With residential sales well up so far this year, Jordan’s real estate sector looks to be rebounding from the downturn it experienced during the global economic crisis. Questions remain, however, as to whether the surge can be maintained for the rest of 2011 in the face of rising interest rates and a possible end to state-backed incentives.
Figures issued in early June show that there was a 42% increase in real estate trading in the first five months of 2011 compared to the same period in 2010, with a total of $3.68bn worth of transactions. Though an excellent overall performance, the 42% increase does represent something of an easing in the market – $2.4bn of those sales were made in the first three months of the year, with $1.3bn in transactions having been carried out in March alone.
The rise in sales has in part been spurred by lower prices, with costs for residential properties in many segments of the market down by some 20% from their pre-crisis peaks. Though not close to the nearly 50% drop in prices seen in some Gulf states, the retreat has prompted more buyers to re-enter the market, assisted by lower interest rates and state incentives.
One of the measures credited with revitalising the sector was the raising of the exemption threshold on property registration fees for homebuyers. In May 2009 the government announced it would waive registration fees on the first 120 sq metres of apartments of up to 300 sq metres in size, the exemption having previously covered apartments up to 150 sq metres. In June the following year it extended the exemption further, applying it to the first 150 sq metres of homes under 300 sq metres, while also cutting property taxes in half.
According to data issued by the Department of Land and Survey (DLS), the exemptions have saved homebuyers more than $285m. However, unless the government extends the fee holiday, the exemption on charges is set to close at the end of June, a move that could make potential buyers think twice.
There are a number of other factors that could slow expansion in the real estate market, not least of which was the decision announced on May 31 by the central bank to raise key interest rates by 25 basis points. While the move was intended to help rein in inflation by easing strong domestic demand, the increase is likely to be passed on to existing and future holders of home loans.
Though the central bank’s benchmark lending rate is still a relatively low 4.25%, the interest on credit extended by commercial banks is far higher, in some cases almost double that charged by the reserve.
Though the Central Bank’s rate hike should help cool inflation, which came in at 4.5% year-on-year in April, Mefleh Aqel, an economist and the former chairman of the Industrial Development Bank – the predecessor to the Jordan Dubai Islamic Bank – is not optimistic about the possibility that local lenders will absorb the increase.
“I hope banks do not use the decision to raise interests on loans because banks still charge interests that are much higher than what they should be,” he told The Jordan Times on June 2.
Concerns over regional stability may also hinder investment in the real estate sector, with overseas buyers in particular likely to be wary.
While the government might want to enact further measures to boost property sales and the associated construction industry, it has little room to maneuver when seeking to offer support to the real estate sector. With state debt hitting $17bn – 58% of GDP – at the end of the first quarter and estimates suggesting $1.4bn or more could be added to this by the end of the year, there is a very tight limit on available funding for new developments. The government must also balance efforts to encourage home ownership, such as the relaxed fees regime, with the need to pad the public purse.
The minister of finance, Mohammad Abu Hammour, has suggested that the registration fee exemptions might not be renewed after their current term expires, having told local press that the real estate sector had recovered well from its earlier downturn.
Some additional stimulus is expected during the summer months, when both expatriate locals and overseas investors on holiday traditionally travel to Jordan and buy into the domestic property market. However, the real test for Jordan’s real estate sector will be how it performs in the latter part of the year, especially if the government scales back or ends its incentive programme and if interest rates climb further.