Rental supply to increase over 12 months

In the wake of redundancies, the slew of rental options has resulted in landlords offering incentives to entice tenants to their buildings

Richard Rayner is senior surveyor, Valuation Advisory, DTZ Qatar.
Richard Rayner is senior surveyor, Valuation Advisory, DTZ Qatar.

In the wake of redundancies, the slew of rental options has resulted in landlords offering incentives to entice tenants to their buildings.

Despite successful diversification efforts, the economy in Qatar continues to be driven to a large degree by the hydrocarbon sector. The recent fall in oil prices from $114 in June 2014 $48 in June 2016 has started to impact on some areas of the real estate market.

The commercial office market in Qatar is dominated by occupiers from the government related and oil and gas sectors. In total DTZ Qatar estimates that in the region of 65% of all office space in Doha is occupied by these sectors.

As expected, the recent fall in oil prices has resulted in many Qatari institutions in these sectors revising their budgets. The result has been a significant drop in leasing activity from previous years, with no commercial leases in excess of 5,000m² agreed over the last six months. The majority of lease transactions in Doha recently have related to smaller office suites of less than 250m². Despite a reduced level of new office lettings, DTZ Qatar estimates that there is currently less than 150,000m² of vacant offices available to rent in West Bay, which represents less than 9% of total supply. This has resulted in stable rental levels being maintained in the this area.

A further 300,000m² of office accommodation is likely to come to the market in West Bay and Lusail within the next 12 months, which will increase supply levels and potentially increase vacancy rates, and is likely to put downward pressure on rental levels. In order to replace the demand that was previously generated by the government and oil and gas sectors a significant increase in private sector activity will be required.

Demand for new residential property in Qatar has been underpinned by strong population growth. According to Qatar Statistics Authority, before the traditional decrease during the summer months, the population reached 2.53 million in March 2016, equating to an annual increase of 7.7%.

Recent redundancies in various oil and gas and professional services firms has created an increase in vacancy levels in the prime residential market over the last six months. The increase in vacancy levels has resulted in rents for prime apartments and villas stabilising, providing respite to tenants who had experienced strong rental growth in recent years.

While there has been little evidence of reduced rents on the back of the increase in vacancy levels, landlords however have been increasingly willing to grant incentives such as rent-free periods for properties that have been vacant for an extended period, or for properties in which they wish to increase occupancy levels quickly.

DTZ Qatar is of the opinion that the recent increase in vacancies caused by the redundancies is likely to be temporary, as further demand will be generated by the wider economic and population growth in the coming months.

The land market in Qatar has experienced significant changes in recent months as macroeconomic factors influence transactional volumes and pricing, with the number of land transactions occurring in any period having a strong relationship to the price of oil and the Qatar Exchange Index. Given the downturn in these markets recently, there has been an impact on the number of land plots being exchanged.

From analysis of data produced by the Ministry of Justice, the total number of land transactions recorded has gradually decreased from its peak of 1,750 in Q2 2014 to 230 in Q1 2016. It should be noted; however that pricing has not fallen significantly, with values remaining only slightly below what they were at their peak.

These trends are most likely owing to financial institutions reducing their willingness to lend to land and, vendors not willing to accept lower prices, rather holding than trading.

In summary, the fall in oil prices has led to a more balanced real estate market following several years of rapid growth and rental inflation. Market confidence; however, remains strong for the general economy owing to Qatar’s abundant oil and gas reserves and low production costs.

For real estate, the residential sector continues to have a positive outlook as the population increases; however, the office and hospitality sectors may experience downward pressure on rental rates, occupancy and ADRs if increases in demand do not match supply increases.

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