Qatar: A burgeoning real estate sector

Real estate in Qatar - A growth story: The economic background

The Qatari financial services sector

A burgeoning real estate sector

 "Every time I visit Doha it takes my breath away," says a Dubai-based banker who is a frequent visitor to Qatar. "If you look at the skyline and at what’s going on in the city there is nothing like it in the region other than Dubai. It is very much a building site." Many of the cranes that appear to be a permanent fixture on the Doha skyline reflect the feverish construction activity arising from the ambitious and far-reaching infrastructure investment programme being implemented by the government. In 2007/08 alone, for example, the government has allocated some $7.3bn, or 10% of its projected expenditure for the year, to infrastructural investment.

Showcase infrastructure projects in Qatar range from ambitious initiatives in the transportation sector such as Doha’s new international airport, 32 new road projects and the causeway linking Bahrain and Qatar, through to a series of important developments being planned by Qatar Electricity and Water Company. These include the largest power generation and water desalination plant ever constructed in Qatar, a $3 billion project that will have a capacity of 2,600MW of power generation and 55 millions of gallons of water per day. Qatar has also been at the forefront in promoting the development of a number of other independent water and power plants.

Doha’s ever-expanding cluster of cranes, however, also reflects the boom in the Qatari real estate market that has been an inevitable by-product of the spectacular growth of the economy in recent years and the surge in demand for residential as well as commercial property that has emerged as a result.

Reform of real estate ownership law
The recognition that economic growth would be inseparable from demand for real estate led the Qatari government to start liberalizing its laws on property ownership well in advance of a number of other Middle Eastern economies and to rescind Law No 5, passed in 1963, which ruled that non-Qataris were nor permitted to own real estate. A key breakthrough came in June 2004 with the announcement of a new law that allowed non-Qataris to own real estate in the three showcase developments of Pearl Island, West Bay Lagoon and Al Khor resort. More specifically, Law No 17 of 2004 permitted non-residents to acquire real estate at these three locations on 99-year leases, extendable for a further 99 years.

Further legislation on the sale and lease of properties by foreigners was enacted in February 2006, allowing GCC nationals to own land and residential units in the three designated areas of Lusail, Al Kharayej and Jebel Thiyab. At the same time, the list of designated areas in which foreigners were permitted to lease properties for 99 years on an extendable basis was expanded from three to 18. Another important piece of legislation supporting the local property market was Law 2 of 2006, which authorizes the Qatar minister of the interior to issue entry visas and residence permits to non-resident investors in the local economy.

Population-driven demand
Increased demand for housing has accompanied the sharp increase in the population in recent years, which has been driven by the strength and increasing diversity of the economy. According to the latest census published by Qatar’s planning council, the population grew by 42.5% between 1997 and the end of 2004, from 522,000 to 744,000. More recent estimates published by Qatar National Bank put the population at 920,000 in December 2006 rising to a forecast 980,000 by the end of 2007.

Qatari nationals make up about 25% of the total population, although this is expected to fall because of a rising inflow of expatriates. A report on the Qatari real estate sector published in November 2007 by Kuwait-based Global Investment House observes that "industry sources estimate that the number of families expected to shift to Qatar in the next two to three years would exceed 200,000, while around 500,000 families at least are expected... by 2012. Moreover, industry sources are suggesting even higher figures as all indicators are shifting towards an impending population explosion. For example, one of the companies with a significant base in Qatar, Shell, has announced that it will have 250,000 employees coming into Qatar in the next five years."

Qatar’s demographic trends will also have an important impact on the property market, reckons Global. Its report points out that "the high intensity of [the] youth population bodes well for the medium-term demand for housing. The proportion of male population in the age group 25-34 is 25.5% of the total male population. One could conservatively expect 10% of the males in the age group 25-34 to move into a new house every year."

