Bouncing back

The real estate market in the country is returning to normalcy with a generous demand for both commercial and rental properties, thanks to the consistent economic growth witnessed by Oman despite the slowdown of the past two years

When The volatile period of the past two years has eased for the real estate sector and stability now has returned with an increased supply as well as demand for the entire spectrum of properties – from high end to low end.On the demand and supply side, the demand for apartments and supply are evenly matched. But there is an excess supply of villas. Construction costs and land prices have come down therefore housing is much more affordable now than in 2008. But there is nothing like a breakthrough, which will make house prices very cheap.

According to the Ministry of National Economy’s monthly statistical bulletin, the price index for rents confirmed a 16 per cent increase in January of 2009, compared to the same month the previous year. Meanwhile, a slight challenge still exists in commercial propert spaces in the medium range. The rents of commercial spaces are much lower than what existed in the peak of 2008. Given land price and construction costs, prevailing rents give reasonable returns to the developer as well.

Figures released by the ministry of housing, in the first quarter of the year indicate that there is a 62 per cent rise in sale value of property and 11 per cent rise in the sale volumes compared to corresponding period last year.

Price corrections

The property prices peaked in 2008 and moderately dropped since then. The phase of price correction that the market had experienced through 2009 is over. Market experts have predicted that rental prices may not go down any further but instead the market is expected to move forward.

Vacancy rates in rented houses have decreased significantly since 2003, despite an influx of new units. Before the so-called real estate bubble, apartments that were rented out at RO250, reached RO600, today the prices have come down and became stable at RO450 after correction. Although the prices are now stabilising, they still remain high.

Comparing the current rents with that of 2008, rents have come down. But between 2009 and 2010 10 there isn’t much difference. Between 2008 and 2009 there was a drop of 15- 20 per cent in rents of apartments. The government expenditure in the infrastructure development for ports, airports and roads is giving a boost to the economy. Consequently, there is going to be more liquidity in the money market and the standards of living are expected to go up. This will see more spendings and a resultant growth across the economy. Such growth will definitely be witnessed in the real estate sector as well.

Financing

In 2009, banks and investors were unwilling to provide funds to the sector but 2010 has witnessed a change in attitude. Both banks and investors are willing to lend at present. While many speculators were active in the real estate market earlier, the people who buy property now are real investors. They are the people who actually buy properties that they now want to live in.

For a reliable client, funding is not an issue but banks no longer fund speculative activates and they would like to see tangible results from a project. Some market observers feel that the issue facing Muscat is that of an oversupply of properties. There has been a lot of building activity in terms of office space supply, which might be absorbed at a low rate. People are still looking at developments but they are more realistic about their feasibility studies.

People are much more aware now than they were three years ago. If you are looking for a quick short-term profit from investments in property market, then it is high risk. But people, who look at long-term investments, will be successful.

Affordable housing

The crash of the real estate sector in the turmoil of global financial crisis has given a new urgency to affordable housing. Oman’s beachfront and cityscape are dotted with high-end luxurious properties that are much talked about. Ongoing projects in the housing sector, especially in the affordable housing sector are progressing fast and serious buyers are active in the market. Real estate agents are getting enquires. But for Omanis, who belong to the middle rung of the society, this expensive housing, which is currently available in the market, is not affordable. Therefore, affordable housing is the need of the hour.

One of them is the growing young population of Oman, which is also becoming affluent. A whopping 60 per cent of Oman’s population is below the age of 30 with the average salary earned being RO600. It is this segment that wants to create their own set-up and want to invest and buy property such as those available on affordable investment schemes. It is estimated that by 2025, the country’s population will swell to 5 million from the current 3.3 million.

In the absence of official price statistics for the real estate sector, both rental and sale prices are estimated to have doubled over the past four years. It is a fact that many Omanis are finding it hard to keep up with rising housing costs. There is a speculation that rents will further go up in 2011 for new properties. The government has done its bit to ensure that Omanis in the middle to low income brackets do not get priced out of the housing market.

High potential

To limit the impact of the high prices, in June 2008, an amendment in the 2007 housing law limited the cap on rental price increase to 7 per cent per annum for three years, subsequent to the signing of a lease agreement. Under the previous cap, landlords could increase rent up to 15 per cent over two years. This may have a bearing on how flats are taken on rent.

Many Omanis who work in Muscat currently take flats on rent but are interested in paying an equated monthly (mortgage) installment that is equal to monthly (rental) rates in order to finance a property purchase. The average income of this particular segment rests between RO700 and RO900, though that may not be the full picture of his income. His earnings may also come from other sources like stock market, financial support from family, land, shops and rents.

In the absence of personal tax, it is difficult to assess people’s income. There is a potential demand for affordable housing, which will continue growing as Oman’s large youth population moves away from joint families to the system of nuclear families. However, in the absence of a proper survey, demand cannot be quantified. Oman’s biggest advantage is that it has sprawling land, prices for which had dropped dramatically at one point of time. Location wise, there are two segments of markets, based on personal preferences. There is demand for houses in Muscat city; a sound infrastructure and a happening city life being the reason behind such demand.

