Oman eyes key real estate areas amid low rents and occupancy rates

 

Oman’s real estate market has continued to feel the effects of slower economic growth over the past year. Rental rates have declined by more than 25% since recent highs were reached in 2014, and 2019 saw prices continue to fall amid concerns about oversupply and expatriate workers leaving the country. The residential segment has been the most affected, with a large amount of recent developments placing pressure on rental and sales prices. However, with strong growth expected in the retail and industrial sectors, related real estate offerings present unique opportunities.

Structure & Oversight

The sector’s primary regulatory body is the Ministry of Housing (MoH), which provides oversight for the industry, sets its priorities, proposes and executes policies, issues directives, registers and monitors transactions, administers social housing and provides land grants. The MoH also coordinates with other government entities on broader urban planning goals, including supporting the Supreme Council for Planning (SCP) with city mapping, research and socio-economic studies to gauge the future needs of the population and propose ways to meet them.

Another noteworthy public player is the Oman Real Estate Association, an organisation created by the MoH in 2012 to improve the sector through the pursuit of best practices, transparency initiatives and reform proposals. The Royal Institution of Chartered Surveyors (RICS), a global professional organisation that establishes and enforces standards for the valuation, operation and development of property, also has a presence in Oman. The RICS board in Oman are in discussions with various government entities to establish a valuation framework, something that some industry experts have pointed out is missing in the local market.

Private players in the real estate sector include a variety of local firms, foreign-domestic joint ventures and Omani branches of multinationals. Some of the main firms are Alargan Towell Investment Company, which is focused on middle-income and affordable housing; Majan Engineering Consultants (Majan), an Omani project management and quantity surveying firm; and Al Habib & Company, a local real estate and property management company. Multinationals with branches in Oman include the UK’s Cluttons and Hamptons International, and German company Engel & Völkers.

Performance

Oman has seen a sharp decline in property demand in recent years. According to the National Centre for Statistics and Information (NCSI), the total value of property transactions in Oman in the first nine months of 2019 fell by approximately 11% to OR1.82bn ($4.7bn), from OR2.05bn ($5.3bn) registered in the same period of 2018. Meanwhile, the number of property transactions between January and September 2019 stood at around 159,574, down 5% from the same months of 2018, when 167,897 properties changed hands.

Data from the MoH paints a similar picture; the average value of real estate traded across the country fell by 10.7% year-on-year (y-o-y) in the first quarter of 2019, to OR33,789 ($87,800). Muscat, which usually accounts for more than half of annual property transactions by volume and value, registered the largest price decline over this period, falling by 28.1% to an average of OR98,181 ($255,000). The capital was followed by Al Sharqiyah South governorate, where property values were down by 25.8%, Al Buraymi (-20.7%) and Al Sharqiyah North (-14.3%). In contrast, Al Dhahirah saw its real estate prices The number of property transactions recorded in the first nine months of 2019 fell by 5% year-on-year to 159,574 almost quadruple y-o-y, while strong increases were also recorded in Dhofar (66.5%), Al Wusta (32%) and Musandam (31.8%) governorates.

Reforms

In 2018 and 2019 the government discussed and enacted several reforms aimed at easing foreign property ownership rules and real estate investment laws. Under legislation in place since 2006, foreigners can only purchase properties in integrated tourism complexes (ITCs), but according to government statements from May 2019, there are intentions to change regulations to allow foreigners to own leasehold properties in 2020 (see analysis). However, it is likely that foreigners will still not be allowed to own freehold real estate under the proposal. Nevertheless, the move is an indication of the government’s drive to attract foreign investment and revitalise the real estate market.

Allowing the use of real estate investment trusts (REITs) is another avenue the government is pursuing to attract foreign investment into the country. In January 2018 the Capital Market Authority (CMA) – Oman’s financial regulatory body – introduced new rules on REITs in order to encourage investment and increase liquidity in the market. REIT regulations allow companies to own, operate or finance income-producing real estate provided that they have $26m in capital, are run by an investment manager licensed by the CMA, distribute 90% of annual profits to shareholders and offer at least 40% of their equity to the public.

REIT portfolios typically include a combination of types of commercial real estate, and individual investors can purchase shares in these portfolios via publicly traded securities. While other GCC countries have introduced similar regulations, REITs in Oman allow for 100% foreign ownership, which makes them a unique investment prospect in the region.