The rapid growth of Qatar’s population, twinned with the government’s commitment to improving living standards and the aesthetic appeal of urban regions, has created challenges as well as spectacular investment opportunities for developers and investors. The opportunities arising were spelt out, for example, in the memorandum that accompanied the private placement of Global Investment House’s GCC Real Estate Fund in March 2005. "In Qatar, there exists a housing shortage in Doha and its suburbs, owing to the demolition of old buildings in some areas like Al Bida, Rumaila and Al Rayyan for the state-sponsored beautification drive and to build modern structures," this explained. "Rents have sky-rocketed due to the shortage of residential flats. Soaring rents – in some areas even half-yearly rent hikes are being seen – [are] causing people to share flats, including Arab families. In Al Rayyan, an old complex comprising some 60 houses has recently been taken over the by the state for [the] beautification drive and this has led to the displacement of a large number of single workers. In the posh Al Sadd area, a 2-bed apartment was available for about QR1500 per month until two years ago and is now going for a monthly rent of between QR3000 and QR4000. Villas in several areas that were available for around QR2500 to QR3000 are now being rented out for up to QR7000."

In the two years since the publication of that memorandum, demand and rental rates in Qatar have continued to shoot up. A recent research report published by TAIB notes that the average monthly rent of a two-bed high-income apartment rose from $900 in 2002 to $2,800 in 2007. "In the residential segment, over the past three years, the demand for both freehold and leasehold residential units has outstripped supply, spurred by double-digit GDP growth, increasing disposable income and significant growth in the number of expatriates," the report says.

The increases in rental rates in Doha have been higher than in any other Gulf city, according to data published in a report by the Kuwait Financial Centre Markaz) in September 2007. Between November 2004 and November 2006, notes this report, the average rental increase in Doha was 83%, compared with 66% in Dubai, 29% in Muscat, 27% in Manama (Bahrain), 24% in Kuwait and 21% in Riyadh.

Supply/demand and inflation
In 2006, according to the Markaz report, demand for freehold and leasehold residential property in Qatar was estimated at 195,000 units, with supply reaching just 144,000 units. An inevitable side-effect of this imbalance between supply and demand has been the role it has played in fuelling inflation in recent years. The threat of real estate-driven inflation is clearly one that the government is concerned about, because it has sought to check the spiralling rise in rents by imposing a 10% cap on rental rate increases under Law No 4, passed in February 2004. This cap, however, appears to be have been unsuccessful in curbing inflation, which averaged less than 1.6% a year between 1998 and 2003 but is now well into double digits. In its annual review on Qatar published in May 2007, National Bank of Kuwait comments that "price pressures... have continued to mount, with consumer price inflation reaching 11.8% in 2006, fuelled by soaring rents. Expansionary fiscal policy and resource constraints contributed as well to the acceleration in inflation. There were also some seeds of a wage-price inflation spiral. Unless structural adjustments in the housing market stabilize rents, the risk of accelerating inflation is not expected to abate. With monetary policy remaining largely accommodative, high inflation may well become entrenched in the economy with long-lasting negative repercussions on the real economy."

A booming real estate market is also stoking inflation in the market for building materials. Analysts report that construction costs in Doha more than doubled between 2003 and 2006, with the local price of aggregates, cement and rebar (steel used in reinforced concrete) all rising markedly in recent years.

Some commentators, however, appear to be relatively relaxed about the ominous rise in inflation originating chiefly from the real estate market. In its research, TAIB has argued that it expects the demand-supply gap in the housing market to narrow over the coming years, which would reduce inflationary pressures. Indeed, in the summer of 2007 some signs started to emerge to suggest that the housing boom was slowing: in July 2007, for instance, the local Qatar Journal reported that some 2000 newly built top-end apartments in Doha remained empty, with their owners perhaps trying to push things too far in demanding higher rentals. According to the Markaz report, Qatar will require an estimated 250,000 additional housing units by 2010, which will be almost matched by new supply over the same period of about 240,000 units. "This would translate into an addition of 27,000 housing units every year on average between 2008 and 2010," says the Markaz report. "However, we expect the shortage ratio to narrow... going forward, as we expect Doha (the major housing market) to see more supply of housing units by 2010. According to an estimation of Property Weekly, Doha will have a supply of 111,000 housing units by 2009, as against current supply of 80,000 units."

