To put the ArabianBusiness.com 2008 Property Survey results into perspective Joel Bowman spoke to Philippe Dauba-Pantanacce, senior economist for Middle East & North Africa Global Markets at Standard Chartered Bank, and David Oayda, general manager of Asteco in Qatar.

Almost four-fifths (79.55%) of real estate owners in the region said they plan to purchase another property in the GCC according to the ArabianBusiness.com 2008 Property Survey. What is present demand like in the region?

David Oayda (David): Demand here in Qatar is extremely strong, and we think it will continue to be this way in the future. Qatar is a new market and every new market is exciting to be in. I think there is a good three to four years of growth in the country. Economically speaking, rentals here are almost high enough here to cover the mortgage and, in some cases, actually exceed mortgage repayments. Rentals here in Qatar [and across the GCC] are extraordinarily high.

Philippe Dauba-Pantanacce (Philippe): In the UAE the demand is still strong and will still be strong on the back of many reasons. If you break it down, there are some obvious segments of the demand that will be strong for years to come. If you think about villas in Dubai, it is vastly undersupplied so there is more demand to come on this.

You might see some easing in demand at the high-end segment of the apartment side, but in the mid- and low-range, the demand is vastly under met. We see a flight to prime locations and quality. Right now the market is booming.

Cost and fears of a market correction were by far the biggest deterrents for those not wishing to enter or re-enter the market at this time. Do you feel the market is due for a price correction?

D: Definitely not. I think that’s just a perception right now because many people have missed the boat, that’s what you would call wishful thinking on their part. Economically speaking, the cost of construction is going up... It will be logical therefore for property prices to continue to rise. How could a developer sell something for less than it costs them to build?

P: This actually depends on the first assessment that you’ve made regarding the market and its fundamentals. We think the market is still strong and supported by these fundamentals.

The primary concern that Standard Chartered has is linked to the macroeconomic environment of the GCC in general and the UAE in particular. Mainly we are talking about the ample liquidity in the market. The fact that bank lending has been skyrocketing fuelling money supply growth. We are in a situation were interest rates are negative in real terms. This is just a reward to the borrower. But there is a risk: the typical, classical risk of overheating…this is one of the caveats on the region’s real estate market, definitely.

Data from the annual survey shows 78.1% of respondents said they would require financing for their property purchase. More than a quarter (27.3%) said they were seeking property financing of 90%, whilst nearly a half (48.6%) were seeking finance of between 71-90%. Does this look like an over-leveraged market to you?

D: I think for international standard, that [figure] is about right; 80% is probably right on the mark for borrowing. In Qatar, overall, I believe the borrowing to be less. A lot of people are injecting their own cash and borrowing a lot less, in my experience.

P: I think that the whole banking system will have to play its role in the way they lend because again there is a risk that we may end up with a rise in what we call “nonperforming loans.”

This is consistent with the rise of asset bubbles, and is a risk that has to be monitored.

Linked to this is the whole debate of the currency reform. Because you cannot raise interest rates due to their pegging to the US dollar, they keep falling...so there is a perceived reward for borrowing money. Again, this has to be closely watched and monitored.

More people buy property in the GCC as an investment than for any other reason (45.74%). Does this figure reflect your experience? What does such a large percentage of speculation mean to the health of the market?

D: Broadly speaking, real estate, no matter which way you look at it, is an investment. For a lot of people, it is the biggest investment they will ever make. The secondary market plays an integral role in Qatar; we need the secondary market to take place. It is good for the economy and good for business.

P: It depends to what extend this is true and what proportion of people here are investors. This gives a good picture of the type of market we are in…there are a lot of wealthy homeowners that are willing to sit on the rent with the hope of selling at a higher price in the future or making better rental yield down the tack.

The market does have some inefficiencies and over-speculation or empty towers won’t be a good sign of a healthy market, that’s for sure. There’s a limit to which you can do that, you know.

We are in an economy that is booming, generally speaking. With that comes a lot of challenges and issues such as supply bottlenecks. We are exactly in this situation right now where the country is facing a lot of supply bottlenecks and shortages of certain construction materials. There are some risks and they are completely linked to the risk of a booming, and probably overheating, economy.

For me, this completely falls under overheating challenges that this whole economy might encounter. So again, we think that fundamentals and specificities will sustain the market, but the major caveat, is to watch closely the potential effect of overheating. Supply bottlenecks, inflation, too much liquidity, asset bubbles…these are all the kinds of symptoms associated with an overheating economy.

Nearly three out of four investors who have purchased a property in the Gulf believe that the UAE is the best market for capital gains growth over the next two years. Would you agree?

D: I have seen a lot of UAE interest coming to Qatar. One reason is that as well as the UAE has done in the past, I don’t believe it can sustain what it has done and continue. I think Qatar is ripe to overtake the UAE. We’re at the early stages and this will be the next natural place for investors to come to. About 30% of our sales have come from the UAE.

P: One of the best assets of the UAE and Dubai specifically is not only great housing and construction…it’s the lifestyle that goes with it. That’s the best competitive advantage of Dubai and it’s a self-fulfilling effect. If you have this advantage then you are able to bring in more people. To attract human capital you need not only one economic activity, you need a lifestyle to provide for the human capital. When people talk about all these iconic projects in the Emirates, you might think they are just accessories. They are not; they attract more people like a magnet and that’s what we call human capital.

Dubai is also the most advanced in terms of economic diversification. You have fewer worries in the future here because the economy is increasingly diversified.

Only 13.62% of prospective buyers said they intend to buy property that has already been built. Given the escalating costs of raw materials, what are the risks of buying “off plan”?

D: I believe there is risk purchasing something prior to it being built. There are issues with quality and knowing that you are getting what you paid for. People need to ask “am I going to get what I’ve paid for?”

It is certainly a concern for developers that have not priced in the final costs. As a property investor, you need to do business with a company you trust and that has a reliable and proven track record of delivering supply on time and on budget.

P: This is a very good explanation of some people’s argument that, seeing all the empty towers in Dubai, they see that demand cannot be under met…because there are many people that just buy with the hope that they can sell it a better price, irrespective of the possibility of renting it or even living in it.

In Abu Dhabi it was announced that developers may be forced to build lower-cost housing rather than compete for high-end markets. Could this happen in Qatar?

D: It is already happening in Qatar. There is affordable housing being looked at and they are either in development or about to commence. I think you’ll find that most developers tend to build from the medium level upwards. I think most of the low-cost, affordable housing will be pushed through by government initiatives.