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Al Mazaya Report: The time is right to focus on projects targeting middle-income buyers

 

A decline in building materials and energy costs can be key drivers for the development of low and intermediate cost housing

 

The importance of building material costs stems from their considerable impact on the real estate market and investments related to their production. This in turn, impacts on the cost of real estate units – in terms of both sales and leases.

In Al Mazaya Holding’s Weekly Real Estate Report it is noted that the rise in building material prices to unjustified levels has had an adverse impact on real estate activity in the region and has added further challenges to demand factors – making it difficult to reduce prices of real estate products given the high costs. Any reduction in prices to meet the financial capacity of investors or property buyers will cause the developers to sustain substantial losses or reductions in their profit ratios.

In cases of economic recession, particularly in respect to real estate projects, the decline in prices of energy and building material costs can lead to more affordable real estate products and would increase the pace of external demand, given the attractive power of ready-made real estate products that are already available in the market.

Al Mazaya’s Report notes the presence of positive indicators in the building materials market in the region, despite the upward and downward movement depending on current real estate activity. The key will be for developers to identify the right opportunities and prevailing prices and to use them proportionate to demand.

Al Mazaya’s Report also reveals that the key drivers in this economy are related to the timing as much as the price movement. Real estate markets and developers’ accounts must reflect the supply and demand forces in all economic conditions and they cannot rely on achieving objectives simply based on fluctuating prices. At this level of transparency there may be a need for intense competition among the contracting companies, although this is unnecessary for steel and cement given that the stability and flexibility of their prices grant developers an ability to plan and calculate the cost – throughout the project’s duration.

It is worth mentioning that a recession in business volume may motivate contractors to reduce profit margins to win tenders, a matter that has led to and will lead to reduced building costs. With existing low or intermediate costs of building materials, real estate products of stable and fair prices will help activate demand, irrespective of recession or boom cycles.

UAE

Al Mazaya’s Report points to the difference in costs of building materials in the UAE market – with fluctuations noted from emirate to emirate. Also notable are the differences with regard to the cost of labour, office rentals and land prices, differing levels of quality in building, and other relevant factors related to competition and inflation rates.

It is a fact that building costs in Abu Dhabi are higher than in the other six emirates due to the higher costs of rentals, manpower, land prices and accompanying costs for applying quality, sustainability and safety standards. All of these factors have led to an increase in aggregate building costs, in the UAE capital and the wider emirate. In addition, the UAE real estate market is among those that need stable building material prices to enable the contractors to determine costs. This is because ongoing cost fluctuations motivate the contractors to be patient when entering into new projects or hedge their inclinations towards higher cost estimates, which eventually leads to an increase in overall building costs.

Information issued by the Statistics Centre Abu Dhabi (SCAD) has revealed that the average pricing of building materials saw a rise in Q4 2015, increasing by 16 per cent over the corresponding period, in 2014; however, steel prices marked a decrease by up to 23.5 per cent. The cost of diesel also saw a marked reduction of 20.7 per cent, over the same period. In Dubai, within the same timeframe, prices of building materials dropped, with steel seeing a decline between 23.7 and 19.9 per cent, while cement dropped by a rate of up to 2.4 per cent.

Al Mazaya’s Report adds that the decrease in prices of building materials, along with the decline in oil prices, will activate the UAE real estate market across all categories, and in particular the middle-income group. This will be achieved by immediately constructing housing units at these competitive prices, with forecasts suggesting that the current recession in the prices will not last. At the forefront of this recession is the current cost of energy, which constitutes a large part of the overall production cost.

KSA

In Saudi Arabia, Al Mazaya’s Report notes that in spite of the kingdom’s high production of steel, the domestic demand is also high and increasing due to an undeterred production of real estate and housing projects in the country. Therefore, the Saudi market will remain a target for global steel companies both in the immediate and medium term. Market indicators point out that steel prices are prone to an additional decrease due to continuing negative forecasts in relation to the Chinese and European markets. That said, Al Mazaya’s Report stressed that a recession in prices of steel and building materials, in the Saudi market, is having a positive impact on the cost of real estate and ready-made housing products. It is, therefore, anticipated that prices will go down further – at rates proportional to the reduction in steel prices and other materials (namely oil).

Observers of the Saudi market also believe that there will be a direct impact on the price of housing caused by citizens’ large-scale abstention from purchasing property (60 per cent of the KSA market are tenants not owners) due to the high costs. It is, therefore, expected that such a recession will contribute to a re-offering of real estate products, at prices that are appropriate for the domestic demand.

Qatar

Al Mazaya’s Report notes that the Qatari real estate market has seen a marked increase in the volume of consumption of building materials, in 2016, and has had to resort to importing materials to meet the requirements of hosting the 2022 FIFA World Football Cup. Therefore, indicators of the construction market reveal a rise in building costs with an intense concentration on the execution of infrastructure projects. In this respect, Al Mazaya’s Report suggests that any marked rise in building costs may increase the cost of real estate products and will likely delay the handover of a number of other projects. It is worth mentioning here that the high demand for building materials and their high prices will lay the foundations for a new phase of development for other industries in Qatar and pushes towards an inauguration of new production lines for building material factories. This, in turn, will encourage the private sector to enter into this industry. High building costs, in Qatar, are also often affected by transport costs, which increase during the high demand periods.

 

Conclusion

Al Mazaya’s Report concludes that currently decreasing levels of building materials costs are good and beneficial for refreshing the building and construction sector for the middle-income group, across the GCC. This will become more relevant as the numbers of middle-income groups are increasing. Therefore, there would seem to be no time like the present for developers to commit to projects that will meet this new demand category.

While the expansion of the construction sector and building of houses for middle-income earners will have a direct contribution to the national economy of GCC countries, it is also understood that it will also grant GCC markets further competitiveness in the minds of international real estate investors.