Real estate has been on a slow but secular decline with oil prices since the middle of 2014. Real estate performance closely tracks long term movements in average oil prices rather than short term fluctuations. Oman’s average oil price improved from USD 40.1 per barrel in 2016 to USD 51.3 per barrel in 2017 although average production went down from 1,004 thousand barrels per day in 2016 to 970 thousand barrels per day in 2017 owing to OPEC/Non OPEC deal to take about 1.8 million barrels per day out of the market. In the year 2018 up to April, production has been at about the same level as last year. In the same period average oil price has been USD 62.9. Oil is hovering around USD 75/- at the moment and the consensus is that oil prices will average around USD 65/- per barrel in 2018. While this is positive for the Oman economy, the prices are well below the over USD 100/- per barrel that prevailed prior to June 2014. Despite the improvement in prices, the government of Oman recognizes that it must pursue prudent fiscal policies and has based its budget for 2018 at an oil price of USD 50/- per barrel. The deficit in 2017 was about RO 3.5 billion which was about RO 500 million above budget. The 2018 budget projects a deficit of RO 3 billion but in actual it may be less as oil prices are expected to be about USD 15/- per barrel higher than budgeted. With improving oil prices and increasing gas production and the knock on effect this will have on the non-oil sector, the Oman economy is expected to grow 3% in real terms and see much higher growth in nominal terms.
The government continues to press on diversification away from oil & gas and is delivering on the Tanfeedh targets. The focus sectors of tourism, manufacturing, logistics, fisheries and mining continue to see growth although it will take time for these to replace the oil & gas GDP. Our view is that the slowdown is temporary and with rising oil prices and delivery on diversification, Oman’s economy will see healthy economic growth in the coming years.
Employment is the biggest generator of demand for housing both for buying and renting. To see where the market is going it is essential to look at the job market.
The total number of expat employees has gone up from 1,848,175 as on December 31, 2016 to 1,854,880 as on December 31, 2017 an increase of 6,705 (0.36%). However a closer look at the numbers shows that the number of expats who hold a diploma and above has gone down, in the same period, from 159,506 to 150,871 a decline of 8,635 (5.41%). In the first four months in 2018, this has further dropped to 146,153 a decline of 4,718 (3.15%). These are the job holders who are likely to rent apartments and their decline is putting a lot of pressure on the rental market. Our own experience is that there are no new enquiries from expatriates. Enquiries are from just the expatriates that are already here, and are seeking to move to cheaper and better accommodation. As you will see in the later part of the report, rents have declined significantly. Occupancy has dropped and therefore the rental income has gone down markedly.
The total number of Omanis in the private sector has gone up from 223,083 as on December 31, 2016 to 238,688 as on December 31, 2017 an increase of 15,605 (7%). It has further increased to 245,253 as at end April 2018. Over decades, the government of Oman, has invested in education and to find qualified Omanis for white collar jobs is not difficult.
We forecast a further decline in rents and occupancies as more white collar expat 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 their own houses.
The House mortgage market
With increasing number of Omanis being employed, there is steady demand for villa plots and villas. The number of construction permits for villas issued by the municipalities is steady at around 30,000 per year. This translates to about RO 2 billion being invested in new villas and this provides ample opportunities for Banks to give housing loans against mortgages. Data from the Ministry of Housing shows that mortgages have gone up from RO 541.8 million in 2017 up to April 2017 to RO 664.6 million in the same period this year an increase of 22.7%. At the same time value of sales contracts has gone down from RO 422.5 million to RO 340.9 million in the same period, thus confirming that there is a slowdown in investment property activity.
However, it must be noted that salary is a more important source of security for the lenders in the case of home loans to end users, rather than the asset itself. With increasing number of Omani employees and an improving economy, job losses are unlikely and therefore housing loans are low risk.
With declining number of white collar expatriate employees rents have declined by about 10% to 15% y-o-y in Q1 2018. However, premium properties with facilities like swimming pools & gymnasiums are enjoying higher occupancies and smaller declines in rents. In addition declines in rents and occupancies depend on the location. Given below are declines in rents Y-o-Y in Q1 2018.
It can be clearly seen that the declines are less in popular locations like CBD/MBD, Qurum, Al Khuwair & Ghubra. The declines are higher in Wadi Kabir, Ruwi, Amerat & the areas beyond the airport.
Occupancies are even more important than rents and we have found the same pattern in occupancies. The popular locations listed above, which have experienced lower declines in rents, enjoy higher occupancy and the less popular locations which have experienced higher rent declines also suffer lower occupancy. Therefore it is a double whammy.
We have noted a slowdown in growth in supply but it will take at least couple of years for demand to catch up with the supply.