Land Rights

The primary law governing real estate in Oman, the Land Law of 1980, declares all land in the country to be property of the state unless otherwise specified in provable title deeds. A number of other relevant laws have since been passed, including those on usufruct rights (1981), tenancy (1989) and land registration (1998). Omani nationals may own land on a freehold or leasehold basis, and at the age of 23 are entitled to receive a grant of land from the government for personal use, as well as a low-interest mortgage through the state-run Oman Housing Bank (OHB). A grant wait list is administered by the MoH based on the age and need of applicants. More than 174,000 citizens were on the wait list for residential plots in the Muscat governorate alone as of February 2019.

Foreign individuals or companies may be granted a usufruct approximating freehold ownership, which would then allow them to benefit from land on a long-term, conditional basis. This is typically a period of 50 years and is restricted to activities seen as having a social or economic benefit to the country, such as infrastructure or public utilities. In 2004 foreign ownership of land or constructed property on a freehold basis was granted to GCC citizens and wholly GCC-owned companies for both residence and investment, putting them on a par with Omanis in this respect. In 2006 all other foreigners were extended this right as well, albeit restricted to ITCs. Foreigners who purchase property in ITCs are entitled to residency benefits.

While regulatory reforms will see property ownership rights for foreigners expand, several challenges related to valuation remain. For example, there is currently no publicly available land registry in the country. Therefore, the onus is on the owner to ascertain the value of real estate in a certain location, which is extremely difficult. This proves unattractive to investors, as the risk is too high.

Residential

Residential rents and sale prices continue to decline in Oman as they adjust to muted economic growth. A combination of factors, including readjustment of salaries and job losses in key sectors, expatriates leaving the country and new project handovers, have impacted demand.

Real estate demand is closely linked to the job market and the broader economic environment. The total number of foreign employees in Oman has fallen from a high of 1.84m at the end of 2017 to 1.79m at end-2018, according to a March 2019 report by Al Habib & Company, a decrease of 3.6%. The number of expatriates who hold a diploma meanwhile, fell from 159,506 to 142,989 between 2016 and 2018, a contraction of around 10.4%. Omanisation requirements and a 2018 ban on visas for some 87 job roles are behind this decline, and since the demand for rental housing is mainly from expatriates, their shrinking numbers have had a significant impact on demand for properties.

The downturn in real estate demand caused by the decreased number of expatriate workers could be alleviated by allowing greater freedom of labour in Oman, for example. At the same time, expatriates who have stayed in the country have begun moving to cheaper accommodation options, resulting in declining rents to pair with lower occupancy rates.

With white-collar foreign employees leaving the country, rents declined by between 10% and 15% in 2018. Landlords who have been quick to lower rents and offer good maintenance services are enjoying higher occupancy rates than those who have not. Location is also a key determinant for renters, with rents and occupancy in popular areas remaining steadier than those in other locations. In Muscat, highly sought-after areas such as the Central Business District (CBD), Qurum, Al Khuwair and Ghubra saw declines in rental prices of about 13% in 2018, compared to 18-23% in less popular areas such as Wadi Kabir, Ghala and Amerat. As of the end of 2018 monthly rental prices for two-bedroom apartments in Qurum and Al Khuwair averaged OR300-350 ($779-909) and OR660-900 ($ 1710-2340) for three- to five-bedroom villas. Rental rates for high-end properties in desirable locations only declined by approximately 5%, according to a 2019 report by consultancy and chartered surveying firm Cavendish Maxwell, and occupancy rates in these areas are generally much higher than in other parts of the capital and country.

Alongside the decline in rents, property sales prices have also fallen. As of the end of 2018 the sales prices for one-bedroom apartments in popular areas of Muscat ranged from OR53,000 ($138,000) in Al Khuwair to OR85,000 ($221,000) in Shatti Al Qurum, while a three-bedroom villa in Al Khuwair was priced around OR135,000 ($351,000) and a five-bedroom villa cost about OR500,000 ($1.3m) in Shatti Al Qurum. Cavendish Maxwell highlights that Muscat’s residential market continues to be oversupplied with apartment blocks, while a gap exists for high-end villas and townhouses.

Lower property prices have also been observed in the southern coastal city of Salalah. Large-scale investment in the airport and port is expected to bring in businesses and residents, thus the city has seen a significant increase in property supply across all segments. However, the high activity has put downward pressure on occupancy rates.

Still, growing industrial activity and investment at the Duqm Special Economic Zone (SEZ) are creating demand for residential real estate in the area, which is expected to have a knock-on effect on purchasing and rental prices. In mid-2019 the Renaissance Village township to house employees at the Duqm SEZ was finished. The site has the capacity to accommodate 18,000 residents, and 13,000 workers – including some 2000 Omanis – were living in the complex as of August 2019. The township includes various styles of housing – from dormitory-style rooms with six or eight beds to executive suites – recreational facilities and services such as barbershops, medical care, stores, cafeterias, banks and a mosque.

