Savills: Lower oil prices, COVID-19 to challenge Oman real estate sector
“Muscat’s residential rental sector was already in slowdown; the pandemic has further deteriorated the economic landscape”
Due to the impact of the COVID-19 pandemic and lower oil prices, the Sultanate of Oman is expected to witness challenging economic conditions, an acceleration in the exodus of the expatriate population, and a strained real estate sector, according to the latest market report released by real estate advisor Savills.
The report highlights the historic correlation between Oman’s GDP trends and movement in oil prices, and an assessment of the impact of macroeconomic conditions on the real estate sector.
Following the impacts of the global financial crisis in 2008-09, the Oman economy recovered and grew steadily between 2010 and H1 2014. However, the fall in oil prices in mid-2014 became evident in 2015 and had a significant negative impact on Oman’s GDP which dropped by almost 20% from 2014 to 2016.
This was followed by a strong economic recovery in 2017 and 2018 by 7.3% and 12.1% respectively, driven by higher oil prices, before the economy dipped again in 2019. As a result of COVID-19 and lower oil prices, Savills expects the Sultanate to experience increasingly challenging economic conditions during the coming months.
In terms of population, Oman’s total population grew from 3.6 million in 2012 to 4.6 million in 2016 and has levelled off since then. This growth was driven primarily by the expatriate population which grew from 1.5 million in 2012 to 2.1 million in 2016.
Current evidence suggest that a net exodus of highly qualified expatriates started in 2016 due to economic conditions and increasing restrictions on expatriate employment. The number of highly qualified expatriates dropped by 17.6% between 2016 and Q1 2020, while the total number of expatriate employees dropped by 6.8% during the same period.
Savills expects that this reduction in the expatriate population will be accelerated by recent events.
Commenting on the impact of the expatriate exodus, the head of Savills Oman, Ihsan Kharouf, said: “Expatriates play a significant role in influencing demand for real estate. Market conditions in both the residential and office space rental sectors in Muscat were already in slowdown or recession prior to the COVID-19 pandemic as a result of slow economic growth and negligible net population growth.
“The ongoing pandemic has further deteriorated the economic landscape. While the longer-term impacts of the pandemic on the sector are currently unclear, it is evident that there will be increasing challenges over the coming months.”
The residential rental market in Muscat has also seen a notable increase in supply over recent years, although the supply of mid to higher grade apartments with facilities and compound townhouses/villas remains relatively limited.
The residential rental market in Muscat is driven by expatriates and the drop-in expatriate numbers since 2017 has resulted in a shrinking market size for residential rental properties.
As a result, realistically achievable rental values for better quality apartments were generally around 30% to 40% lower at the end of 2019 in comparison to 2014. In comparison, rental values for villas and townhouses in the prime locations of Shatti Al Qurum, Muscat Hills, and Al Mouj saw greater resilience.
While better quality residential units are likely to show a more stable performance, the expected drop in the number of expatriates in Muscat over the coming months will place the residential market under increased downward pressure in terms of both reduced demand and achievable rental values.
However, Savills foresees potential interest from existing tenants looking to upgrade from their existing rental property at more affordable values.