Sector to be a primary benefactor of improving macroeconomic dynamics across region
Ten years ago, real estate was considered a key barometer of GCC's economic affluence as rapid rise in per capita income, influx of expatriate population, and changing demographics fueled demand for both commercial and residential properties in the region. However, the 2008 financial crisis followed by the dip in oil prices in 2014 cultivated several challenges for the sector with property prices and rentals plummeting by as much as 40 per cent across the region. The slump in oil prices, fiscal consolidation measures, oversupply of housing units, introduction of mortgage cap, and geopolitical tensions have significantly weighed down on property demand in the GCC.
As a result, GCC investors, who traditionally preferred real estate as an asset class, have maintained a cautious stance despite positive initiatives taken by the government and developers. Going forward, the GCC real estate market is expected to post recovery in 2020-21, and it is important to understand why real estate is still the answer to all GCC investors.
Firstly, real estate has long been the cornerstone of GCC economies and will be a primary benefactor of improving macroeconomic dynamics across the region. The real estate sector - which accounted for about 6 per cent of GDP in the UAE and 7 per cent of GDP in Saudi Arabia in 2018 - makes up for a significant portion of the consumer price inflation baskets, and also accounts for a large share of the region's FDI inflows. Consequently, the sector shares a symbiotic relationship with overall economic activity wherein an upswing in one will benefit the other and vice-versa.
After the oil price crash in 2014, regional governments undertook on a reformist agenda focusing on economic diversification, opening of new sectors for FDI, relaxation in visa requirements and easing of business regulations to provide a conducive environment for already established businesses while attracting new investment and human capital.
Additionally, regional governments also implemented targeted initiatives to support the growth and stability in the real estate sector. These measures, along with stabilising oil prices and higher budgetary spending in priority sectors such as public infrastructure, healthcare, education and many others, are expected to pay dividends in the long-run. Needless to say, the real estate sector will emerge as the primary benefactor as upcoming mega events such as Expo 2020 Dubai will further drive demand for real estate in the region, thereby presenting significant growth and income opportunities for the investors.
Secondly, real estate remains one of the most popular asset classes across the region. According to Select Property Group's 2018 GCC Investor Survey, 75 per cent of investors in the GCC have invested in local property at some stage, while in terms of frequency, 71 per cent of GCC investors look to make a new investment every six months or less, and 32 per cent look to make one at least every quarter.
The investor allure of real estate is enhanced by its financing structure, which allows investment into the asset class with about 20-25 per cent in down payment in equity, while the remaining can be financed through debt/borrowing, as compared to other asset classes that require 100 per cent equity financing and are often volatile to global economic environment.
Thirdly, the GCC real estate sector still offers a high return profile for investors. While rents and property prices have softened in the last five years, the rental yield across GCC remained strong as compared to global peers. Property Finder research indicates that Dubai properties have consistently offered rental yields of more than 7 per cent on average, largely outperforming average rental yields offered in other major cities such as New York (2.9 per cent), London (2.7 per cent), Singapore (2.5 per cent) and Hong Kong (2.4 per cent).
Moreover, the correction in property prices presents a unique opportunity for investors to reap dual benefits of high rental dividend yields and capital appreciation.
Finally, real estate investors will benefit from improved regulatory environment and competitive offerings by the developers. Since 2014, GCC states have been working towards a robust framework for the smooth functioning of the real estate market. For instance, Bahrain, wherein the real estate sector is one of the major non-oil contributors, witnessed its first comprehensive real estate law under the Real Estate Regulatory Authority in March 2018. Meanwhile, Saudi Arabia is also working on solidifying its regulatory framework for the real estate sector, which has plenty of room to develop through regulatory reform given its relative nascency.
With diversification plans taking shape, 10-year visas on the horizon and oil prices holding firm, it is only a matter of time before the GCC real estate sector embarks on the path to recovery. Market segments such as affordable housing is already witnessing robust demand, thanks to government incentives and initiatives, and greater creativity from industry stakeholders and developers. GCC investors should rethink investment strategies and reallocate capital to the real estate sector to benefit from increased investment opportunities, high returns and growing demand.