By Andy Sambidge
Rating agency says developers in oversupplied markets such as UAE likely to scale back projects
Property prices and rents in the Gulf will continue to fall in the second half of 2011, Standard and Poor's has said in its new outlook report on the region.
The rating agency said property developers in oversupplied markets, such as the UAE, are likely to continue to scale back development activities in favour of rental and management of existing property stocks.
As markets in the GCC region mature, S&P said it expected to see greater emphasis on urban regeneration with "a pronounced shift away from high-end residential development toward affordable housing", particularly in Saudi Arabia.
S&P credit analyst Tommy Trask said in the report: "Despite property price falls of up to 60 percent in some markets – in the UAE, Qatar, and Bahrain for example – between late 2008 and 2010, we expect capital values and rents to continue their largely downward slide in 2011."
He said real estate companies in the region are confronting risk factors, such as supply/demand imbalances, affordability of property, and lack of mortgage financing.
"In our view, much work also remains to be done in shaping legal and regulatory frameworks for real estate activity in the region," Trask said.
He added that countries which have suffered directly through prolonged protests as part of the Arab spring, such as Bahrain and Egypt, would see an even more sluggish real estate sector in the short-term.
Many real estate projects – planned or in progress – in areas directly affected were subject to delays and cancellations, S&P said.
Hardest hit were the leisure and high-end residential segments, the report added.
"We do not expect restarts in large scale property developments in areas hit by the unrest until the political landscape stabilises and authorities are in place and able to handle property titles, permits, and licences," he said.
"In our opinion, development will likely be much more focused on projects with identified end users. We believe far greater effort will go into research before a project’s launch and that it will involve end users from the design stage," he added.
He said the recent economic stimulus measures undertaken by the governments of Saudi Arabia, the UAE, Oman, Bahrain, and Kuwait "may help offset some of these negatives" through job creation and provision of home financing.
"Specifically, Saudi Arabia’s possible implementation of a mortgage law to introduce mortgage products and legislation could also serve as a catalyst to kick-start demand in the domestic residential property market, which has so far fared relatively well, because of severe undersupply," Trask said.
He said real estate firms may eventually adopt realestate investment trust (REIT) status, which can bring advantages both from investor and creditor standpoints.
REIT structures are rare in the Arab world. The Dubai International Financial Centre (DIFC) is the only authority to have launched formal REIT regulation, but take up has so far been slow.
REIT regulation can enhance real estate companies' credit quality by limiting their financial leverage and exposure to riskier activities, like speculative developments, and by promoting standardisation and transparency.