Realty firms face rising costs risks

Rising costs in the Gulf property market remain one of the industry’s biggest risks despite the solid growth likely to be seen by the region, new research has revealed.

The escalating cost of materials has left “less reputable” developers in the region resorting to cheaper materials at the expense of quality, Moody’s said in a new industry outlook released yesterday.

Cement prices rose by at least 40 per cent over the second half of 2007, while the price of steel shot up by about 25 per cent, resulting in margin pressures.

“At this stage we see little relief for the sector’s cost pressures, and indeed expect these to heighten in line with macro-economic inflationary pressures and ongoing demand for building materials and skilled labour,” said the report, authored by Philipp Lotter, Senior Credit Officer at Moody’s Middle East Limited in Dubai.

Moody’s said although it expects the region’s large master developers to be in a position to defend margins, helped also by greater business diversification, smaller companies could face more severe pressures.

The Gulf property market, which remains highly dependent on migrant labour, also faces the challenge of skilled labour shortages, that have led to project delays and further pressures on

“Double-digit inflation rates in most Gulf economies have eroded the financial incentives for many labourers from India, Pakistan and Bangladesh, who have either demanded higher pay, or are returning to their home countries, where booming economies are starting to provide similar remuneration,” Moody’s said.

A shortfall in qualified contractors and labour, increased construction costs, and an insufficient supply of equipment led to a handover of less than half the residential units initially expected in Dubai over 2007.

According to estimates from investment bank EFG Hermes, no more than 25,000 residential units were handed over in Dubai in 2007, rather than the 57,000 that had been anticipated at the outset.

The market has also experienced shortages of utility services such as power and water, said the report, which gives an industry outlook of the sector for the next 12 to 18 months rather than

Solid growth

However, Moody’s said the Gulf property sector is likely to experience further solid growth. Market prospects are broadly positive, contributing to an overall expectation of ratings stability, although different markets are at different stages of development. The rating agency said it expects sustained real estate market growth in the region, based on indications that demand for new housing, office and retail space is likely to outstrip supply over the medium term.

“Despite calls to the contrary, the Gulf real estate market is no bubble, but based on strong fundamental factors that are driving demand, whereas supply is facing difficulties matching it.

 

Nonetheless, we admit that the scale of some projects relies heavily on continuing levels of sustained demand,” the report said.

The introduction of freehold property laws and wider incentives in many Gulf countries, aimed at attracting foreign human capital, have also had a direct impact on demand for housing, office space and retail offerings. Moody’s cautioned that   the still-high element of speculative demand in some regional markets adds to market volatility.

The report also highlighted that even in a more developed market such as Dubai, the government has the ability to influence supply and demand by steering the release of property onto the market and consequently phasing construction developments. Dubai’s three largest master developers – Emaar, Nakheel and the subsidiaries of Dubai Holdings – together make up around 75 per cent of new supply coming to market in Dubai, Moody’s said.

The real estate market makes up a growing portion of the GCC states’ economies, as record crude oil prices fuel GDP growth and a population surge creates more demand for residential, commercial and leisure properties.

The total value of residential, retail and commercial real estate projects in the Gulf – excluding the UAE – exceeds $600 billion (Dh2.2 trillion), according to Moody’s report.

In Dubai alone the value of property projects planned or underway over the next decade is $230bn, while Abu Dhabi follows suit at around $130bn.

The UAE figures take the total estimated value of real estate projects in the GCC to more than $1trn, with nearly 40 per cent of that concentrated in Dubai and Abu Dhabi. The UAE capital last year released a new master plan aimed at creating a framework for development through to 2030. The plan projects three million residents in the city by that time.

Regional outlook

In its outlook for Abu Dhabi, Moody’s said the recent market liberalisation and freehold properties for foreign investment should boost the market. Strong growth, expatriate influx and a co-ordinated government tourism and diversification policies are also expected to build up the capital’s real estate market, which remains heavily under-supplied.

Meanwhile, Dubai is at risk of an over-supply of apartment units. The ratings agency said apartment units are likely to close the supply gap in the emirate by 2009 or 2010, leading to softening, with a risk of over-supply in some areas. However, villas and office spaces are expected to remain in tight supply, with high demand also expected in the free zones.

Dubai will see a gradual decline in speculative investment and a trend towards owner-occupancy, although speculation is still expected to be significant. While the emirate is leading the way on regulation and legal framework, it is expected to continue its ongoing reliance on the expat market.

Outside the UAE, Qatar – the world’s richest economy by per capita GDP – remains heavily undersupplied, and also faces a huge influx of foreigners from the hydrocarbon sectors and the growing financial sectors.

Saudi Arabia is expected to be one of the most favourable markets, said Moody’s. The Kingdom continues to be driven by demographic factors and severe under-supply, given its huge population growth.

In other parts of the GCC, Oman is expected to continue focusing heavily on sustainable tourism. Kuwait and Bahrain are developing at a slower pace, though both have large long-term ambitions, Moody’s said, adding that pressures are less sustained due to lower expat influx in these countries.