Middle East developers widen their nets

Liquid Real Estate, Euromoney magazine, December 2008

Viewed from a distance, the Middle Eastern property industry is symbolised by Dubai. That’s the place with the fastest pace of development, the tallest buildings, the wackiest plans for world-shaped islands and underwater hotels. It may be as brash and bold as Las Vegas, but it’s not the whole story. Outside Dubai, and even beyond the booming cities of Abu Dhabi, Doha, Kuwait City and Manama, there are other interesting real estate stories. With concern growing about overheating in Dubai property, they’re starting to look like more attractive propositions.

At the heart of this momentum is money from the Gulf itself. For some time, Gulf developers have been looking for new opportunities. Jordan, Oman and Egypt have captured particular attention, with some looking as far afield as Lebanon, Morocco, Tunisia and Syria. All the big names in Gulf property development – Dubai’s Emaar and Damac, Qatari Diar, Bahrain’s Gulf Finance House as well as the big Saudi and Kuwaiti conglomerates – are aware of the risks of concentration in one market and, more importantly, see great long-term gains to be had in less well-trodden locations. The only question now is: in the new, more frugal environment that must follow the credit crunch, can they all be funded?

“You cannot invest your whole capital in GCC, because the economy is not so large,” says Faisal Hasan, head of research at Global Investment House in Kuwait. “With the liquidity GCC has, even with the decline in oil prices, they are still looking at investing their surpluses outside. The MENA region is one they understand and you can also see substantial appreciation in it: the latest IMF report says MENA will grow at 5.5% at a time when other markets are in recession.”

It’s natural that developers are looking beyond their home markets. Whether or not you think Dubai and other centres are bubbles waiting to burst [and see the news story on page xx for a discussion of falling prices in the luxury residential sector], nobody could claim they are cheap. “Prime rents continue to demonstrate unprecedented increases,” says Mohammed Faheem at CB Richard Ellis in a third quarter 2008 review of Dubai’s office market. Prime office rents are going for between AED5650 and 5920 per square metre, a 38% year on year increase, and are unlikely to fall any time soon: “With no new office supply anticipated, prime CBD rents are likely to appreciate further during the remainder of 2008.” Renting or purchasing prime office space or land has become prohibitive in Kuwait City, Abu Dhabi and Doha as well. And, while Gulf investors are historically quite happy to invest in the US, UK and Europe, they are increasingly happy to invest in their own region too – a trend seen all the way from the high-net-worth individual to corporates and sovereign wealth funds.

The problem is that this expansion into overseas markets has come at exactly the same time that sources of wealth for the big developers are drying up. The credit crunch took a while to arrive in the Gulf, but it has certainly turned up now: for the first time, the Dubai government, and others in the region, are talking about scaling back their construction ambitions. That suggests a rather less rosy underside to some of the brochure pictures of soaring blocks in azure skies.

“Most of the market in GCC is in flux now,” says Bikash Rout, senior financial analyst at Global. “People are really scrabbling for liquidity, not looking for new investments. It’s not that they’re exiting Dubai and going to Oman, they’re selling in Dubai and trying to preserve their capital. You won’t see people taking much interest in new projects, as most of them are facing some kind of liquidity crunch.”

After all, it’s not as if these new projects in Egypt and Oman have suddenly sprung up overnight. The landmark developments in these countries long predate the price dynamics of Dubai or Kuwait. “These are developments which started a few years back driven mostly by demand for real estate facilities on the back of growing economies and strong demographics, as well as opening up to tourism,” says Bassam Al Othman, senior vice president at Markaz in Kuwait. “I don’t see developers from the Gulf investing new capital in these countries.” Instead, he feels developers are more likely to take their next step into deeper markets such as Abu Dhabi, Qatar and Saudi Arabia if correcting prices reveal new opportunities. “Real estate investors are in a wait and see mode, trying to play it safe until the dust of the global financial crisis has cleared,” he says. “Would we see investors migrating to areas which had lower attention in the past few years? That is doubtful. I would assume that investors will become more risk averse and will focus on places with the strongest fundamentals.”