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Oil price fall and real estate market

Posted by Alshima Nasser on October 6, 2020
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Oil Prices have dropped significantly in the last year. How has the real estate market in Oman reacted and what does the future hold? As of now, demand and supply are matched and therefore rents and prices are stable. Demand is underpinned by the fact that the economy continues to grow in real terms and, therefore, job creation continues. Non-oil GDP is growing at over four per cent in real and nominal terms but one must remember that oil prices have a knock-on effect on non-oil GDP. The government continues to spend at almost the same levels as last year and this is holding up non-oil GDP. The number of Omanis in the private sector has gone up by 8,838 (4.47 per cent) in the first seven months up to July this year and the number of expatriates in the private sector has also gone up by 4.08 per cent in the same period.

It is hard to predict oil prices, but if they do not rebound, government at some point, may have to bring in austerity measures. What effect will this have on the real estate market? Austerity may slow down the economy and hence slow down job growth.

A slowing of demand may result in softening of rents. Will this impact property prices? The rental yields in Oman are among the highest in the region and therefore, investors may accept a lower yield for want of attractive alternative asset classes. Therefore, prices could hold even if rents drop. However, this is in the medium to long term but in the short term investors may be able to get higher yields simply as there may be too many sellers (mostly developers). It must be also be noted that a drop in investment by the government may be partly offset by private investment as the oil boom of the last decade has resulted in a lot of private capital.

In the medium and long run, costs play a critical role in prices. The two components of cost in property are land prices and construction costs. Commodity prices have droppedsignificantly in the last year or so. Specific to construction, an important building material like steel has dropped by about 30 per cent in the last year. The devaluation of the Chinese Yuan and the strengthening of the US Dollar (and hence the Omani Rial) against most major currencies will result in lower building material costs. Some of this may be offset by higher prices of locally produced building materials especially if the government rationalises subsidies. If the rental demand drops, developers may scale down development and this could put pressure on land prices. Overall, there may be a drop in costs in the medium term and this may put pressure on property prices.

The interplay of costs, rents and yields will determine prices and as always there is support and resistance. All in all, Oman’s real estate market is going through interesting times.

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