Among ratings agencies, Moody’s also appears to be relaxed about Qatari inflation. In its most recent country analysis, it advises that it expects inflation to "decline over the medium term as newly constructed housing gradually becomes available and the investment boom moderates." Moody’s adds that, to date, consumer price inflation has had little impact on the competitiveness of Qatar’s exports, which are predominantly hydrocarbon-related and priced in US dollars at international market rates. If unchecked, however, Moody’s warns that inflation could threaten the competitiveness of Qatar’s fast expanding non-oil economy.

Residential structure and distribution
The Markaz research provides a detailed breakdown of the distribution of the property market in Qatar, noting that residential real estate constitutes most of the market, accounting for 95% of completed buildings in 2005 and 63.5% of new building permits issued as at the end of 2005. According to the Markaz review, the number of new building permits issued to the residential sector grew at a compound annual rate of 16.8% to almost 4,000 permits between 2001 and 2005.

Markaz reports that apartments account for just under 30% of all residential properties nationwide but for 44% in the main urban district of Doha, which is home to about half of Qatar’s population and more than 90% of its apartments. In the inland municipality of Al Rayyan, to the west of Doha, the second most densely populated region in Qatar, Arabic (traditional-style) houses and villas account for more than 60% of residential units.

Another increasingly popular residential area is the former fishing village of Al Khor, 50km north of Doha on the east coast of Qatar, which, according to the 2004 census had a population of 31,000. According to Markaz, real estate in Al Khor has a relatively balanced structure with almost the same number of Arabic/popular houses and villas. "In terms of purchasing power," adds the Markaz analysis, "apartments in Doha have been occupied mainly by mid-to-lower Asian and Arab expatriates, while western expatriates have traditionally lived in rented villas."

The office market
The surge in demand for real estate in Qatar has not been confined to the residential sector. With the influx of international companies to Doha in recent years there has been a dramatic rise in demand for office space, as a result of which average annual office rentals in the central business district of Doha have increased by 37% since August 2005, according to the Markaz research.  

However, rentals for offices have not risen as dramatically as they have in the residential sector, and rates in Doha remain reasonable compared with the other main business centres in the Gulf. As of mid-2006, according to data published by Colliers International, premium office rents in Doha were still below those of Dubai and Kuwait City. Office vacancy rates in Doha, however, remain very low compared with those in other important cities throughout the world: as of 2006, according to the Colliers International data, the office vacancy rate in Doha was just 1%, compared with 2% in Riyadh and Abu Dhabi, 4% in Mumbai, 7% in New York and 9% in London.

The low vacancy rate suggests that rental rates seem likely to maintain an upward trajectory over the medium term. "Looking forward, we do not expect a correction in prices and rents for the commercial sector in the near future until... new supply is delivered," advises Global Investment House in its recent analysis of the Qatari real estate sector. "Given the level of industrial activity and foreign investment... in the country, we continue to hold the belief that supply for the high-end office market will continue to lag behind demand, thus implying higher rentals."

The topography of Doha’s office market has undergone something of a shift in recent years. As Colliers International observes in its latest report, the central business district has gravitated since 2000 from the city centre towards the West Bay area, located immediately to the north of the centre of Doha. "The emergence of West Bay as Doha’s prominent office district is in part due to the government’s policy of moving its departments to this area," notes Colliers, adding that West Bay is now the de facto hub for blue-chip multinationals and prestigious GCC firms. The same report warns, however, that "though West Bay is likely to be formally accepted as Doha’s CBD, inadequate parking facilities and poor ingress and egress into this high density cluster raise some concerns".