By Sam Bridge
Senior Savills exec says the impact of the Covid-19 pandemic will continue to challenge the sultanate's economy and property sector
Lower oil prices and the impact of the Covid-19 pandemic will continue to challenge Oman’s economy and real estate sector, according to experts.
Real estate consultancy Savills said it expects to see increasingly challenging economic conditions and an acceleration of the exodus of the expatriate population.
It said market conditions in both the residential and office space rental sectors in Muscat were already in slowdown/recession prior to the Covid-19 pandemic.
"The impacts of the Covid-19 pandemic and lower oil prices will place both the residential and office space rental sectors in Muscat under further pressure over the coming months," it added.
Savills said current evidence suggests that a net exodus of highly qualified expatriates started in 2016 due to economic conditions and increasing restrictions on expatriate employment.
The number of highly qualified expatriates dropped by 17.6 percent between 2016 to the first quarter of 2020 while the total number of expatriate employees dropped by 6.8 percent during the same period.
Savills said it expects that the reduction in the expatriate population will be accelerated by recent events.
The International Monetary Fund expects Oman’s budget shortfall to reach 16.9 percent of gross domestic product this year, hit by the pandemic and declines in oil prices. Both Moody’s Investors Service and Fitch Ratings have downgraded the country’s sovereign ranking this year, citing financial challenges.
The outlook is a major challenge for Sultan Haitham Bin Tariq Al Said. The ruler made lower debt a priority when he succeeded his cousin in January, and authorities have since looked to lower spending as declines in oil prices and the pandemic cut into revenue.
Ihsan Kharouf, head of Savills Oman, said: “Expatriates play a significant role in influencing demand for real estate. Market conditions in both the residential and office space rental sectors in Muscat were already in slowdown/recession prior to the Covid-19 pandemic as a result of slow economic growth and negligible net population growth.
"The ongoing pandemic has further deteriorated the economic landscape. While the longer-term impacts of the pandemic on the sector are currently unclear, it is evident that there will be increasing challenges over the coming months.”
According to Ihsan, recent years have seen a gradual decline in achievable rental values in Muscat as a result of increasing supply relative to moderate demand.
Savills estimates that there is currently around 350,000 sq m of better-quality office space for the rental market in Muscat with a further 100,000 sq m of office space under construction between Qurum and Muscat Hills which is due to be completed in the coming 12-18 months.
He said that the majority of recent demand has been focused on smaller, fully finished office units with around 90 percent of demand coming from companies with an existing presence in Oman while demand from new market entrants has been limited.
The longer-term impacts of the Covid-19 pandemic and lower oil prices on the office rental market in Muscat will only become clear over the coming months but the sector is highly likely to experience downward pressure in terms of both demand and achievable rental values in the short term, he added.
With rental values at historically low levels, however, Savills considers that landlords are increasingly likely to agree to incentives such as extended initial rent-free periods and/or assistance with office fit-outs for shell and core space rather than notable further drops in rental values.
Ihsan said the residential rental market in Muscat has also seen a notable increase in supply over recent years, although the supply of mid to higher grade apartments with facilities and compound townhouses/villas remains relatively limited.
The residential rental market in Muscat is driven by expatriates and the drop-in expatriate numbers since 2017 has resulted in a shrinking market size for residential rental properties. As a result, realistically achievable rental values for better quality apartments were generally around 30-40 percent lower at the end of 2019 compared to 2014.
Ihsan added that while better quality residential units are likely to show a more stable performance, the expected drop in the number of expatriates in Muscat over the coming months will place the residential market under increased downward pressure in terms of both reduced demand and achievable rental values.
However, he added that Savills does foresee potential interest from existing tenants to look to upgrade from their existing rental property at more affordable values.
Oman’s legislature is proposing to implement a value-added tax after January 2022 as falling oil revenue pressures its finances, following similar moves by Gulf neighbours.
A joint committee of the State Council and Shura Council suggested the time frame and sent a draft law for approval to Sultan Haitham Bin Tariq Al Said. He took power in January vowing to take unpopular steps to bolster the near $80 billion economy that his predecessor had sidestepped.
Oman would become the fourth of the Gulf Cooperation Council’s six states to collect VAT, a move agreed by the bloc years ago. The UAE imposed a 5 percent VAT in 2018 on most goods and services, while Saudi Arabia tripled its levy to 15 percent earlier this year.