Economic expansion, a growing population and increasing interest from foreign investors are driving a strong recovery in Oman’s real estate market. After a dip caused by the global financial crisis, an initially slow revival is gaining momentum. Segments including integrated tourism complexes (ITCs) and higher-end residential and office space are doing well (see analysis), while logistics and industry are also showing promise. The estate agents’ old adage of “location, location, location” is particularly pertinent in Muscat: rents and values can vary greatly depending on district, and well-placed, high-quality units that take market demand into account have performed especially well.
Clients are also increasingly looking for more than just a pleasant home or functional office, seeking supporting facilities and after-sales service from developers, the latter being a relatively new concept in Oman. After several years of growth, the market saw a rapid slowdown after 2008, as investors backed away from the Gulf and economic growth tapered. This led to a degree of oversupply in some segments, much of which has now been absorbed. Development has been picking up since 2012 to meet resurgent demand, and projects are being rolled out in all economic sectors.
Residential Rentals
The residential leasing market continued to fall for some years after the financial crisis, partly owing to oversupply, with rents for an average two-bedroom apartment in Shatti Al Qurm dropping from OR850 ($2200) in 2010 to OR800 ($2070) in 2011 and OR750 ($1940) in the first quarter of 2013, according to real estate agency Cluttons. Similarly sized units in Al Khuwair fell from OR500 ($1300) to OR450 ($1170) and then OR400 ($1040) in the same period. A typical two-bed apartment at The Wave, an ITC, dipped proportionately less, and the decline was not sustained; from OR850 ($2200) in 2010 to OR800 ($2070) in 2011, the level at which it remained in the first quarter of 2013. Throughout the same period, a two-bed unit in Azaiba flatlined at OR500 ($1300). For sales, the upturn started slightly sooner. “Prices started to fall in 2009, and as they came down, sellers were selling for less than the purchase price,” Maha Nakhalah, head of marketing at Muscat-based Al Qandeel Real Estate, told OBG. “Things started to improve in 2012, and in the summer of 2013, really started to pick up.”
Shadow Dancing
Sector experts including Matthew Wright, head of logistics and industrial at Cluttons Oman, and Christopher Steel, managing partner at Savills Oman, told OBG that Muscat’s real estate market tends to shadow that of Dubai, which sets the pattern of regional growth. Therefore, Dubai’s slowdown in 2008 and the debt crunch and dropping property values of the following year helped to put the brakes on in Oman. The emirate’s revival over the past two years has similarly stimulated a recovery in the sultanate.
“When Dubai sneezes, Oman catches a cold,” Steel told OBG. “And when there is a recovery, once you start getting a growing difference in capital values between Muscat and Dubai, you start getting more interest from the likes of Emiratis and Qataris.”
Revival
The revival in the Omani market that began towards the end of 2012 has continued throughout 2013, with high transaction activity on rental properties, particularly in the mid-range segment, according to Savills. While demand at the budget end of the market has been more sluggish, for ITCs – where many of the best residential units are located – it has proved robust enough for waiting lists to swell.
The improving economic climate, as well as greater access to funding, particularly though cheaper mortgages and the expansion of sharia-compliant financial services, has contributed to rising transaction activity.
At the end of the first quarter of 2013, rents for good-quality residential units in central areas, excluding ITCs, ranged from OR375 ($970) for a two-bedroom apartment to upwards of OR1550 ($4000) for a five-bedroom villa, according to Savills. Rents for three-bed apartments, three-bed townhouses and four-bed villas averaged OR525 ($1360), OR950 ($2460) and OR1300 ($3370), respectively. The company identified an “s-curve” following the 2008 corrections, and forecasts continuing rental increases through 2013 and beyond, if the economy continues to perform well.
Standards
The standards of new apartment developments have improved – according to Savills, some are of similar or better quality to what is found in Dubai. Premium rates for apartments can outstrip those for villas, which have traditionally been preferred by welloff Omanis and expatriates. Savills cites the example of Salem Gardens between Al Khuwair and Medinat Sultan Qaboos, which leased within a fortnight of completion with rents over OR800 ($2070) for two-bed units.
