Real estate activity in Oman strengthens on back of economic growth

 

As Oman’s economy starts to feel the effect of resurgent oil prices, its gradually recovering property market is creating brand new opportunities for both tenants and property buyers. Although departing expatriates, Omani unemployment rates and limited salary increases have limited the property market’s potential since 2014’s decline in oil prices, Oman’s young population and carefully managed economy ensure that it continues to possess the fundamentals necessary for long-term investment value.

Although much will depend on the economic impact of government diversification initiatives in 2019 and 2020, continued regulatory improvements are adding to the market’s investment fundamentals. Tailored mixed-use developments that may be owned by non-GCC citizens, known as integrated tourism complexes (ITCs), have allowed for a growing number of properties to be available for foreign investment each year. The introduction of liberal legislation for real estate investment trusts (REITs) in early 2018 also adds investment appeal, though the full impact of this legislation remains to be seen.

Size & Performance

According to the latest figures from the Central Bank of Oman, the real estate and business activities segment of the economy was worth an estimated OR1.4bn ($3.6bn) in 2017, 6.5% more than in 2016. The segment’s increased value appeared to defy challenging market conditions to reach its highest rate in four years.

According to the Ministry of Housing (MoH), in 2017 the value of real estate transactions dropped by 61% to OR2.6bn ($6.8bn). With the number of title deeds issued dipping by only 6%, the MoH figures suggest that investors in high-value property are proceeding cautiously. The highest number of real estate transactions occurred in Muscat Governorate, where a total of 70,903 purchases were recorded overall, followed by the governorates of Al Batinah North and Al Batinah South, which posted 66,769 and 56,419, respectively.

Full-year figures released by Muscat Municipality for 2017 revealed that rents in the capital decreased by 30%. Property investments also fell, and the municipality issued 14.9% fewer permits to investors in major commercial and residential buildings. “One of the key challenges facing the real estate and construction sector is that Muscat is not open to foreigners who wish to buy property; they are restricted to certain areas,” Muhammad Sultan Al Salmy, managing partner of Hoehler + Al Salmy architects and engineers, told OBG. “If Muscat was to become more open, it would create the competition that the market needs.”

Increased Fees & Demand

Meanwhile, increases in transaction fees and rising demand for real estate services have added value to the sector. The MoH first raised the real estate transaction fee in February 2016, bringing the rate applied to sales and leases up from 3% to 5%. In 2017, the first full year of application, the government collected more than OR80m ($207m) in fees, up 22% from OR65m ($169m) in 2016.

According to Benjamin Cullum, general manager of Oman at real estate firm Hamptons International, increased demand for real estate services also means that some companies have benefitted from the depressed property market. “In a down market, more people use our consultancy and valuation services to make sure they make the right investment,” Cullum told OBG. “In addition, banks are demanding that property valuations for loan security come from an experienced international property consultancy.”

Key real estate market indicators from the first several months of 2018 suggest that recent deflation may soon reach the bottom of its cycle. According to the National Centre for Statistics and Information (NCSI), between January and June 2018 the value of property transactions declined by 0.4% year-on-year (y-o-y) to OR1.4bn ($3.6bn). By comparison, between January and June 2017 the value of property transactions fell by 69.9% y-o-y. The latest available data on the rental market also shows a marked improvement: in the first quarter of 2018, rents fell by just 1.1%, a much slower pace of decline than the 20-25% contraction registered between 2014 and 2017. Sector stakeholders believe that this slightly improved performance could lead to a return to growth in 2019.

In its outlook for Muscat, published in 2017, international property consultants Cluttons predicted that rental value and upward momentum would return to the market in 2019. This sentiment was reiterated by Himansu Mohapatra, general manager of Al Tamman Real Estate. “We are all expecting the market to pick up in the second half of 2019,” Mohapatra told OBG.

Structure & Oversight

The sector’s primary regulatory body is the 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 ministry also coordinates with other regulatory bodies on broader urban planning goals, including supporting the Supreme Council for Planning with city mapping, research and socio-economic studies in order to gauge future needs of the populace and propose ways to meet them.

