Details

Importance of a diversification strategy to better serve future of the regional real estate market is mounting

Risk of luxury projects exceeding their investment attraction

It has become noticeable, in 2016, that there is a growing trend towards offering more and more housing units in the luxury category for real estate projects – at both the regional and international levels. This comes at a time when we are also noting a rise in both the values and volumes of transactions executed, by investors from the GCC region and some overseas markets known for their interest in luxury properties.

Irrespective of the objectives underlying these purchase decisions, their impact should be assessed and understood from a couple of perspectives. The first being that such a trend will motivate real estate developers to move towards luxury real estate projects and pay less attention to calls for other, more affordable, real estate developments and products. Secondly, it means that foreign investment will bottleneck into a type of investment that is limited to a category within the wealthy community; a matter which leads Al Mazaya to believe that the real estate market is trending towards luxury real estate projects and away from initiatives and plans carried out by government looking to find long-term solutions to housing challenges.

Al Mazaya Holding’s Weekly Real Estate Report points out that this trend involves many risks; not only for focusing on luxury real estate products, but also for contradicting the demand indicators and fiscal and economic cycles we are currently observing.

Al Mazaya’s Report further notes that luxury real estate projects dominate almost all offered projects in real estate exhibitions and events that are organised at both regional and international levels. This is also true for the nature of projects offered by foreign companies in exhibitions and events hosted by the region’s countries.

 Abu Dhabi

This trend was noticeable at Cityscape Abu Dhabi 2016, which concluded a few days ago, where we saw many new projects launched – amounting to hundreds of billions of US Dollars. Particular focus was on luxury housing projects in the islands surrounding the Emirate of Abu Dhabi, with developers targeting UAE nationals, residents and foreign investors. In addition to this, freehold projects were also launched, again focusing on luxury products. Therefore, villas and luxury tower projects on Saadiyat, Al Reem, and Marina islands appealed to exhibition visitors and were reported to have generated sales at a rate ranging between 40 and 90 per cent, during the period of the exhibition. The greatest losers within the exhibition were projects and real estate products in the intermediate housing category, which seem to have almost disappeared.

In this respect, Al Mazaya’s Report points out that the real estate market in Abu Dhabi has seen a marked rise in the number of luxury real estate products being offered. This has come as a direct result of the handover of ready-made projects, in addition to the existence of trends and resolutions by the companies operating in the emirate to reduce housing allowances proportionate to the prices of luxury category housing units. With these new developments, it has become clear that the number of luxury units being offered is increasing, while a rise in the demand for housing units of affordable prices is low or simply being ignored.

It is Al Mazaya’s opinion that the Abu Dhabi real estate market is in desperate need of offering real estate products at affordable prices, while appealing to all community developers in the emirate for more diverse housing options. This will, in turn, also affect future forecasts for an increased or decreased demand for freehold projects.

Egypt

In this context, Al Mazaya’s Report points out that the events of Cityscape Egypt have also shown a need for diversification. In Egypt, the need for constructing hundreds of thousands of intermediate-level housing units has been placed on private sector companies to undertake an advanced role for carrying out such ambitions. This is largely because government budgets will not be able to complete such projects alone. Therefore, there must be an inevitable collaboration between the private sector and future government projects. If this can be achieved then the demand for housing projects will see an increase and can be expected to continue at a similarly healthy pace, in the future.

Al Mazaya’s Report adds that the gap between supply and demand in the Egyptian market is widening day-by-day due to a booming increase in population. Currently, the deficit is around 600,000 housing units per annum, a matter that reflects the volume of challenges and investment opportunities in front of private development companies. In spite of the momentum, driven by Egyptian and Arab investment, a large number of real estate projects constructed by foreign companies can also serve a luxury category and can benefit a particular segment, due to their higher prices.

Qatar

Qatar’s real estate market leads regional markets in the glut of units being offered in the luxury category, which we have witnessed and will continue to witness with the types of real estate projects being launched over the coming years. The current indicators still indicate an increase in lease revenues, which, according to current information, was an average of 15 per cent during the past year. It is noted that indicators of Qatar’s market also show a continued demand for housing units of all categories, including luxury units. A qualitative defect in real estate investment by the government, with continued focus on the luxury projects, buildings, resorts, palaces and villas, is clearly at the expense of intermediate real estate products, which are not proportionate to the largest segment of demand in this market.

Al Mazaya’s Report emphasises the need to avoid a shortage in intermediate housing products, which will mainly lead to recording high increases in lease prices, high increase in land prices, and thus difficulties in constructing intermediate housing projects. The problem lies with the current preference for investment in luxury projects, with tourism projects and resorts getting priority at this time.

Conclusion

Al Mazaya’s Report also touches on the nature and structure of foreign investments carried out by Gulf and Arabian investors abroad, in particular those investments that lean towards London real estate, which reached upward of GBP 4 billion last year. Noticeable focus was on London’s luxury real estate units and, as a result, luxury real estate prices in London continue to go up without being affected by the tax levied on profits. This is because the market for luxury real estate in London is robust and its wealthy clients come from all over the world.

It is worth mentioning that any global crisis is beneficial to luxury real estate, as it offers a safe investment shelter. That said; Al Mazaya’s Report emphasises the necessity of diversifying real estate projects in harmony with the segments of demand – both in the present and the future – whether local or foreign, without focusing on a single product.