Optimistic outlook for Oman’s Construction sector

By Siraj Bhavnagarwalla

Prospects are bright for the Omani residential as well as commercial office construction market on the back of increasing population and rising employment levels

In their quest to move away from predominantly oil-based economies, the GCC nations initiated several big projects, with construction being one of their top-most priorities in the last decade. The GCC construction sector saw a period of spectacular boom and was subsequently adversely affected by the global economic meltdown. Although the sector is showing signs of recovery, investors are still taking a cautious approach. However, the growth of the sector is supported by sound economic fundamentals and healthy growth forecasts of the GCC countries. With oil prices expected to be stable, any further increases in government spending will support investment and consumer spending, thereby having a positive effect on GDP growth, which will bode well for the overall economy in general and construction sector in particular.

Outlook
Although the construction and real estate sector has started recovering from the lows of 2008-2009, growth is still far from pre-crisis levels. The growth is also not uniform across all regions within the GCC and while some countries are leading the recovery; others continue to take a more careful approach. Prospects in the Qatari construction market are looking optimistic on the back of strong GDP growth and the successful bid for the 2022 FIFA World Cup. In Bahrain and Saudi Arabia, the focus of the residential construction sector has shifted to providing affordable homes to the low and middle income group of population. UAE’s reputation as a safe and stable country amid the recent ‘Arab Spring’ is likely to have a positive impact on the construction sector despite the current oversupply and cautious approach to new investments.

GCC region continues to enjoy premium on rental yields as compared to the mature markets of the US and Europe, which will keep the overseas investors’ interest intact in the sector. Due to low number of transactions taking place in the marketplace, the determination of the price ranges is a challenging task, thereby making this a buyer’s market. We foresee continuation of this phase in near to mid-term.

Residential construction market
Oman’s construction and real estate market did not witness the same boom as exhibited by other GCC member countries mainly due to government regulations (non-GCC nationals were not allowed to acquire freehold interest in land till 2006). However, post 2006, when the government introduced a change in law, allowing foreign nationals’ ownership rights in land located in designated Integrated Tourist Complexes (ITCs), the residential construction and real estate market received a big boost.

Since the construction and real estate sector was not as big as compared to other GCC member countries, the global recession in 2008 did not have as severe an impact on Oman as it did on some of its counterparts in the GCC region. With an oversupply of residential units, Oman’s residential construction and real estate market underwent a correction and average lease rates in Muscat dropped by nearly 13 per cent between 2009 and 20101.

In the last few quarters, the lease rentals have shown some signs of stabilisation. An improving private sector is the primary driver for the recent growth in Oman’s economy. The number of employees in the private sector has grown by 20.7 per cent from 2008 to 2010 leading to a surge in demand for properties2.

The residential prices which fell significantly from their peak in 2008 showed signs of stabilisation in 2011. We expect this trend to continue in future (particularly in Muscat) on the back of a recovering economy.

We expect demand for residential properties to be strong in the well developed localities of Qurum, Shatti Al Qurum, Madinat Qaboos, The Wave and Muscat Hills.

Over the long-term, we have an optimistic outlook on residential construction markets on the back of increasing population and rising employment levels.

Commercial construction market
Oman is currently facing a steep fall in property prices due to oversupply and muted demand. The post-crisis period has been marked by declining office prices, rentals, and high vacancy rates due to oversupply of commercial properties. Currently, the office vacancy rates in Oman stands at around 25 per cent.

In Muscat, stock of modern commercial office space has increased drastically over the last few years on the back of economic and demographic growth, government diversification and privatisation initiatives. However, Grade A buildings which meet the requirements of multi-national companies still remain in short-supply. This situation might change in the next one year with the completion of several office buildings like Al Rawaq Building in Qurum and Tilal Complex in Al Khuwair.

Prime office rentals in Muscat fell by around 33 per cent between Q3 2010 and Q2 20113. Rental yield from property in Muscat stood at around 5.5 per cent gross return to value. However, based on original purchase price off plan, the properties rental yields stood at around 10 per cent per annum4.

The commercial office properties market will continue to be marked by oversupply in the short to medium-term as new supply enters the market. However, though the overall commercial office properties market will remain oversupplied, quality new office space in smaller modular units will be in undersupply.

Prices as well as rentals will continue their downward spiral in the near-term. Due to lack of suitable office space around Muscat, many companies are looking at the option of constructing purpose-built offices, which may result in further downward pressure on occupancy levels and rentals in Muscat.

Over the long-term, we have an optimistic outlook for commercial office construction markets on the back of increasing population and rising employment levels.

Free Zones in Oman
Oman too has put emphasis on development of free zones which is expected to act as a catalyst for economic development, investment and providing employment to Omani nationals. Currently, there are two new free zones under development, namely Al Duqm Free Trade Zone and Sohar Free Trade Zone. The Duqm Free Trade Zone and Industrial Area is proposed to be housed on a 24,000-hectare plot near Duqm port. The Sohar free zone is being built on an area of 4,500 hectare and had begun its first phase development in 2010. We expect the completion of these Free Zones to boost demand for commercial office space in Oman.

Key Growth Drivers
Continued growth in global oil demand and an increasing long-term trend in oil prices have given a boost to GCC’s economy. With oil prices expected to be stable, any further increases in government spending will support investment and consumer spending, thereby having a positive effect on GDP growth. Positive GDP growth forecast for the GCC region is expected to be translated into an increase in construction activities.

Increasing urbanisation and young & growing population base is likely to drive the construction sector across the GCC region. The GCC is also home to a large expatriate population and in a bid to drive real estate growth and investment, the governments of several GCC countries have opened up the real estate sector to foreigners, allowing them to own/lease properties. This, combined with the increasing influx of expatriate population in the region mainly due to shortage of skills among local nationals, is likely to drive housing demand in the GCC’s member countries.

Most of the GCC member countries have also been pro-active in changing their existing regulations in order to attract Foreign Direct Investment (FDI) and provide better living conditions to the expatriates giving a further boost to the construction sector. Oman will also benefit from a favourable attitude of the government towards improving transparency in the real estate sector.

Manageable inflation levels in the GCC region coupled with low property prices (as compared to historical prices) are likely to act as demand drivers for residential as well as commercial construction markets.

We have an optimistic outlook on the Omani residential as well as commercial office construction market on the back of healthy growth in population and increasing economic activity. 

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