In recent years there has been stricter enforcement of building regulations, which has effectively raised the standards of the construction sector. “Building quality has been improved by the MoH’s enforcement of regulations. There have not been major changes to regulation, but there has been a stricter following of the law,” Cullum told OBG.

Private influences in the sector include a variety of local firms, foreign-domestic joint ventures and Oman-based branches of multinationals. Some of the main companies include Alargan Towell Investment Company, launched in 2003 by Kuwaiti holding company Alargan and local firm WJ Towell, which is focused on middle-income and affordable housing; Al Habib, an Omani real estate and property management company founded in 1978 that acts as a developer and broker; Al Qandeel Contracting Company, a local developer and consultancy founded in 1984; and Edara, a joint undertaking formed in 2014 between Tilal Development Company, Al Madina Investment and Al Madina Real Estate. Multinationals with branches in Oman include the UK’s Cluttons and Hamptons International, and the German company Engel & Völkers.

General Trends

Positive forecasts for the real estate market are supported by Oman’s broader economic recovery, and the IMF projects that national GDP will expand by 1.9% in 2018 and 5% in 2019. The World Bank, meanwhile, expects GDP growth of around 2.3% in 2018 and 2.5% in 2019. These projections follow the six-year nadir to 2017, when the delayed effect of the 2014 oil price decline caused GDP to contract by approximately 0.3%.

Expectations of a return to steady growth are supported by resurgent oil prices and the government-backed diversification programme Tanfeedh. The strategy is part of the government’s ninth five-year plan which prioritises the tourism, fisheries, transport and logistics, manufacturing and mining sectors. These sectors have been chosen for their high economic potential and are being developed under the Tanfeedh initiative through a range of government investment programmes.

By the end of September 2018 the price of Omani oil on the Dubai Mercantile Exchange had reached $86.15 per barrel, an increase of 28% from September 2017, when the price stood at $57.78. The government is investing heavily in economic diversification to buffer the economy against future oil-price fluctuations, with oil remaining the backbone of the Omani economy and accounting for 25.3% of nominal GDP as of 2017.

With more than 40% of the country’s population under the age of 25, Oman’s demographics support optimistic forecasts for the long-term property market. Oman has also enjoyed strong population growth in recent years, with World Bank figures indicating that it grew by an average of 8.5% annually from 2011 to 2015. However, unemployment continues to limit property market potential, with overall unemployment and youth unemployment holding steady at 17% and 49%, respectively. The government continues to enforce Omanisation policies to address this issue in the long term. The objective of creating Omani jobs is at the core of the government’s diversification programme, and unemployment could decrease as a growing number of Tanfeedh-supported projects come to fruition. A return to strong growth, driven by diversification, could also precipitate a resurgence in the number of white-collar expatriates in Oman.

In the shorter term, however, some aspects of Omanisation are putting downward pressure on the property market, and in 2017 the total number of expatriates in the country began to wane for the first time in a decade. In the wake of the 2014 drop in oil prices, deflated economic conditions caused many highly educated expatriates to seek employment elsewhere. The latest decrease in numbers was driven by the departure of blue-collar workers, many of whom were negatively affected by increased Omanisation rates. Full-year figures for 2018 are expected to show a continuation of this trend, partly as a result of a partial halt of expatriate work permits. The Ministry of Manpower is enforcing a ban – initially launched in January 2018 and renewed in May 2018 – on issuing work permits to expatriates in 95 professions. The ban applies to positions in a variety of economic sectors, from IT to medicine, construction and engineering.

REIT

In January 2018 the Capital Market Authority introduced new regulations regarding REITs that are intended to encourage investment and increase liquidity in the market. REIT regulations allow for 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.

The portfolios created by REITs typically include a combination of different types of commercial real estate, and individual investors can purchase shares in these portfolios via publicly traded securities. While Oman’s fellow GCC members have also introduced REIT regulations, the fact that the sultanate is allowing 100% foreign ownership of REITs makes its approach in the region unique. “REITs are a very positive development for both Omani developers and foreign investors, as they will increase liquidity in the market. For small investors, property is a real asset with better liquidity than many stocks and shares, which can be very volatile in value,” Mohapatra told OBG.

