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Sat 21 Mar 2009 04:00 AM

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Recovery position

Qatar's real estate market will bounceback on population influx and infrastructure spending, despite downturn.

Qatar's real estate market is in the midst of a dramatic correction, and it is expected that prices will continue to fall as liquidity remains tight. However, analysts argue that continued population growth and spending on infrastructure projects mean Qatar is better placed to deal with the downturn than some other Gulf nations.

In the global economic turmoil, few countries are without their problems. However, some analysts argue that few countries are better prepared to bounce back than Qatar. As its neighbours across the Gulf struggle amid the downturn, Qatar remains on track to post double-digit GDP growth in 2009 - a remarkable feat when set against the global economic slowdown and its impact on the GCC.

The emirate's economy is forecast to grow 10.8 percent this year on the back of strong exports of liquefied natural gas (LNG), according to the Economist Intelligence Unit (EIU) in London. And despite the ongoing credit crisis the government is pressing ahead with infrastructure projects and is pouring investment into the gas industry - so much so that Qatar is now the largest exporter of LNG in the world.

"There is a chance that Qatar will buck the global trend this year through the growth of its energy exports," says Justin Alexander of the EIU.

"Qatar has got substantial reserves [of capital] and the government has said they are going to press ahead with projects; they're claiming they are going to have a budget surplus this year," he continues. "There is still strong population growth and for the real estate market that is a major factor."

Population growth is forecast for the next two years as the government's massive economic diversification strategy - including a 45km causeway linking Qatar to Bahrain - is implemented. According to figures compiled by the EIU, Qatar's population is set to rise 10.9 percent this year and 9.5 percent in 2010 to 1.89 million.

Although the property market is cooling, there is strong evidence to suggest that real estate demand will be healthy in the long term, even if it has ebbed marginally in the last few months.

Reg Barichievy, general manager of property consultant Colliers International in Qatar, agrees that sustained population growth due to the government's commitment to infrastructure development is supporting the property market.

"Fundamental demand is still very strong," he says. "You have long term oil and gas projects, so you've got people being brought in. Just because there is financial turmoil now they are not going to stop the projects.

As one of the richest nations in the world, with a GDP per capita of nearly $60,000 (this is projected to increase to $66,000 in 2010 on the back of higher energy prices), Alexander calculates that the country will post a budget surplus of $7bn for the financial year 2009-10 with oil at $40 a barrel.

By contrast, the Gulf's largest economy Saudi Arabia, said in December it expects to post its first budget deficit since 2002, of $16bn. Economists at Standard Chartered Bank in January said it was highly likely the UAE would also fall into the red this year.

In addition to the $4.2bn bridge to Bahrain, other major Qatari projects include the 35 sq km Lusail City on the outskirts of Doha, and the $10bn Energy City, the GCC's first hydrocarbons business centre which is due for completion next year.

"Last year there were 457,000 new people who came to Doha and those increases are still filtering through," notes Barichievy. "There is still an undersupply in almost every sector of the property market - residential and offices - and it's taking time for prices to come down and adjust."In a report last month, Colliers said that house prices in Qatar would ease 10 percent in 2009 due to lack of financing from banks. In Dubai, by comparison, anecdotal evidence suggests that some valuations have slipped by as much as 50 percent since their peak last summer.

"We haven't had the same turmoil that Dubai has suffered, and we haven't had the same number of projects stopped. In fact we have no records of any projects being stopped under construction," says Barichievy.

"There have been some retrenchments but they have been minor compared to Dubai," he continues. "There is a lack of liquidity but certainly the banks are starting to talk about lending again. There is progress on the lending front, and at this stage the situation is manageable."

Indeed there are signs that the government is taking decisive action to address the liquidity drought. Last week the country asked its sovereign wealth fund, the Qatar Investment Authority, which controls an estimated $60bn worth of assets, to buy the investment portfolios of local banks to kick-start lending.

Kuwaiti investment bank Markaz said at the start of February that although the Qatar property warranted "a need for close watch" and that there was a risk of contagion from the more depressed markets in the Gulf, bank lending in the country during the boom had been less risky than some other GCC markets.

Banks' loan-to-value ratios in Qatar during 2007 and the first half of 2008 were generally lower than they had been in other places like Oman, Bahrain and Dubai, where lenders were prepared to finance 90 percent to 95 percent of the property's value. As a result, the extra amount of equity demanded by banks for loans in Qatar had made speculation more expensive.

Not all analysts, however, are upbeat on Qatar's prospects. Markaz analyst Raghu Mandagolathur remains bearish on the outlook for the real estate market and warns prices will drop more than 10 percent this year. Not only that, but banks' exposure to the sector has been increasing, leading to a fall in those companies' share prices.

Qatar Islamic Bank is 37 percent down this year, and Qatar National Bank has slipped 40 percent in the same period - that compared to a 1.5 percent drop in 2008.

"Projects are getting cancelled. That would bring back the question of reduced demand and increased supply which will definitely put huge pressure on prices and the quality of earnings for the sector," Raghu says. "That will get translated into stress for the banking sector because [the banks] are directly exposed."

As well as property prices, rents are also expected to drop 10 percent this year, prompted by a major easing of supply in the form of 9,000 new apartments that are due to be completed early next year. Kuwaiti investment bank Global Investment House published research last month which stressed that the major influx of expatriates in 2008 would prevent rental rates from slipping by much more than 10 percent.

Despite the uncertainty in the current market, investors are still willing to buy, albeit their mood is more cautious, Barichievy points out.

"They still see a potential to invest, and here the guys are still prepared to buy - it's just at what price. It's very price sensitive," he explains.

Price sensitivity is nothing unique in the current climate, and like all countries in the Gulf, Qatar cannot be complacent. For now, though, it's looking in better shape than many of its peers.