With considerable new supply having come onto the market in the past decade, it is becoming harder to lease older properties, the values for which have consequently fallen. Savills reports “some landlord resistance to modernisation, particularly of centrally located villas”. But it adds that where owners have redeveloped, replacing old buildings with purpose-built new accommodation, and are pricing it correctly, 100% occupancy is almost always achieved within two months of completion. This is thus a strong incentive for capital investment in replacing failing older units with newer ones; with the broader market now reviving, more landlords may seek to do just that.
Capital values vary greatly by location. For example, a two-bed flat in Shatti Al Qurum, a desirable, central seaside area, will sell for around OR90,000 ($233,100), while inland in the commercial district of Al Khuwair, OR80,000-90,000 ($207,200-233,100) will buy a three-bed flat, according to Nakhalah. In Ruwi, traditionally one of the commercial centres of the city and the heart of its South Asian community, but now less popular and facing traffic problems, a two-bed apartment can be found for OR45,000 ($116,550). “We expect to see a gentle decline in some areas, while other segments grow, for example, better quality properties in the centre and west of Muscat,” Wright told OBG. “This is not necessarily based on what is the most expensive, but the best standard for what the market needs.”
Complex Issues
Perhaps the most important development in Oman’s real estate sector over the past decade is the launch of ITCs. These mixed-use developments have a strong focus on residential and leisure property. Most importantly, they are the only places in the sultanate where foreigners who are not citizens of GCC member states can buy 100% freehold property. Construction on the first (and still most high-profile) ITC, The Wave, began in 2007. It has since been joined by Muscat Hills, which has become a favoured location for Omanis in particular. The timing of the launch of ITCs was in a sense unfortunate in that it was quickly followed by the global crash. But developers have proved adept at adapting to the new conditions, and in 2012, as the market recovered, the complexes have blossomed. Interestingly, they have attracted relatively few investors for tourist rentals, the initial concept behind the developments. ITCs clearly aim to attract international buyers, and initially around 90% of units were sold to expatriates – predominately from the UK, but also from other GCC member states.
However, more recently the appeal of the complexes to Omani investors and residents has become apparent. According to Savills, around 80% of new-launch purchases in 2012 were made by Omanis. “Nationals are showing a strong interest in purchasing prime real estate in ITCs,” Philip Paul, head of country at Cluttons Oman, told OBG. “To accommodate the customer, developers are increasing the amount of luxury villas and plots available. ITC projects are growing in number across the country. Owning property in these projects will be beneficial for locals and expatriates alike.”
ITCs offer a package that can be hard to find elsewhere in Oman. They remain, however, a work in progress and as developments are rolled out, changes in facilities and management have caused some complications for owners and residents.
Growing Value
ITCs already command higher prices than similar units elsewhere, due to the desirability of their location, facilities and services – and, of course, the fact that foreign investment adds to domestic demand. Property values at Muscat Hills rose 25% in the 12 months to the first quarter of 2013, according to Savills, driven by a demand-supply mismatch that has seen a waiting list develop. Existing owners see no reason to sell with units yielding up to 10% gross on the initial purchase price unless a premium price is offered. Resales at The Wave’s Al Marsa Apartments showed growth of 12% for off-plan prices, although capital gains across the entire project are dependent on the type of unit and the phase in which it was completed.
Facilities
The Wave has become one of Muscat’s most prominent addresses. The addition of new facilities in 2012 coincided with the market’s revitalisation, with a golf course, restaurants and shops adding to the project’s competitive advantages. The Wave has also been continuing construction of new units, though initial plans have been altered due to market conditions. One- to three-bed apartments have been retailing for some OR79,000-350,000 ($205,000-907,000) in 2012 and 2013, with the price varying depending on the part of the development. The Wave plans a limited number of villas – supporting value growth for that type of property – although several thousand apartments are also in the pipeline. Momentum depends in part on the completion of other parts of the development, including four hotels and a shopping mall.