Rents have declined sharply in almost all locations, CBD being affected more than the others. Occupancy is even more of a problem than in the residential segment with owners suffering long periods of vacancy. Rents in CBD are RO 3/- 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. Occupancy has become a major problem and properties are suffering high vacancy for long periods. Even, grade A offices in the best locations are finding it difficult to attract tenants despite lowering rents.
A very small number of office space properties are being offered for outright sale and even here developers are finding it difficult to sell. Most of these are high end and although prices have dropped from about RO 950/- per sq. m to about RO 850/- per sq. m, there are few takers.
Tourism is one of the thrust area for the government and infrastructure, in terms of Hotels are being added. However, the number of guests in 3 to 5 star hotels in 2017 has dropped to 1,534,146 from 1,597,584 in 2016. Although revenues are up from RO 190 million in 2016 to RO 195 million in 2017. Hotel occupancy has dropped marginally from 57.4 percent to 57.1 %. However, there is a big uptick in tourism numbers this year with occupancy in 3-5 star hotels improving from 65.3% in Q1 2017 to 70.8% in Q1 2018. 3-5 star hotel revenues in Q1 2018 have gone up to RO 75 million from RO 65 million in Q1 2017. As the new airport has open, the Oman Convention & Exhibition Center has started attracting the MICE customers (Meetings, Incentives, Conventions and Exhibitions) customers, visa restrictions are eased and more hotel rooms are available, we can expect tourism to grow.
There are about 16,000 hotel rooms in Oman and another 10,000 rooms from budget to luxury hotels are expected to be added in the next couple of years. While demand may grow and adequate hospitality infrastructure is essential to attract tourists, there may be softness for a few years when supply comes on line and before demand catches up. Some of the newer hotels, which have been built at huge costs may suffer prolonged periods of gestation.
The Muscat Grand Mall (MGM) is expanding 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 and with about 350 outlets, has started. This will be the biggest mall in Oman. The USD 300 million Palm Mall (rebranded Mall of Muscat) in Mabelah from the Jarwani group is in an advanced stage of construction.
A large 7,000 sq. m aquarium and a 5,000 sq. m snow park are the differentiators of this mall. Another mall, the Al Araimi Boulevard in Seeb with about 70,000 sqm of leasable area and 220 + units is also under construction and is expected to be completed by the end of 2018.
On the outskirts in Barka “Chinese” malls have come up offering low prices. More malls have been announced but time will tell if these will fructify.
Even as retail malls/outlets grow exponentially, the slowing economy has led to a slowdown in retail sales and retailers are feeling the pressure. They are negotiating lower rents and longer rent free periods. The weaker and older malls are coming under a lot of pressure in retaining retailers and maintaining rents. Smaller community malls are suffering the most with very low occupancy and low rents.
Even with softness in the retail sector, the popular high streets like Ruwi high street, the Seeb souq, the Al Khoudh souq are able to retain their retailers and maintain rents.
With the decline in rents, investment property prices have declined with the investors demanding the same yield. Within investment properties, land prices have declined sharply from between 15 to 30%. Cost of construction remaining the same, it was inevitable that the correction in property prices would be reflected in declining land prices.
However, prices of villas & villa plots remains fairly stable. As stated in the earlier part of the report, demand is fairly good for these. It is the investment properties. especially, commercial/residential buildings that are bearing the brunt of the down turn.
Real estate is a very illiquid asset and the larger the value the lesser the liquidity and hence the realizable price may be much lower for large properties. In addition, buyers demand large discounts, reaching distress levels, where the properties areW vacant. In general prices have corrected by 20 to 30% in investment properties and large plots.
Changes in laws & taxes
The government has committed to implement VAT sometime in 2019. Taxes on leases and on selling properties are already at 5% and we will know the impact of VAT on real estate when the government announces VAT on real estate transactions.
As part of Tanfeedh, the government has permitted Real Estate Investment Trusts (REITs). The Capital Market Authority (CMA) has published a regulatory frame work. Real estate investments are usually lumpy, illiquid
and hence riskier for individuals to invest in directly. REITs will enable smaller investors to invest in real estate in small amounts with risks spread out. Since units will be traded, the investor will not face the problem of a lack of liquidity. This is a welcome move. We understand that a few REITs will be launched in the near future.
Expatriates wishing to invest in real estate in Oman have limited options in a few Integrated Tourism Complexes (ITCs). Even within the present framework, there are some affordable ITCs that are being launched.
In the ITCs, prices are down by about 10-15 % in the last one year and absorption of new launches is very slow. Some of the ITCs have no reason to charge huge premiums and buyers are baulking on paying these premiums.
Alhabib & Co LLC 2018. 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 Group, any use of any part of it requires prior written consent.