Affordable Housing & Finance

The government continues to run the Social Housing Scheme and Housing Aid Programme for Omani citizens, working to combat the affordable housing deficit. In 2019 the government set aside OR90m ($233.7m) for affordable housing, a OR10m ($26m) increase compared to 2018. The 2019 budget allocation is divided between OR60m ($155.8m) for housing loans provided by the OHB, and OMR30m ($77.9m) for other housing and development loans.

The OHB was established in 1977 to provide loans and banking facilities to citizens, and by May 2019 it had issued a total of 44,288 loans worth some OR1.1bn ($2.9bn). In 2018 alone the bank granted 1841 loans totalling around OR80m ($207.8m), and in the first half of 2019 it approved 630 loans worth more than OR26.8m ($69.6m).

In addition to housing finance, the government is directly investing in affordable housing developments earmarked for Omani citizens. At least four projects to provide affordable housing units through public-private partnerships were being planned as of March 2019. These include a largescale project in Barka to build 1000 houses on a 350,000-sq-metre site, with integrated facilities such as mosques, health clinics and commercial centres, in addition to tree-lined boulevards and parking space. Beyond government funding, the OHB is set to receive injections from regional institutions. In July 2019, for example, the OHB signed a OR75.6m ($196.3m) agreement with the Arab Fund for Economic and Social Development to deliver housing programmes and loans for Omani nationals.

Mortgages

Subdued market activity has led to a lower number of mortgages approvals. According to the NCSI, the number of properties transacted between January and May 2019 stood at 94,171, down 8.8% from the same period in 2018, when 103,211 properties changed hands. Of the total traded value of OR1.1bn ($2.9bn) for the five-month period, OR418.9m ($1.1bn) worth of contracts were sales contracts and OR662.4m ($1.7bn) were mortgage deals. By May 2019, 25,322 sales contracts had been executed, down 5.8% on the 26,894 seen in the same period of 2018, while the number of mortgage contracts fell by 7.4% from 7423 in 2018 to 6875. The Muscat governorate continues to register the highest number of mortgage transactions, followed by Al Batinah North and Al Batinah South.

Property valuations in mortgage contracts remains a key concern in Oman due to a lack of enforcement of regulations. International valuation standards (IVS), which are a required part of the international financial reporting standards (IFRS), are now mandatory in Oman. However, only a few property companies prepare IVS-compliant reports, and only a small percentage of loans are IVS-backed. Industry stakeholders have highlighted the need for financial institutions and the MoH to ensure proper and more widespread implementation of IVS for both loans and contracts.

Retail

As with other real estate segments, the oversupply of retail space, combined with weak consumer demand, has created sluggish market conditions. However, the fundamentals of Oman’s retail industry are solid and certain factors point to promising long-term growth.

In 2018 and 2019 a significant amount of retail space was added to existing stock, particularly in Muscat. Several new malls opened during this period, including Landmark Group’s Oasis Malls in Sohar (33,000 sq metres) and Salalah (35,000 sq metres), and Al Araimi Boulevard in Muscat (149,000 sq metres). Other developments that were under construction in the second half of 2019 include Muscat’s Mall of Oman (137,000 sq metres), which will feature 350 outlets, a snow park and a Carrefour supermarket as its anchor store.

With additional retail space becoming available, developers and management firms may struggle to fill space. As high competition places occupancy rates under pressure, retail rental prices have softened across the country. In Muscat monthly rental rates currently range from OR6-12 ($16-31) per sq metre in Ruwi to OR25-35 ($65-91) in Seeb, according to Cavendish Maxwell.

However, developers that have tailored their offerings to meet current market needs have managed to keep occupancy rates high. For example, the 200,000-sq-metre Mall of Muscat, working with global real estate management agency JLL as the exclusive leasing agent, has effectively geared its retail space towards entertainment-focused and experience-led offerings that target a growing young population. In doing so, the mall – which opened its doors in April 2019 – achieved an occupancy rate of 85% by June 2019.

Ultimately, the fundamentals of Oman’s retail market – including a large local population relative to other GCC countries, an increasing number of tourists and growing awareness of international trends – are sound. The retail industry is forecast to grow from $10.3bn in 2018 to $11.3bn by 2023, according to Euromonitor International, and developers are eyeing new opportunities. Major retail giants like Majid Al Futtaim, Al Jarwani Group and LuLu Group are all pressing ahead with multimillion-dollar expansion plans and investment in malls.