At Muscat Hills, the final quarter of 2013 saw the launch of phase two, developed by Oman Urban Development Company (a $60m joint venture between the private Oman-based W J Towell Group and the Oman Integrated Tourism Projects Fund launched by Bank Muscat) in partnership with Muscat Golf Course Project. Under current plans, the second phase, which is being sold off-plan, would have 80 four- to six-bedroom townhouses and villas on plots of between 278 and 1700 sq metres. Prices range from OR270,000-456,750 ($0.7m-1.23m) for four-bed units to OR465,000-900,000 ($1.2m-2.33m) for the larger homes.
While some press reports suggest yields of up to 10%, Wright says that this is unlikely, and that 6-7% is more common for ITCs. Even so, Savills still expects a shortage of new units to continue through 2014, driving up rents that are already on the rise. “Only when the Villas at Reehan Gardens of The Wave and Muscat Hills Phase 2 are completed is the pressure on these rentals likely to subside,” the agency reports. It expects values to appreciate for some years to come.
As of April 2013, a two-bed apartment at The Wave was renting for between OR800 and OR900 ($ 2070-2330) a month, with a three-bed townhouse at OR950-1200 ($2460-3110) and a five-bed villa at OR1650-2000 ($4273-5180), according to Cluttons. At Muscat Hills, a two-bed apartment rented for OR750-800 ($ 1940-2070), while rents for five-bed villas varied considerably, from OR1750-2200 ($4530-5700).
Secondary Market
On the secondary market the barrier of OR1000 ($2590) per sq metre has been breached. Two-bed apartments at The Wave fetch OR120,000-150,000 ($310,800-388,500), three-bed townhouses go for OR180,000-225,000 ($466, 200-582,750) and five-bed villas OR380,000-650,000 ($0.98m-1.68m). At Muscat Hills two-bed apartments are seeing values of OR120,000-140,000 ($310, 800-362,600) and five-bed villas reach OR400,000-500,000 ($1.04m-1.3m). Two other ITCs, Jebel Sifa and Salalah Beach Muriya Tourism, have hit the market and welcomed their first occupants. Savills notes that further development of auxiliary facilities will be needed to secure permanent residents, but that in the long term the projects may attract more buy-to-let investors as their locations are ideal for tourist rentals. Others are also tourist-oriented, including the Omagine and Saraya Bander Jissah resorts.
Expatriates
While expatriates make up a smaller portion of the population of Oman than in most Gulf countries (around 20%, compared to up to 80% elsewhere), they are not an insignificant factor on the residential market, particularly at the upper-middle to high end. Some ongoing developments that have seen wealthier expatriates as an important part of their resident mix have been affected by the post-crisis tendency of international employers to squeeze their housing budgets. Whereas previously companies provided generous sums for foreign professionals to spend on accommodation as they wished, many now offer either more limited packages or small wage increases from which expatriates are expected to cover their own rent. In either case, the effect has been to trim spending.
However, according to Savills, movement on housing allowances is an “area to be watched with interest”, particularly given that housing stocks have been improving and diversifying elsewhere in the region and beyond. Savills expects expatriates to become less tolerant over time of substandard accommodation and to put pressure on employers to increase budgets or wages again. International companies may find this pressure hard to ignore, given that they already face challenges in attracting appropriately qualified workers to Oman.
The move towards personal leasing, rather than employer allowances, has led to shorter payment terms Major retail malls in Muscat area, 2013 as individuals have a reduced ability to provide large down payments compared to companies. Higher-value properties – those often rented out to high-earning expatriates – now typically command a down payment equal to a quarter or half of the rental value rather than one year in advance as was once the case.
Changes in the expatriate workforce are also having an effect. Shorter-term and contractual work is on the rise, stoking demand for furnished units for those who are likely to move on within a year or two. With Oman rolling out a number of major infrastructure schemes over the coming years, an increase in the number of expatriates is likely, but many will be in the sultanate only as long as their projects are active.