Tourism Complexes

Since 2006 international investors have been allowed to own property in ITCs. Only a limited number of developments are given legal ITC status, however, and an ITC committee chaired by the Ministry of Tourism holds responsibility for granting the designation. Criteria for receiving ITC status usually include a set ratio of residential units to hospitality units within the development. Purchasing property in an ITC automatically entitles the purchaser and the purchaser’s immediate family to official residency status. Limiting the number of ITC properties in the country has allowed the government to maintain a high level of demand for them, thus establishing a segment of the property market that remains relatively unaffected by fluctuations in price caused by domestic market trends and macroeconomic factors.

Following statements from government officials regarding proposals to allow foreign nationals to buy property outside of ITCs, the introduction of REIT regulations could be the first in a series of moves to open the property market to foreign investors. Sector stakeholders also expect the ITC market to diversify. “ITCs have all been premium so far, but we expect regulations to allow for more affordable options in the near future,” Sudhakar Reddy, CEO of local real estate firm Al Habib, told OBG.

Residential

In 2017 a combination of economic and demographic factors combined to move the residential market in favour of both buyers and tenants. Chief among these factors were high unemployment and the departure of expatriates, which led to declining rental and sale prices.

In its first quarter 2018 report, Cluttons noted that Muscat’s weakest performing rental markets were Azaiba and Ghubra North, Muscat Hills and Madinat Sultan Qaboos, where rental rates declined by approximately 4.6%, 1.6% and 0.4%, respectively. While rent in most areas declined or stayed stable, there were exceptions, with rent increases reported in Bausher (4.5%), Shatti Al Qurum (2.8%) and Qurum (0.6%). The average prices for middle-income areas of Muscat, such as Bawshar, range from OR270 ($701) per month for a one-bedroom apartment to OR950 ($2470) per month for a four-bedroom villa or townhouse.

Unit Prices

For units listed on the market at the beginning of the year, property consultancy Cavendish Maxwell reported in March 2018 that the average sale price for a one-bedroom apartment in Muscat ranged from approximately OR21,850 ($56,700) in Mabela South to OR132,400 ($344,000) at Al Mouj, while the average price for a three-bedroom villa or townhouse ranged from OR81,700 ($212,000) in Mabela South to OR242,200 ($629,000) at Madinat Sultan Qaboos.

Despite a general decline in prices, agents and landlords who have been able to adapt to the market have maintained good turnover rates. “Some of the properties that are doing well are premium properties and villas at decent prices with amenities,” Reddy told OBG. In its first quarter 2018 report, Cavendish Maxwell noted a preference among tenants for larger communities with a range of amenities.

The decrease in the expatriate population has also affected the market’s balance of supply and demand. “Two- and three-bedroom properties are struggling to be filled because they were designed to suit the expatriate market, and so many small expatriate families have gone home. The workers that stayed have often sent their families home,” Mohapatra told OBG. Economic circumstances are also changing dynamics in the Omani market. “The current scenario would see good demand for studio apartments. Although they are currently limited in number, Omani bachelors and students would all prefer studios for their cost-effectiveness,” Mohapatra added.

Affordable Housing

Since 1973 the Omani government has supported citizens in lower income brackets with the acquisition and maintenance of property. Currently, the initiatives that work towards this end, such as the housing assistance programme, the housing loan programme and the condominiums programme, are legislated by a variety of laws and regulations including the Social Housing Act (Royal Decree 37/2010). The housing assistance programme provides grants for home maintenance or construction to families with monthly incomes of less than OR300 ($779), while the housing loan scheme offers interest-free loans to citizens earning from OR300 ($779) to OR400 ($1040) per month.

With more than 50% of Omanis earning less than OR500 ($1300) per month, the sultanate has seen increased demand for affordable housing in recent years. Under the condominiums programme, the MoH builds communities on greenfield sites, combining housing units with social infrastructure such as mosques and schools. In late 2017 a pilot project to construct 1000 houses on some 350,000 sq metres of land in the Barka region, north of Muscat, was announced. Presented as the first of several such projects, the development was scheduled to break ground by the end of 2018.

Al Habib’s Reddy suggests technology can play a role in expanding the building of affordable housing. “There are two aspects to the issue of affordable housing: land and construction cost. The only way to make land suitable is by implementing power, water and road networks. In terms of construction, techniques have been the same for the last 20 years. Without some technical breakthrough, affordable housing won’t take off in a meaningful way,” Reddy told OBG.

