent of the impact felt by each of the GCC's property markets is dependent upon three primary factors; the level of global integration, the benchmark price of oil/gas revenues set in that particular state's fiscal budget and the level of property speculation prior to September, said the Colliers report. Also, currently the various regional markets are at different stages of reaction dependent upon the interrelationship of the key factors. However, most markets, except for Saudi Arabia, are suffering from a chronic lack of liquidity. There has been, in Dubai and Abu Dhabi for example, a limited reintroduction of consumer finance with some banks tentatively re-entering the residential mortgage market. However, the two largest participants, Amlak and Tamweel, who between them represent 50 per cent of the market and who are in merger discussion with one another, have as yet remained on the sidelines. The Colliers report said the primary change within each of the real estate markets is the importance of the professional investor. "These investors look at real estate returns solely as a means of revenue and, in time, capital appreciation – removing some of the hedonic factors that end-users attribute to property values," said Albert. Historically the market was speculator driven, distorting values as the hold period was significantly shorter than in the case of either end-users or investors. Rental yield as a determinant of price had become secondary to short-term, speculative gains. As the markets have cycled through the speculator and end-user phases, it is the professional investors' requirements that now need to be satisfied and addressed. To stimulate the GCC markets, aside from improved liquidity and sentiment, there has to be a convergence of purchasers' and sellers' prices. This gap, known as the price-yield gap, is still some way from parity due to a lack of any significant number of transactions and the reluctance of sellers to rationalise portfolios and assets in the light of global changes. Having previously been a major pillar of property values, the diminution of the importance of capital appreciation as a factor of value has inevitably had to be compensated for by a rise in the cash-on-cash return. Further price depression is being contributed to by the on-going fall in rental rates. Investors required yields have risen by an average of 25 per cent to 40 per cent to accommodate the risk borne by the investor of falling rentals and the removal of capital appreciation as a yield component. ABU DHABI In Abu Dhabi, according to the Colliers report, the asking prices for off-plan office space in Al Reem Island in Abu Dhabi have increased despite adverse market conditions, though secondary market transactions have remained depressed since the fourth quarter of 2008. Less than 5,500 square metres of new office space was delivered in 2008 in Abu Dhabi, though an overall supply glut is still anticipated by the fourth quarter of 2010. Aside from introducing international standard leases of between five and 14 years, and providing more reasonable parking allocations, the standard of s