Retail
The retail market’s growth has been stimulated by the health of the economy as a whole. The increase in the minimum wage from OR200 ($520) to OR325 ($840) as of July 2013 should provide a boost to the sector, although retailers are wary of its potential effect on inflation, which erodes real purchasing power. Muscat is currently seeing a spell of mall development, although high street shopping remains more prominent than in many Gulf states.
Market leaders include the 64,500-sq-metre Muscat City Centre, owned by Dubai’s Majid Al Futtaim, and the Muscat Grand Mall, with over 60,000 sq metres in Al Tilal Complex in Al Khuwair. The fourth quarter of 2012 saw the opening of the Opera Galleria, a high-end mall with around 6500 sq metres of space for 50 outlets, at Muscat’s iconic Royal Opera House, an important tourist destination as well as a cultural centre for residents. The Al Khuwair and Bausher districts have also proven attractive to developers. Of particular note are the extension to the Lulu Mall and the Panorama Mall, both of which should be completed in 2014. The extension of Lulu increases retail space to around 100,000 sq metres, with 150 shops and a large food court, while Panorama slots into a substantial mixed-use development by Allied Real Estate. Panorama will include a cinema and some 21,000 sq metres of leasable retail space. In November 2012, Tilal Development Company announced plans to launch an OR53m ($137.27m) sukuk(sharia-compliant bond) to finance an expansion of Muscat Grand Mall, raising the number of retail outlets from 113 to around 160.
Another development which should have an impact well beyond the retail segment is the Marsa Village Retail Centre at The Wave, which saw construction start in November 2012. The mall will cover 10,850 sq metres anchored by a 1500-sq-metre Waitrose supermarket, a range of food and beverage outlets, a gym, retailers, a clinic and a dentist’s. The centre is scheduled for completion in the second quarter of 2014.
Logistics
The expansion of Oman’s manufacturing industry is driving demand for better warehousing and other logistics-related property, of which there is currently a shortage. The mismatch led to a moderate rise in warehouse rentals in 2012, although additions to supply in 2013 may weaken this effect going forward.
Warehousing rental values understandably vary by area. In Ghala, Rusayl and Misfah, they are around OR3-4 ($7.77-10.36) per square metre, in Barka and Mabellah OR2.5-3.5 ($6.48-9.07) and Sohar OR2-3 ($5.18-7.77).
Agility, a Kuwait-based logistics company, ranked Oman 13th in the world on its Emerging Market Logistics Index 2013, citing the sultanate’s low barriers to market entry, as well as rising volumes of cargo. In the long term, the development of infrastructure, including the GCC Railway and Oman’s own port expansion should stimulate the logistics sector, as well as demand for other industrial property as Oman capitalises more fully on its strategic location at the mouth of the Gulf.
Outlook
Oman’s property market underwent what many saw as a necessary correction between 2008 and early 2012, in the shadow of the global financial crisis. The sector’s subsequent recovery has been supported by strong economic growth as momentum has steadily built up. Sustained future growth will remain closely tied to that in the broader economy, particularly the price of oil. Sectors that are part of Oman’s growing diversification, particularly tourism and transportation, will have a direct and indirect impact on property as well. To some extent, the market will also be influenced, as before, by its neighbour Dubai, the barometer for real estate in the region. Investors will be cautious of the possible emergence of a bubble in the UAE, and also of any geopolitical changes that could deal a blow to confidence. While the tide is rising, it will not lift all boats. Poorly planned and less well located buildings, particularly mid-range apartment and office blocks, are unlikely to see much value or rental gain, and indeed may slide as better-quality units become available elsewhere, leading landlords to redevelop.
The revival that has taken place over the past year and a half has had a particularly large impact on ITCs, the brightest stars of Oman’s property firmament. Value and rental growth may continue into 2014, although increasing supply should slow the pace in the medium term. As existing projects expand and enhance their facilities, newcomers also have the opportunity to make an impact, especially by playing to the tourist market.
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