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Boom in region's real-estate sector likely to continue

High population growth rate, excess liquidity driving force behind surge
Local banks compete to provide housing loans to consumers at low interest rates

The real-estate sector in the region is experiencing booming economic conditions. Such growth has been underpinned by various factors that include high population-growth rates of around 2.5 to 3.5 percent annually, excess liquidity looking for investment outlets, economies growing at 5 to 9 percent a year and some of them at double digit growth rates.

Other factors are local banks competing feverishly to provide housing loans to consumers at interest rates much lower than before, and governments making it easier for foreigners to own real estate in their respective countries. Most of these factors are expected to prevail in the months ahead supporting the current uptrend in the region's real-estate sector.

The real-estate markets in the Arab Gulf countries, Jordan, Egypt, Lebanon, Damascus and even the Palestinian territories have been experiencing a surge in prices ranging from 25 percent to more than 100 percent in the past 18 to 24 months. More than three years of high oil prices, low interest rates, some capital repatriation and the return of regional stability have left the region with healthy levels of liquidity. The spending spree on construction and real estate is expected to continue. Not only governments are spending more on public sector projects, but also the private sectors are generating substantial demand on housing and commercial real-estate projects. Reforms including the gradual easing on multi-storey building in Saudi Arabia and the deregulation of the fixed-rent market in Jordan, Lebanon and Egypt will reflect positively on the region's real-estate market. If by the end of the decade, rents in major Arab countries become subject to market forces, many people will feel they are better off owning property rather than renting it.

The most important reform that is likely to impact the region's real-estate market is the decision taken by several Arab countries to open the property market to expatriates. Jordan has recently made it easier for foreigners to own real estate in the country. This encouraged many Iraqis, Syrian and Palestinians to decide to settle in Jordan and buy property there. A law was passed in Bahrain last year allowing foreigners to own property in certain parts of the kingdom. A law in Dubai announced in May 2002 that non-GCC ownership of property would be permitted for selected projects, notably the two Palm Island schemes, had contributed to the unprecedented real-estate boom in the emirate. Changes in the property laws are also in prospects in Qatar, Oman and Kuwait, and these initiatives could have enormous long-term consequences. Should foreign ownership of property be recognized across the region, the prize would potentially be one of the biggest influxes of foreign direct investment the Middle East has ever experienced.

Residential rentals for houses and apartments had also increased, justifying to a large extent the recent rise in real-estate prices. In the commercial segment, land prices have grown significantly in Dubai, Manama, Doha, Muscat, Amman, Beirut, Cairo, Damascus, Riyadh, Jeddah and Dhahran, but rose only moderately in other cities. In most cities of the region there is still a shortage of office and commercial space.

Another reason for the surge in activities in the region's real-estate markets is the rising competition among banks to extend housing loans to their clients. This is happening at a time when interest rates have been on the decline. Just a couple of years ago, banks used to charge more than 12 percent on housing loans plus various service fees. The rates have dropped now to 6-8 percent and this has encouraged increasingly more people to become first time buyers of houses and apartments. Credit facilities extended by banks operating in the region to the construction sector accounted for 15 percent of total bank credit facilities during 2003 and the first half of 2004. The largest portion of the credit facilities was extended for retail consumers to cover their various purchases with the bulk of that going to housing and real estate.

The recent upturn in short-term interest rates and the expectations that rates may rise further in the months ahead are unlikely to reduce mortgage borrowing or leave a major impact on the region's real-estate market. Interest rates are edging higher at a time when the Arab economies are growing and the mortgage market is gaining popularity. Unless interest rates rise steeply, which is highly unlikely in the foreseeable future, there is enough pent-up demand to keep the region's real-estate market growing.

Furthermore, the mortgage markets in the various Arab countries are still in their early stages of development and the addressable markets that banks are trying to reach are quite sizeable. The structure of the population is such that increasingly more couples aged between 20 and 35 will be getting married and moving into their own apartments, maintaining the demand in the local real-estate markets.

Although the region's real-estate market is witnessing a period of strong growth and is currently expanding at a significant rate, there are still several obstacles that are hindering the proper development of the sector. These include a general lack of information and transparency about prices and size of real-estate transactions, the absence of real-estate companies and funds that invest in the sector, and the concentration of land holdings in the hands of a few large investors. The volatility of building material prices is important issue that needs to be resolved as well. Volatile prices of building materials could discourage new projects and can result in a slowdown in the construction segment of the real-estate sector. Some of these drawbacks may be attributed to the absence of a regulatory body that governs the sector as a whole and protects the rights of different players, as it is the case in other parts of the world.

Allowing foreigners easy access to the region's real-estate markets will support the effort of the various Arab countries to attract foreign direct investment that will add value to their economies. We are confident that foreign land ownership will always be contained to acceptable levels. After all, Arab investors have for years owned huge real-estate properties in London, Europe, the U.S. and elsewhere, and no one there seemed overly concerned. On the contrary, such foreign investments are welcomed by the host countries.

While the boom conditions in the region's real-estate sectors were supported by strong economic growth and a general rise in income levels, the higher real-estate prices will in turn contribute to economic growth through the impact of the "wealth effect" on consumers. A rise in real-estate prices will make people feel wealthier, and hence more willing to borrow and spend. This creates a self-supporting business cycle that adds to liquidity and keeps the real-estate sectors of the region flourishing.

To conclude, four predictions can be made with confidence. 1) Housing and real-estate is a good long-term investment that should be part of one's portfolio. 2) Location is the most important factor that should influence an investment decision in real estate. 3) The current boom conditions will sooner or later give way to a downward cycle as is happening today in such major cities as Sydney, Dublin and London. 4) People who make confident predictions about long-term real-estate prices are usually proven wrong.

Henry T. Azzam is the chief executive officer at Jordinvest in Amman

Beirut,11 08 2004
Henri T. Azzam
The Daily Star
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