The government of Oman is spending a huge amount of money on infrastructure projects like the Southern Express highway and Batinah Coast Highway. Muscat International airport expansion is going on. In short, Muscat is getting connected to the outskirts of the city and there are buyers, who by choice, would like to be located there for comfort and a bigger house, away from the hustle and bustle of city life.

Popularising the segment

According to the statistics from MONE, the wholesale price index, for building materials in Muscat fell to 163.2. The index has plummeted further as the cost of steel, cement and other materials remain low due to decreased worldwide demand stemming from the global meltdown. This dip in construction and materials costs has spurred developers to deliver more units to the expanding middle-income market. Their high price was once a prohibitive factor in building affordable housing. But with the situation easing out, developers are now looking to increase their presence in the sustainably affordable housing sector or on reasonably priced properties.

However, Omanis have not yet reconciled to the fact that they can own and live in apartments as most of the people perceive them as smaller and closed space. The general preference is for more open space as in villas. Developers need to raise awareness among buyers to invest in this kind of property. Generally, an affordable property hovers between RO50,000 and RO70,000. Muscat is becoming a much denser city, which is making affordable housing increasingly important. Certain areas are zoned and rezoned for allowing the higher density development, based on the infrastructure provided around them.

Companies like Alargan Towell Investment, Zain Property Development and a few others are moving in to take advantage of low-cost constructions.

Moody’s forecast

The supply-demand imbalance remains a key driver of the continued negative outlook for the property industry in the Arabian Gulf, says Moody’s Investors Service in a new Industry Outlook report. The negative outlook reflects the rating agency’s view of fundamental credit conditions in the industry over the next 12-18 months.

“The supply-demand imbalance in commercial property and to some degree in residential units, depending on the city or country, is likely to grow worse as vast supply meets slack demand and is a major driver of our negative outlook,” says Martin Kohlhase, a Moody’s Assistant Vice President – Analyst and author of the report. In the report, Moody’s notes that the other drivers of the outlook remain the same as in 2009, namely funding and the preservation of cash, which includes potential disposals of non-core assets, cash collection and debt standstill agreements. Moody’s believes that these factors will remain in place for the rest of 2010, albeit with a different emphasis from the previous year.

Ratings downgraded

The rating agency further notes that it has downgraded the ratings of all GCC issuers with real estate exposure over the past 12 months. The average rating of A2 at the beginning of April 2009 now stands at Ba1, a five-notch drop. This is largely a reflection of lower government support assumptions that had underpinned a number of ratings.

However, although Moody’s industry outlook for the region as a whole is negative, it notes that significant differences continue to exist across the region, with Saudi Arabia seen as the brightest spot of the six Gulf Co-operation Council (GCC) countries. “The large, growing and young population of this Kingdom continues to support the local residential market,” explains Kohlhase. “Furthermore, rent and sale prices have remained stable in prime areas, while limited price correction has been witnessed on the outskirts.”

The rating agency says that several factors could prompt a revision of the outlook to stable, including government spending for public infrastructure work; government intervention; a shortage of low- and middle-income housing and international expansion. “However, we do not envisage moving to a stable outlook in the near term,” Kohlhase cautions.

Foreign investment

One of the biggest countries in the Middle East, the Sultanate holds tremendous potential in terms of trade, industrial growth and of course, real estate. As a result of a long maritime history and interaction with various cultures, Oman can rightfully claim that it is the friendliest country in the Gulf basin. Today, Oman is one of the fastest growing economies in the Gulf, thanks to prudent government planning, responsible expenditure as well as heavy investment in the non-oil sector.

Unlike other countries in the Middle East, Oman boasts lush green terrain in certain areas that spell out the promise of a relatively calm and unhurried lifestyle. This country is home to vast agricultural farms that are a vital source of fruits and vegetables to the rest of the GCC. With extensive geographic and climatic diversity, fertile coastal zones and mountains, Oman has the most versatile terrain in the Gulf. As the country is poised to develop further, the local real estate sector is going through an exciting phase.

Oman is attracting foreign investors, not only from the GCC and Asia but also from distant Europe, due to the low cost of its land, high economic growth potential, easy availability of beachfront plots and good infrastructure. Of late, Oman has been investing heavily in its tourism, infrastructure, specifically in its airline, roads and airports. Foreign participation in the tourism industry has also been increasing due to government incentives to investors.

Over the last five to ten years tourism in Oman has taken off in a big way, with remarkable growth being experienced recently. There has been an increase in direct, non-stop flights from key international markets which have identified the potential of Oman as both a tourist and business destination. This boom in the tourism sector is reflected in the real estate industry as well.

Advantages of property Investment in Oman
Oman has zero taxation
Rental market in tipped in favor of landlord
Strong economic growth of the country
Exceptional performance of tourism sector
Freehold property ownership

The government is drafting a law to attract foreign investments and is on a liberalisation drive to expand the markets. Many multinational companies have taken advantage of the situation and established bases in Oman, especially in Muscat. This has boosted rents and consequently the rental yields.
 

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