Colliers International releases GCC Overview Report at Cityscape Abu Dhabi

Against this backdrop, Colliers has identified a fundamental change to the regional market dynamic as speculators, end-users and occupiers have fallen away and professional investors become the dominant drivers of transactional activity.

While many pundits have written off 2009 completely, market participants cannot share the luxury of inactivity, and will look to make best use of the market insight that professional investors' requirements now need to be satisfied and addressed in order to stimulate activity in the short-term.

As the longest established global real estate consultancy in the region, Colliers has drawn upon its unrivalled access to primary data from financial institutions and its network of experienced representatives to compile the report, covering factual statistics on the residential, retail, office and hospitality sectors for key markets in the Gulf region over the last six months.

The report's findings indicate that the extent of the impact of the global crisis is primarily dependent on each market's exposure to global economic drivers and the level of speculation that occurred prior to the price peak last year.

Explaining the contraction in Gulf real estate markets Ian Albert, Regional Director, Colliers International said, "The impact of the global crisis continues to be a lack of liquidity and stricter lending criteria when compared to last year. Most importantly, sentiment has deteriorated further as corporate downsizing has become more pronounced and greater job insecurity has forced end-users and occupiers away from the market."

"In the last six months, a relatively short space of time, we have witnessed the switch from speculators to end-users and occupiers, and now to professional investors as the main type of purchaser in these markets," he added.

Albert continued, "The consequence is the increasing importance of investor yield in the market place, and as long as a significant price/yield gap exists, we foresee difficult times ahead in terms of price stability and transactional activity."

Colliers' analysis addresses a fundamental change in the nature of Gulf markets, namely the replacement of speculators and end-users and occupiers by professional investors as the dominant purchasers of real estate.

Investors are assessing potential purchases on the all important basis of yield, the calculation of worth to the investor of a property based upon its cash-on-cash return from rent and capital value appreciation.

As capital values and rental incomes fall, a disconnect develops between what sellers are willing to accept and what buyers are willing to offer: the difference between the expectations of buyers and sellers is commonly referred to as the price/yield gap.

According to Colliers this gap is still some way from parity due to the reluctance of sellers to rationalise portfolios and assets in the light of the global changes.

Colliers' analysis concludes that while the price/yield gap remains a dominant issue in Gulf markets the probability of the establishment of price stability for real estate assets, and for the resultant prospects of recovery, remains a long term probability.

Acknowledging the difficulties that the real estate industry currently faces Albert said, "At this moment in time our clients rely on expert and realistic guidance based on factual data, rather than wishful thinking, in order to best deal with the current conditions. The forthcoming summer may extend the repression of oil prices which, together with the on-going impact of corporate downsizing and rationalisation will continue to affect investor sentiment."

Albert added, "Whilst we believe 2010 could see a levelling period and the hopeful matching of sellers and buyers expectations, in the absence of any strong underlying global indicators, this is at best optimistic."

In Dubai, Colliers identifies a number of trends that provide benchmarks that would enable the return of investor confidence. Primarily, a marked improvement in the global economy, and with it a recovery in oil prices is of great importance, as well as regulatory reforms aimed at labour market flexibility.

The ability of primary tier developers to focus on existing inventory, a prioritisation of 'affordable housing' in the future, and a shift in investor activity towards completed, income-generating assets targeting a wider income demographic will also act as indicators of a possible return of investor confidence.

The extent of the 'ripple effect' on other MENA real estate markets is governed largely by the respective economies' exposure to the global economic system, together with the proportion of end users versus pure investors in driving historic capital value trends.

Capital values in the expatriate dominated markets of Abu Dhabi and Qatar have been negatively impacted due to significant speculative investment, while Saudi Arabia appears more stable given the strong demand from its domestically addressable market.

Key findings:

Dubai
• 39% decrease in average office sales prices between Q3 08 and Q1 09
• 40%-42% decrease in average residential sales prices since Q4 08
• 20%-40% decrease in residential rental rates dependent upon the circumstances of the landlord
• Average yield of 8.9% on residential property and 8.8% on office property
• Demand projections for Dubai retail property can only absorb a further 140,000 m² of GLA before being oversupplied.

Abu Dhabi
• 20% average decline in capital value of residential property launched in Q2 08
• 24% decrease in office rentals between Q3 2008 and Q1 09
• Average yield of 9.9% on residential property.

Doha
• Rentals for newly constructed office space have softened by 10%-15% over the last 4 months
• Sales of residential properties have collapsed due to the lack of finance and a wait and see attitude on the part of buyers
• The total shopping mall supply is still on track to increase by 100% between Q1 09 and Q4 10
• $17bn has been earmarked to boost the infrastructure for tourism over the next 5 years.

Riyadh
• Average yield on office property is 11% and average yield on residential property is 10%
• Average residential sales prices have dropped 23% due to negative market sentiment and the positive impact of falling construction costs
• Newer retail developments show a shift towards the presentation of an overall entertainment destination

Makkah & Madinah
• Growth of religious tourism buoys the Kingdom's hospitality sector accounting for 51% of the country's total tourist arrivals in 2008.

Jeddah
• Average yield on office and residential property is 10.5%.

The Colliers GCC Overview report is drawn from the full in-depth GCC Report, a key source of data for the property industry and financial analysts.