The outlook for the Arabian Gulf real estate market for 2009 is negative, reflecting tightening access to funding, declining demand and a need to preserve cash, says Moody's Investors Service in a new report entitled "Arabian Gulf Real Estate Market Industry Outlook".
The report expresses Moody's expectations for fundamental credit conditions in the industry for the next 12-18 months.
Martin Kohlhase, an Assistant Vice President-Analyst in Moody's Corporate Finance Group, explains:
"Although drivers of demand vary considerably among the Gulf Cooperation Council (GCC) countries, residential and commercial real estate are under pressure due to lower demand, lack of funding, worsening consumer sentiment and risk of over-supply."
Mr. Kohlhase adds, "Saudi Arabia is the notable exception as it benefits from a large and growing indigenous population base and structural under-capacity for residential property, especially for low- and middle-income families."
Moody's notes that obtaining financing has become more challenging since September 2008 and a nascent mortgage industry cannot fully compensate for a funding shortfall from other sources. Negative market sentiment has also kept away many buyers who are no longer willing to acquire off-plan property (or the capacity) and thereby provide a source of funding through down-payments.
"Furthermore, long-term population growth rates -- in excess of 5% for most countries in the region -- are no longer realistic in the short term and may become negative over the coming quarters as investments in commercial activities, including foreign direct investments, are drying up," cautions Mr. Kohlhase.
Companies have also started to lay off foreign employees, which could negatively impact demand for residential properties, as some markets appear to be over-supplied. Thus, Moody's believes that the advanced markets (Dubai and Doha) will be impacted the most as expansion plans in these markets have assumed a steady influx of expatriates. Instead, these markets have witnessed a decrease in property prices and a slowdown in construction activity. Moody's notes that many projects, particularly in Dubai, have been undertaken in anticipation of future demand, which may not materialise.
Moody's also understands that real estate companies have generally put the majority of planned, but not yet commenced, projects on hold, whilst completing or consolidating those where construction has started. Completed but unsold projects will have to remain on the balance sheet. Furthermore, companies with (uncommitted) short-term bank lines -- which are more common in the Gulf region than in more mature markets -- may face increased refinancing risk.
However, Moody's notes that public infrastructure spending remains buoyant on the back of economic stimulus packages, which have been bolstered by government surpluses accumulated during the period of high oil prices. Furthermore, most real estate companies in the region benefit from strong government support, which in turn underpins their ratings. Moody's expects such high levels of support to continue.
Moody's currently rates seven companies in the GCC region that have real estate-related activities. Some are conventional developers, whilst others operate free zones or cater largely to a certain industry. The majority are government-related issuers.