Hospitality

There are similar prospects for the hospitality industry, as hotel and resort developers gauge Oman’s strong tourism growth (see Tourism chapter). From January to November 2018 Muscat’s three- to five-star hotels welcomed 1.4m guests, for total revenue of approximately OR189m ($490.8m), according to Cavendish Maxwell.

There were 72 hotels under construction in Oman in early 2019, amounting to 6604 rooms; 55 of those hotels, with 4763 rooms, were slated to be finished by the end of 2019. The majority of hotels in the pipeline are rated one, two or three stars, as sector stakeholders aim to make offerings more affordable and attractive to a wider demographic. Meanwhile, a number of multinational hotel groups are behind four- and five-star developments, including JW Marriott, InterContinental and Rotana. JW Marriott’s five-star hotel next to the Oman Convention and Exhibition Centre was the largest high-end hotel to open in 2019, with 304 rooms.

As tourism numbers are forecast to increase, hotel groups are on the lookout for investment opportunities that would suit established destinations. Speaking to industry media in May 2019, Jean-Baptiste Recher, vice-president of development for the Middle East at Accor, cited the company’s plans to step up its presence in Oman. “At the moment, there are only five branded quality hotels in the market. We believe a brand like Sofitel or Fairmont would do very well there; we also see an opportunity for a product like Rixos in Salalah. Something similar to an all-inclusive concept that is positioned at a luxury level does not exist in the country,” he said.

Office Space

Given that firms associated with the hydrocarbons industry constitute the greatest source of demand for commercial office space in Oman, the segment has had to contend with subdued demand in the recent period of lower oil prices. However, as many large companies downsize and consolidate their operations, business centres have become more popular, with firms seeking fitted offices at lower costs to accommodate fewer staff.

Illustrating the shrinking number of companies in Oman, Invest Easy, a business platform administered by the Ministry of Commerce and Industry, reported that the total number of registered enterprises decreased from 25,560 in 2017 to 21,119 in 2018. Still, due to the prominence of commercial space with grade B and C classifications in Muscat, the demand for high-quality, grade-A offices among multinationals is expected to remain stable.

The former CBD in Muscat has been the most affected by lower demand, as many companies have moved to western enclaves to take advantage of the strong public transport links in place and the lower levels of congestion compared to the CBD. As of early 2019 monthly rental rates within the CBD averaged OR3-6 ($7.80-15.60) per sq metre, while newer areas such as Qurum, Al Khuwair and Shatti Al Qurum posted rental rates almost twice as high, at OR6-9 ($15.60-23.40) per sq metre.

Nonetheless, construction of office space continues, as many developers take advantage of lower costs to build. Khazaen Economic City (KEC) in Barka, where construction began in 2018, is a major commercial real estate space under development. The 51m-sq-metre project is set to become a logistics and industrial centre, and many companies in these sectors are expected to open new offices in KEC or relocate there from other parts of the capital.

Industrial

Oman’s industrial real estate is bucking trends seen in other segments as the country’s manufacturing output continues to rise (see Industry chapter). Under its Vision 2040 economic development plan, the government seeks to more than double its industrial output. To achieve this target and establish Oman as a regional manufacturing centre, officials are encouraging foreign investment in free zones and industrial areas. This is creating a pipeline of industrial real estate developments that are being supported by major government investment in related infrastructure.

KEC is one such area, but Duqm and Sohar also present significant opportunities for investors. The Sohar Industrial Estate, for example, had over 16.7m sq metres of area still available for lease and investment as of early 2019, while the Duqm SEZ is planned to have 15m sq metres for logistics companies and 10m sq metres for manufacturing once it is fully completed. Industrial rental rates have remained largely stable, averaging around OR3-4 ($7. 80-10.40) per sq metre as of the close of 2018. At the same time, rates for grade-A storage space across Oman averaged OR0.50-1 ($1.30-2.60) per sq metre.

Outlook

Sustained lower oil prices and subdued economic growth have had a noticeable impact on the real estate market. Oversupply from continued building, paired with weak demand from foreign residents and businesses, has driven rental and sales prices down across the board.

The expected completion of a swath of residential and retail developments in 2020 is set to put further pressure on prices in the market, leading property managers to get creative with incentives and service offerings. With that said, investment opportunities are still present, particularly in high-end villas and affordable housing, two segments where demand from citizens remains relatively high.

With anticipated reforms to regulations governing foreign property ownership and strong forecast growth in tourism, the long-term outlook for ITCs looks positive. Similarly, given sizeable government investment in the country’s industrial and free zones, growth in this segment seems assured.

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The Report: Oman 2020

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