Real estate market continues to be soft. However, prices are holding up in some segments whereas they are declining in others. It is the time to pick and choose to invest or to loan against a mortgage.
Oman Economy is estimated to have grown by 1.8% in 2018 in real terms. Growth in real GDP is expected to pick up to about 3% in 2019. Oman’s average oil price improved from USD 40.1 per barrel in 2016 to USD 51.3 per barrel in 2017 and further to USD 69.7 per barrel in 2018. Thus the nominal GDP growth in 2018 has been about 15%. It is hard to predict oil prices, but the consensus is that prices will stay between USD 60 & USD 70 in 2019.
The revenues in 2019 are budgeted at oil price of USD 58 per barrel. We can expect the revenues to be slightly higher and if expenditure is controlled budget deficit may be lower than the budgeted amount of RO 2.8 billion. The government plans to finance the budgeted deficit mainly through borrowing and debt to GDP ratio has been rising.
Demand for real estate is driven by the job market and it is important to track the job market to understand the real estate market.
The total number of expat employees has gone down from a peak of 1,854,880 as on December 31, 2017 to 1,787,447 as on December 31, 2018 a decrease of 67,433 (3.64%). However a closer look at the numbers shows that the number of expats who hold a diploma and above has gone down, in the last two years, from 159,506 to 142,989 a decline of 16,517 (10.36%). Since the demand for rental housing is mainly from these expatriates, their declining numbers is resulting in stress in investment properties. In most cases, enquiries are not from newly arriving expatriates but from those already in Oman, seeking to move to cheaper or better accommodation. This has resulted in declining rents as well as occupancy and rental incomes have thus taken a double hit.
The total number of Omanis in the private sector has gone up from 223,083 as on December 31, 2016 to 251,009 as on November 30, 2018 an increase of 27,926 (12.5%) in about two years. Oman now produces a number of high school and college graduates each year, and it is natural that they will replace expatriates, especially in white collar jobs.
We forecast a further decline in rents and occupancies as more white collar expatriate employees are replaced by well-educated Omanis. In general, Oman has, among the highest home ownership, in the world and Omanis prefer to live in their own homes, sometimes in extended families, till they are able to buy/build their own houses. It is also common for more than one Omani in a household to be employed while it is less common in expatriate families.
The House mortgage market
Villas are mostly for self-occupation and one would expect demand to be steady with rising employment of Omanis. However, the figures below indicate there is slackening of demand here too. The latest figures show that the number of residential building permits, in all of Oman, has declined to 24,149 in 2017 from 31,912 in 2016 and 34,925 in 2015. We do not yet have the figures for 2018 but it will be interesting to see the numbers when they are published later this year. Surprisingly the drop is steep (more than 50%) in Muscat and Dhofar and less pronounced in the smaller governorates.
With declining number of white collar expatriate employees, rents have declined by about 10% to 15% y-o-y in 2018 compared to 2017. Owners who have been quick to adjust the asking rents downwards, and who offer good maintenance services, are enjoying higher occupancies than those who are less flexible on rents and who do not maintain their buildings well. Location is also a key factor, with rents and occupancies in popular locations, declining less than those in other locations.
Given below are declines in rents Y-o-Y in 2018.
It can be clearly seen that the declines are less in popular locations like CBD, Qurum, Al Khuwair & Ghubra. The declines are higher in Wadi Kabir, Ghala, Amerat & the areas beyond the airport.
Rents have declined sharply in almost all locations and occupancies are even more of a problem. CBD is the worst affected with major banks shifting to locations that are fast growing. Rents in CBD are RO 2.5 per sqm per month and sometimes even lower. In the more attractive areas of Qurum, Al Khuwair, Azaibah etc rents are RO 5 to 6 per sqm per month and sometimes below. Filling up newer buildings (even grade A office space) in popular locations is taking years. Some of the poorer quality office space has come up with very little car park and these buildings, we believe, will be under considerable stress.
Tourism is one of the thrust areas for the government and infrastructure, in terms of Hotels are being added. However, the number of guests in 3 to 5 star hotels in 2018 has dropped to 1,499,461 in 2018 from 1,531,351 in 2017, although revenues are up from RO 194 million in 2017 to RO 214 million in 2018. However, there has been a spike in hotel rooms and profitability in 2018 has been lower than in 2017.
The Muscat Grand Mall (MGM) has expanded with the addition of more than 100 new outlets. The construction of a superregional mall in Bousher, The Mall of Oman, from Majid Al Futtaim group, with an investment of about USD 450 million is delayed by a year and is now expected to open only in 2021. The USD 300 million Palm Mall (rebranded Mall of Muscat) in Mabelah from th AlJarwani group is in an advanced stage of construction, and after significant delays, is expected to open sometime in April 2019.
Another mall, the Al Araimi Boulevard in Seeb with about 70,000 sqm of leasable area and 220+ units has opened but a lot of units remain to be opened for business. A number of malls have opened in the smaller cities of Salalah, Sohar, Nizwa and Sur in the last couple of years. With retail sales stagnating, retailers are struggling to breakeven with increasing outlets catering to the same volume. The newer malls will find it challenging to fill up, and collecting rents is not going to be easy from struggling retailers. Some of the mall owners are offering long rent free periods and sometimes providing subsidy for interior fit out. On the outskirts in Barka & Sohar, “Chinese” malls have come up offering low priced goods.
With the decline in rents, investment property prices have declined. Within investment properties, there is considerable stress in the older areas of Ruwi and the outlying areas like Amerat.
Prices of villas & villa plots remain stable to a slight decline. However, transaction volumes in completed villas, are very low and therefore, price discovery is not efficient.
Some pension funds have added to the supply by developing large mixed use projects.
The market has become very illiquid for large plots/properties and finding buyers for them has become a challenge. In addition, buyers demand distress prices, where the properties are vacant.
Changes in laws & taxes
The government is likely to implement VAT in 2020. Taxes on leases and on selling properties are already at 5%, and we will know the impact of VAT on real estate transactions when the government announces it. Residential real estate, which is about 90% of the real estate market, may not attract VAT, but this remains to be seen.
As part of Tanfeedh, the government has permitted Real Estate Investment Trusts (REITs). The Capital Market Authority (CMA) has published a regulatory frame work. The first REIT has been announced. We believe that the launch of further REITs will depend on the success of the first.
Integrated Tourism complexes (ITCs)
Non GCC expatriates, wanting to invest in real estate in Oman, can do so only in Integrated Tourism Complexes (ITCs). Prices in the most popular ITC, Al Mouj, have declined 10-15% but prices in the other, less popular ITCs have declined more sharply. Some of these ITCs are finding it difficult to find even first time buyers.
All in all, we believe austerity is here to stay for the foreseeable future and while we expect the real estate market to be stable there will be a little bit of stress on investment properties especially in certain less popular locations.
Al Habib & Co LLC 2019. The information contained herein is intended to provide general information to the public and has been obtained through sources deemed reliable but cannot be guaranteed as to its accuracy. Any information of special interest should be obtained through independent verification. The information available in this report is the property of Al Habib & Co LLC, any use of any part of it requires prior written consent.