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Al Mazaya Report: Plans for long-term secure investment havens find a sought after treasure in land

 

The importance of the real estate sector is such that it is undoubtedly affecting current price indicators for other goods and services. This is primarily caused by changes in the prices of different real estate products, in terms of selling, purchasing and leasing. In turn, the surrounding indicators related to the oil sector, financial markets and a country’s budget will affect the pricing of real estate products.

In this context, Al Mazaya Holding Company’s Weekly Real Estate Report would like to highlight that, in the coming period, the stability of real estate values – and their tendency to rise – will be limited to land prices. This is an effect that will be felt across the region and the wider world in 2016.

Demand for all types of land and locations across the GCC region will continue; however, this is in spite of the challenges encountered by the region’s economies and indicators showing a decline in the values of investment liquidity. While land is the key component of any real estate market, the continued demand for real estate products will help to keep prices high, with even higher prices to be expected in the short term. It should be emphasised that land still keeps its status as a secure haven in the face of financial and economic challenges and crises.

UAE

Al Mazaya Report points out that, to date, the land sector in the UAE has kept its appeal. The indicators of supply and demand are due to investment in real estate ownership, in terms of revenue and fluctuation factors, mostly influencing this. This comes in light of projections that land prices will increase more rapidly than the rise in the prices of residential units in the coming years.

It should be noted here that prices have not yet reached their level in 2008 – regardless of the nature and reasons for those prices – as well as their fairness and their dependence on the forces of supply and demand. This will keep the door open for further price rises. It is also noteworthy that in view of the increased value of land, investment in it will be limited to a specific number of investors.

Real estate developers will obviously enter as one of key competitors for land investment. Land investment will require high liquidity values that are not available for many of those interested in real estate investment. The data issued by the Dubai Land Department indicates that the demand for land is higher than that for residential villas and apartments. This bears positive indicators of continued activity and more projects in the tourism, retail, housing and commercial sectors.

 

Qatar

The activity witnessed by the Qatari real estate market in recent years comes as a result of the continued pace of growth of this sector, supported by infrastructure projects expected to amount to around USD200 billion in the coming five years. Qatar is also expected to achieve a significant leap in the volume of real estate sales, including open land and real estate of different types and categories.

It is worth mentioning that land prices in Qatar have witnessed record increases in the past few years as a direct result of rising demand and the expectations of still higher demand. There is also the liquidity factor and the negative role of brokers in this respect, which caused rises to reach 30 per cent within a short period. This will multiply construction costs and consequently the final price of real estate products, which will ultimately reflect on the final sale prices and leasing rates. This will cause a sharp price bubble if the situation is allowed to continue – in addition to the landowners’ already high control of the market.

The indicator of open land prices in Qatar has risen at more than 270 per cent in the period between 2009 and 2014, so the land value has become approximately 50 per cent of the total value of the property.

KSA

In the same context, Al Mazaya Report states that the decision on tax impositions relating to open lands in the Saudi market has had an impact on the values and volume of sales carried out last year, as well as on current prices. This decision is expected to motivate the owners of open land to develop or sell it to real estate developers. In both cases, this will reduce pressure on the demand for real estate and decrease the prevailing prices.

Pricing of real estate properties in Saudi Arabia is one of the most complex challenges facing the government there, in addition to the suffering of citizens who are attempting to own a house or buy residential real estate. It is hoped that the land tax decision will drain off sources of liquidity that, in turn, finance speculation and money circulation.

In Real Estate circles this decision is expected to prompt a decline of land prices and expedite the end of the real estate and housing crisis. It should be emphasised here that the direct impact of the decision on prevailing prices is still insignificant, especially with the market undergoing a significant depression and with prices still high compared with individuals’ income and credit capacity.

Al Mazaya Report further emphasises that the returns gained by landowners as a result of high prices exceed the income they obtain from leasing residential or investment units. They also exceed the return of the sale of real estate projects to the end user or to investors. This occurs if fluctuation ranges are added to prices from time to time, in addition to the costs of building, funding, maintenance and associated costs.

What is noteworthy here is the increased tendency towards investment in land whenever financial and economic pressures increase. That is because real estate selling and leasing prices are declining significantly, while land prices remain steady – and often witnessing remarkable increases.

The competition of developers and landowners for the purchase of land in the UAE real estate market, for example, is the result of the rise in expected returns in the coming years, ranging between 30 percent and 50 percent, while the returns for leasing varies between 10 per cent and 20 per cent. This is especially true of the hotel sector, which is considered a better investment than residential real estate.

In contrast, the high increases recorded by land prices in Qatar have enabled landowners to obtain returns in excess of 100 per cent within a short period. All challenges and financial crises have not affected the classification of land as a secure haven for investment, followed by investment in different kinds of real estate.

Al Mazaya Report: Recommendations

Al Mazaya Report asserts that the continued rise of land prices has repercussions that require attention and timely resolutions by the concerned agencies. The most important of these issues is the high price of land, as well as the increased volume and value of government and private projects in the region, which are also increasing the demand for land. On the other hand, the search for secure havens for the employment of investment liquidity increases the price of land since this sector provides constant long-term returns, despite the instability suffered by countries’ economies at present.

The factor of high returns in the real estate sector occupying a large share of economic activity provides investors with exceptional investment opportunities, protecting their liquidity and investing it in the most profitable sectors.

Al Mazaya Report states that the high price of land has significant economic effects that will make real estate development unfeasible for both medium and prime properties, which usually give high profit margins. They may raise the cost of construction of new projects and affect their returns, weakening the competitiveness of the new projects and leading to negative impact on the prevailing inflation rates. Land cost is the main reason for the inflation of black market prices, in both sale and lease of real estate units.

In this context, Al Mazaya Report states that in order to control the rising land prices, indicators point most probably to the imposition – by a number of regional states – of fixed taxes on landowners who do not invest in their lands within a certain period from the date of purchase. This will increase the supply of lands and will consequently reduce the average prices.

In conclusion, Al Mazaya Report argues that the rise in land prices is a natural indicator of the increase in demand and the high momentum of real estate projects. The continued and unjustified rise resulting from monopoly and speculation is dangerous for the growth of the real estate sector and its classification as the best secure haven – and often used by the regional economies – to attract migrating capitals.