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Real Estate Report February 2017

Posted by Alshima Nasser on March 3, 2019
| 0

Real estate performance is a function of the overall performance of the economy and therefore, we need to look at the macro picture of the Oman economy to understand performance of the real estate sector so far and to forecast what is going to happen in future. Real estate mortgage and real estate as collateral is a large part of the banking sector and the overall stability of the banking and financial system is dependent on the performance of the real estate sector.

The most significant economic event of 2016 has been the further plunge in oil prices to levels not seen in the last 12 years. The economy which had shrunk by over 15% in 2015 has shrunk by about a further 7% in 2016. The government of Oman had run a large budget deficit of about RO 4.5 billion in 2015 and this has increased to RO 5.2 billion in 2016. The expected deficit for 2017 is about RO 3.5 billion.

This is over 15% of GDP which is unsustainable. The government is borrowing to fund the deficit. National debt has gone up to over 25% of GDP. The government has no choice but to cut ex

penditure and it has done that by about RO 3 billion per annum between 2014 & 2016. This is extremely painful but necessary. The government is now relying on the private sector to grow the economy and create employment.

The government has increased fees from 3% to 5% both in the case of leases and sale & purchase. This has added costs and dampened the already weak real estate market. Real transactions have dropped 24.3% from RO 1.356 billion to RO 1.027 billion. Real estate has been effected by this economic downturn and the market is feeling some pain.

Employment
Employment is the biggest generator of demand for housing both for buying and renting. The total number of employees in Oman is as follows.

It can be seen that the private sector is a major employer and the number of employees in the private sector has been growing rapidly as the numbers below show.

However, the number of well-educated expats has dropped in 2016. These are the ones who are likely to rent apartments and villas and this decline in their numbers has put enormous pressure on rents. One must note that supply has been increasing since most of the projects being delivered now were started when the real estate market rental yields were very attractive in 2014 & 2015.

We expect a major slowdown or even a decline in the number of jobs in the private sector unless oil prices rebound. This may lead to higher vacancy, lower rents and lower property prices although it is highly unlikely that prices will drop as dramatically as oil prices. We believe that the maximum downside in completed buildings is about 25% and in plot prices about 35%.

Inflation/Deflation in construction costs
Unlike in the 2008 crash, real estate is not in bubble territory at the moment and any decline in prices will be orderly. The cost of construction has not declined sharply. The Omani Rial has strengthen due to the US dollar appreciating. However overall cost of construction has not gone down significantly. In the case of some of the locally produced construction materials like cement, concrete, aggregate etc, prices have remained static due to weak demand although costs have gone up owing to gas & fuel price deregulation and changes in transportation and other regulations. Some of the finishing items which are imported from countries other than the USA have seen a slight decline. In Oman, the cost of land in any project varies from about 30% in Muscat to about 10% in the small towns in the interior. This means that there will be only a manageable decline in real estate going forward even if plot prices go down significantly.

Office space rents
With a declining economy there has been weak demand for office space. However, the office space segment is small compared to the residential segment and there has been too much supply with the result that absorption rates are slow with it taking two to three years to fill up a building. The city has been shifting away from the CBD/Ruwi areas and rents in these areas have corrected significantly. Going rates in CBD are as low as RO 3.000 per sq. m per month and vacancy levels are high. We can say these properties are financially under pressure. Rents are higher from Qurum towards Seeb. However even these have dipped and some of the Grade A office space in prime locations has fallen below RO 7/- per sq. m per month. We are aware that one major tenant has leased 12,000 sq. m of Grade A office space in Al Khuwair at RO 5.500 per sq. m per month.

Car park is a major challenge. Although, the municipality rules, that have come in to force in the last 5 years or so, stipulate that there should be at least one car park for every 50 sq. m of leasable area, the actual requirement is more like twice the number. Given that land is expensive, it is simply not feasible for a developer to provide this car park ratio. Public transport in Muscat is limited and car-pooling is not prevalent with the result that even whichever Grade A office space you take, car park is inadequate. There has been a move to mechanized car parks to improve car park ratio and it remains to be seen how well this works in practice.

Office Space Sale
A recent and very new trend is that small businesses are buying office space in lots from 100 sq. m to 1,000/- sq. m. This market is very limited but the margins that developers enjoy are very high at the moment and it remains to be seen if these are sustainable. Going prices range from RO 600/- per sq. m to RO 950/- per sq. m. Some of the developers are selling car parks that go with the property. There are only about five properties that are using this model.

Rents in the Residential Sector
Rents are underpinned by employment numbers of educated expats. We have seen these numbers declining while supply is increasing. Thus rents are down in apartments and villas and occupancies have dropped by about 5%

 

in prime locations and by more than 20% in the outlying areas of Amerat & Mabelah. Our data base of over 4,000 apartments under management show the percentage decline in rents of apartments in various locations.

Within the residential apartment sector, rents have dropped less for newer high quality properties compared to the older poorer quality properties.

Villas have witnessed an even steeper decline with average rents declining by 15 to 20%. Here again the worst hit are the older standalone villas. The newer villas in compounds with facilities like gyms and pools are less affected although even here rents have dropped by about 10%.

Rents in the retail sector
Owing to the slowdown, retailers are facing a decline in sales and this is forcing them to negotiate lower and lower rents. According to published statistics, retailers have seen sales decline by about 18% and this is a huge drop. Our own meetings with retailers indicate that sales are down about 20% in the value offer segment and by more than 30% in the meduim and high end brands segment. This is also corroborated by new vehicle registrations, which are down by about 11% from an already low base in 2015.

The newer retail centers are offering long rent free periods and lower rents. Feasibility which the new malls did at over R 25/- per sq. m per month are being leased at around RO 15/- per sq. m per month for shops of around 100 sq. m. Some of the new malls are earning poor returns and Banks which have exposure to new malls may like to be cautious.

Property Prices
With the decline in rents by about 8% and with the gross yields remaining static at 10%, investment property prices in the residential and commercial/residential segment have declined by about 8%. We see further declines going forward.

In the case of residential villas, it is hard to gauge the drop, since these are thinly traded. Most villas are for self-use.

Demand for mortgages for self-occupied villas will continue as well educated Omanis take white collar jobs. However, these mortgages are backed by salaried income usually and mortgages are not a real security. In any case, if too many villas came on to the market, prices would drop and selling will be difficult even at these lower prices.

 

    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.

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