At its best a focus for breathtaking and record-breaking architecture, driving a region that was previously largely ignored (except for its oil) towards becoming a truly global player, the sheer scale of urban development in the Gulf is awesome.
Real estate projects in the six Gulf Co-operation Council (GCC) countries and investment emanating from the GCC into the wider Middle East/north Africa (Mena) region has emerged among the more significant recent global trends.
The boom rests on a forecast of dramatic population increase, as foreign nationals who are attracted by the financial boom choose to work and live in GCC member states. In response, rents for residential and commercial projects have shot up as demand far outstrips supply, and developers have been confronted by shortages of key construction materials. Long-term residents in countries where expatriates often far outnumber nationals are complaining about the somewhat unscrupulous activities of landlords who have exploited the boom.
Looking for diversity
Determined to diversify away from reliance on hydrocarbons and impressed by Dubai’s huge success in using urban development to emerge as an economic power, every GCC member country is now pumping revenues into real estate development. All six states now boast enormous mixed-use real estate projects, which are generally described in glowing terms, although more cynical observers point out that they may not have been thoroughly thought-out in terms of urban planning, attractiveness to foreigners and environmental impact.
Dubai generally grabs most headlines with its ‘bigger and better’ mantra; concerns of future oversupply are pushed aside by the authorities, which point to an estimated population increase of about 400,000 by 2010.
Dubai announces a new mega project almost every week. Two recent schemes that stand out are the 64 million square-foot (sq ft) Business Bay, billed as a new city in Dubai, which the developers say will be “similar in nature to Manhattan and Ginza”, and the 2.2 million sq ft waterfront community of Jumeirah Beach Residence. Both developments are backed by Dubai Properties, which is ultimately owned by Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum.
Another headline grabber is the Dubai World Central Project, planned around the Dubai World Central Airport in Jebel Ali. An estimated 250,000 people will live there on its completion.
Office space expansion
To the relief of many companies operating in the United Arab Emirates (UAE), Dubai’s office space is set to expand dramatically with estimates of 51 million sq ft to 75 million sq ft scheduled for completion in 2007-10. But analysts note that capacity constraints in the construction sector and difficulties faced by government departments in terms of timely provision of infrastructure will ensure ongoing delays in the delivery of some office space.
Cairo-based investment bank EFG Hermes said recently: “Once the new supply begins to pour onto the market in 2008, however, rent rates should begin to fall and yields begin sliding gradually back toward the international average, with the speed of the decline depending on how quickly that supply arrives and the strength of economic and business activity.”
Saudi Arabia is billed as an awakening real estate giant, with a booming residential market and high demand for top quality office space. According to DTZ’s Saudi country manager Peter Bibby: “The current positive economic climate is creating a healthy level of interest in commercial property.” With several large economic cities and a new financial district in Riyadh on the drawing board, office and residential space in the kingdom will increase rapidly.
“The commercial property market in Saudi Arabia is large and diverse, and arguably more mature than in many other Gulf states; and, while it embraces the rules and legislation you would expect, it is generally free of central government intervention,” says Mr Bibby.
“Construction standards are generally good, although the quality of finishing is not to the standards demanded in Europe and North America,” he says. This is a comment that is heard regularly in other burgeoning Gulf centres. In the Saudi kingdom, the level of power, standby generation, redundancy and connectivity “will need to be improved and match those standards found in the key financial hubs of London and New York”.
Oman, which has typically followed a more sedate and modest pattern of development – there are no skyscrapers in Muscat – is hoping to draw a class of international traveller that is perhaps put off by flashy Dubai, with its 13-square-mile, $15bn Blue City development.
Like the rest of the GCC, Omani residents have suffered from recent rental inflation, and in late September the government ordered a rent cap of 15% over the next few years after inflation rose dramatically.
Such rent caps have been announced in the Gulf before but have been subject to the whims of landlords who discovered ways to get round them. This has sometimes been the case in Qatar, where expatriate residents complained of landlords doubling rents with little notice.
Qatar is attracting an estimated 100,000 people a year on the back of its gas boom but this has put further strain on the already over-stretched real estate market. Qatar recently ruled out revaluing its dollar-pegged currency and said inflation would fall to 10% within a year on measures to control rising rents and prices. But such moves may prove too late, with some residents saying that Doha is now too expensive to live in, despite hopes that the rental market would see a correction following the December 2006 Asian Games.
Qatar National Bank has reported rental inflation of 25.97% in 2006 and 26.7% in Q1/07. Real estate agents in the region say that Qatar now has one of the highest rental rates in the Gulf and problems are exacerbated by an ongoing shortage in construction materials.
There are ongoing worries about construction standards in Doha. In July, Bavaria Hotels International (BHI) quit its responsibilities to run Bavaria City Suites Doha because the project was not delivered in accordance “with the required Bavaria Hotels International specifications and agreed hand-over schedule”. BHI said the decision was taken to protect the integrity, brand values and standards associated with its company.
Other observers are more optimistic about Doha’s rental market. One leading real estate adviser, speaking at a businessmen’s lunch in Doha in September, said that between 6000 and 9000 new apartments were expected to be available by 2010 and rents would come down. “While on the commercial scene there are few class A offices and the quality is poor, with no parking, the demand and supply graphs are likely to intersect in 2009 and thereafter landlords will no longer be in the driving seat,” he said.
Across the region, increasing supply seems set to shave margins and improve quality as the Gulf’s ever-growing population moves into a new generation of developments.