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GCC real estate: Lower prices, more home loans, potential mergers, government intervention

The GCC real estate market is at a point where a few things need to happen to jumpstart the sector and boost the region’s attractiveness to local and foreign investors, as well as to home renters and buyers. Find out here

he combined transacted value in Saudi and Dubai markets during March and April 2020 fell by 47% yoy The region's real estate industry led M&A activity by volume with 7 deals and ranked second by value securing $547 million Governments could establish a salvage fund to purchase some upcoming housing units that would remain unoccupied

The GCC real estate market is at a point where a few things need to happen to jumpstart the sector and boost the region’s attractiveness to local and foreign investors, as well as to home renters and buyers.  

Here’s where the market stands today.

GCC real estate market update

There are close to 30 real estate megaprojects in the GCC as of early 2020, representing as much as $1 trillion in investment. When operational over the next 10 years, these construction projects will create significantly improved tourist attractions, entertainment venues, financial and health centers, and residential areas.  

The GCC real estate sector employs around 200,000 people while the construction industry provides more than 5 million jobs.  

Real estate sale transactions in the GCC rebounded in 2019, as total value transacted improved by 14.8% year on year (yoy) to $95 billion (bn), from $82.8 bn in 2018. 

Saudi continued to contribute over 50% of the transacted value, while UAE added 20.4%. However, the average value per transaction in the GCC fell by 4.1% yoy to around $155,680 in 2019 from around $162,330 in 2018 though the number of transactions for 2019 jumped by almost 20% yoy to 610,747. 

Higher transactions in 2019 were signs of a base bottoming out and a leveling of real estate prices.

Read: Allsopp & Alsopp Q2 Report 2020: Outstanding bounceback of the UAE property market

Early GCC real estate figures in 2020  

COVID-19, regional geopolitical tension, and volatile global crude oil markets affected various segments of the end-user real estate demand and further exacerbated the demand outlook for the sector

The combined transacted value in Saudi and Dubai markets during March and April 2020 fell by 47% yoy, while the number of transactions dropped by 46% over the same period.

Average transacted values in Saudi and Dubai combined remained largely stable at around $290,000 for the same aforementioned periods. Additionally, in Dubai, off-plan transactions in April this year jumped from an average of 30% to over 52.5%. Buying off-plan is a much cheaper proposition and an indication of the price sensitivity buyers have for real estate. 

Estimates of around 135,350 residential units are expected to be added to the GCC residential supply in 2020-21.

M&A activity

M&A activity in the Middle East still showcased some stability in the first quarter of 2020, increasing in value by over $5 bn and in volume by 6 additional deals in comparison to Q4 2019, according to the may report by global law firm Baker McKenzie.    

Total Middle East M&A deal activity jumped to $9.3 bn out of 95 deals in Q1 2020, up from nearly $4 bn out of 89 deals in Q4 2019. 

Industries that secured the most value for its deals were Industrials with $1 bn followed by High Technology with $190 mn.

Outbound M&A activity from the Middle East into other regions increased by volume and value, from 30 deals valued at $3.47 bn in Q4 2019 to 36 deals valued at $3.6 bn in Q1 2020.Eng. Marwa A. Murad, Managing Director of MDMS

The real estate industry led by volume with 7 deals and ranked second by value securing $547 mn.

In its August, 2020 report by Baker McKenzie, global M&A activity saw a decline in activity during the first half of 2020 (H1 2020) as total deal values decreased by 41% from H1 2019. The trend was reflected in the Middle East with total M&A deal values and volume decreasing by 58% and 26% respectively from H1 2019.

Despite this significant drop in Middle East M&A activity, there was a slight increase in total transaction values during the last two months of H1 2020 (May and June), from USD 2.649 billion in H1 2019 to USD 33.501. Deal-making overall in the Middle East was driven by high-value deals in H1 2020, such as ADNOC Gas Pipeline Assets’ USD 10 billion deal with Investor Group from the United States of America. 

As for volume, Middle East M&A witnessed a decline in volume during the first half of 2020 with only 196 deals. The decline can be attributed to the volatility across markets around the world due to the global COVID-19 pandemic. 

Prices down, mergers up

Maximiliano Development Management Services (MDMS) recently said that developers are eyeing a reduction in unit prices by as much as 25% and company mergers to minimize business risks and significantly increase the ease of doing business. 

Eng. Marwa A. Murad, Managing Director of MDMS said that the inability of buyers to pay their installments means strategies must be adopted to reduce unit prices by 25% in the event of cash sales and small developers should consider merging with another developer to protect their business.” 

Sovereign wealth funds (SWFs) will feel inclined to make local purchases. Historically only 33% of SWFs had an allocation of 10% or more towards GCC real estate, however, that is expected to change with about 70% of the SWFs doing so. The reasons vary from looking to achieve steady cash flows through rental income, the prospect of capital appreciation, and the current downturn in the real estate sector which makes it an opportune time to invest.

Read: Abu Dhabi real estate values see modest declines over Q2, with sales activity to increase over H2 2020: Report

Other steps to jumpstart GCC real estate

Governments can take measures to support existing real estate players, and then attract investment, and facilitate tourism demand to stimulate sector recovery, according to Strategy&. 

The current market conditions increased the exposure to non-performing loans of financial institutions serving the real estate sector. 

Governments could help avert a market collapse in the residential segment by establishing a salvage fund to purchase some upcoming housing units which would otherwise have remained empty on completion. This would soak up excess supply from housing, generate revenue for developers, and stabilize real estate valuations and thereby protect homeowners and banks.

Purchasing mortgages from banks could be another potentially useful initiative for governments boosting the availability of funding for new real estate investments.  

Governments should also encourage mergers between government-owned developers to increase efficiency, strengthen balance sheets, and streamline the supply of assets to the market. An early example has been the merger of the developer Meraas with Dubai Holding.

Governments can reduce taxes and other charges. In the UAE, commercial and industrial real estate registration fees have been suspended for the rest of 2020, while a temporary decrease in water and electricity bills for all residential, commercial, and industrial customers was also introduced.  

Other supporting measures in the UAE is banks’ exposure to real estate lending which has been increased from 20% to 30% of their total loan portfolio, and will make it easier for people to buy property while increasing sales for developers.