GCC’s real estate sector is on a recovery path

Muscat: The real estate sector in the GCC is on a recovery path after a tumultuous couple of years thanks to the government’s economic diversification efforts, a stabilising oil sector, and rising private investments.
Over the last 10 years, the region has continued to witness rapid economic development and demographic changes fueled by a ballooning expat population, which currently stands at 50 per cent of the Gulf Cooperation Council (GCC) population.
This, according to a report compiled by Al Masah Capital, has subsequently resulted in an increase in the demand for residential units across the GCC region. And in response to the demand, the United Arab Emirates (UAE) on its part has already commenced its expansive affordable residential construction project to accommodate as many as 385,000 expatriate workers.
Regardless of the yield compression in the UAE’s residential market and decreasing transaction values from the previous years, the UAE’s real estate sector is maturing and is poised for growth in the longer term given the improving regulations, solid macroeconomic fundamentals and highly developed infrastructure.
The report also indicates that the region is now positioned as a preferred destination for global investors with its real estate sector establishing itself as a key barometer for the region’s economic growth.
The rise in per capita income has also been attributed to the sector’s continued stability, the report indicates.
The report also highlights that the region’s tourism sector is also poised to further accelerate the real estate market in the GCC, especially for the UAE.
On its part, UAE’s real estate market and the construction sector have also been a growth trajectory collectively accounting for 15 per cent of its total GDP in 2016, with individual contribution of six per cent and nine per cent, respectively.
This, the report also indicates, is mainly due to efforts by the Abu Dhabi and Dubai governments aimed at reducing the oil dependency, improving the economy, and favorable policy decision.
Increased Foreign Direct Investment (FDI) has also been singled out as having a positive impact on the sector’s growth.
According to the report, UAE’s FDI nearly doubled from Dh55.3 billion in 2010 to Dh103.1 billion in 2015 with the Foreign Portfolio Investments (FPI), which is still recovering from the 2009 economic slowdown, reaching Dh7.7 billion in 2015.
In terms of office real estate, Dubai’s office supply outperformed other GCC markets registering a compound annual growth rate (CAGR) of 4.5 per cent during 2012-17. On its part, Saudi Arabia has also witnessed steady growth since 2012 with supply reaching 4.9 million square metres in 2017.
Currently, Dubai still maintains the lowest office vacancy rate in the GCC at only 8 per cent as of 2017. But on the other hand, Dubai is still considered as the most favorable commercial destination albeit it being the costliest. It is closely followed by Saudi Arabia.
On their part, the UAE and Saudi Arabia governments have also been proactively promoting affordable housing plans for both locals and expats.
The Al Masah report reveals that top developers from UAE real estate market have also started focusing on the affordable property segment.
According to the UAE Home Finance report, around 60 per cent of the top Dubai real estate developers are now participating in the affordable property segment and have launched projects, priced within the range of Dh400,000 ($109,000) and Dh700,000 ($190,600).
Introduction of VAT in GCC
Aspart of an economic diversification effort and sustainable growth, the regional governments decided to introduce Value Added Tax (VAT) in all sectors. For the UAE, VAT could generate Dh12 billion in its first year and Dh20 billion in its second year says the report.
This move embodies the inception of a landmark financial reform in the GCC and is likely to relieve some part of the burden from reliance on oil revenues. The GCC VAT implementation of this tax is being left to individual member States within the GCC-wide framework agreement signed in November 2016.On 1st January 2018, UAE and Saudi Arabia implemented the VAT, a single standard rate of 5 per cent, in their respective countries, while the other GCC nations are likely to follow the suit soon.
The introduction of the 5 per cent VAT in Saudi Arabia and the UAE is expected to have an impact on the purchasing power of local investors and on the investment decisions of international investors.
The introduction of VAT is also expected to have repercussions across the real estate industry, particularly with lease agreements and property purchases as they are considered to be a taxable supply in terms of the VAT Law.
In a nutshell, VAT will increase in the costs of renting or owning property with valuation and prices of commercial property price also likely to increase by about 2-5 per cent.
In Saudi Arabia, the VAT rule is expected to have transitory impact on the real estate market. The real impact will, however, be felt after the successful implementation of the VAT.
VAT in Saudi’s & UAE’s real estate market is poised to bring in transparency, which is widely expected to attract foreign investors and eventually write off the risk of high cost of investments.
GCC facilities management
GCC’s Facilities Management (FM) sector has registered rapid growth over the years largely due to the high construction activities, increasing infrastructure spending across the region and a growing tourism industry.
According to the report, the regional FM industry has become highly competitive due to the entry of international players and rise in domestic service providers.
In 2017, the GCC FM market was estimated to be valued at around $44.1 billion and is further expected to reach over $67 billion by 2022 after registering a CAGR of 8.8 per cent.
In terms of size and dominance, the UAE is still the most advanced and adaptive FM market in the region. With an estimated value of about $11.7 billion in 2017, the country’s FM market also acts as a benchmark for FM implementation in the region mainly due to the significant and sophisticated developments in Dubai and Abu Dhabi.
On its part, Saudi Arabia has the largest FM service market in the GCC and is also the fastest growing market in the region.
The FM service market in Saudi Arabia was valued at around $24.6 billion in 2017 and is further expected to reach around $39.6 billion by 2022 after growing at a CAGR of around 10 per cent.