Commercial

The performance of the office and commercial property segment mirrors that of the economy as a whole, with the Cluttons report released in 2018 noting that rental rates in 2017 were largely stagnant. The central business district (CBD) was the only area in Muscat to record a fall; with stock prices declining by around 8.3% to OR2.75 ($7.14) per sq metre per month in the fourth quarter of 2017. The CBD has been the least expensive location for commercial stock in Muscat for the past 10 years. The price per sq metre rises to OR5 ($12.90) in Al Khuwair and OR7.5 ($19.50) in Azaiba.

The possibility of increases in office rent over 2018 and 2019 will depend on broader economic circumstances. According to Cavendish Maxwell, the best-performing properties are high-quality offices offering amenities such as parking and integrated facilities at or below market prices. Offices within mixed-use developments are likely to perform well when positioned as new urban centres. “In general, the old hubs of Muttrah and Ruwi are becoming less popular, though commercial stock on Ruwi High Street is doing very well,” Reddy said. “Seeb Souq and Al Khoudh Souq are also popular areas for commercial stock, particularly for ground floor properties.”

Leisure & Retail

Although malls have traditionally played a smaller role in Omani life than in other GCC countries, consumer habits have begun to shift in line with rapid increases in the sultanate’s mall-based retail capacity. In Muscat, more than 100,000 sq metres of retail space were added in 2015, and in 2017 the capital’s total retail capacity reached an estimated 345,000 sq metres.

Much of this retail space is being developed by pan-GCC companies like Landmark Group and Majid Al Futtaim. In the fourth quarter of 2018 the Landmark Group will open Oasis Malls with combined capacities of 68,000 sq metres in Sohar and Salalah, while Majid Al Futtaim opened the 16,500-sq-metre City Centre Sur in March 2018 and aims to open the 40,000-sq-metre City Centre Sohar before the end of 2018. Indeed, Oman has witnessed the regional trend of shopping areas growing larger in scale. “Small specialty malls will continue to do well, so long as they are maintained; however, foot traffic is expected to slow in smaller community malls with the development of mega-malls,” Hazza bin Salem Almardouf Alsa’adi, CEO of local Wujha Real Estate Developers, told OBG.

Where developers previously saw opportunities for major growth – Oman’s retail space per capita is the lowest in the GCC at 0.09 sq metres in 2016 – shifts in spending habits and concerns about occupancy rates are making firms cautious about further developments. “People are spending on their homes rather than on shopping,” Mohapatra told OBG. “I know of some new developments with just 30% occupancy. Retail has seen the biggest drop in occupancy and rents. For this reason, we are choosing the location and size of our malls very carefully.”

Land

The primary law governing real estate in Oman is the Land Law (Royal Degree 5/1980), which declares all land in the country to be property of the state unless otherwise specified in provable title deeds. Other relevant laws have since been passed 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 21 are entitled to receive a grant of land from the government for personal use. They are also entitled to low-interest mortgages through the state-run Oman Housing Bank. A grant waiting list based on the age and need of the applicants is monitored by the MoH.

Foreign individuals and companies may be granted usufructs approximating freehold ownership, allowing them to benefit from land on a conditional long-term basis. This typically covers a period of 50 years and is restricted to activities deemed to have social or economic benefits, such as infrastructure or public utilities. Non-nationals are also permitted to buy a mortgage. 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.

Outlook

Indicators from throughout 2018 suggest that Oman’s property market could begin to recover in the near future. As the country’s macroeconomic context improves and the government’s investment in diversification projects starts to yield positive results, rents and property prices will benefit from returning expatriates and increased job opportunities for Omani citizens. ITCs are likely to continue to see strong demand, and the first application of REIT legislation is being met with some interest.

In parallel, 2018 has also turned out to be a year of considerable adjustment for the sector, as developers sought to meet the shifting gaps in the real estate market. “Development is still not perfectly matched to demand, so there is an opportunity for some developers to do well with properties that are very finely matched to specific market needs,” Cullum told OBG.

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The Report: Oman 2019

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