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Qatar: The problem with 'Build it and they will come'

When oil and gas prices began to dip in June 2014, very few in the Persian Gulf were expecting the collapse that lay ahead.

From Saudi Arabia, the world's largest oil exporter, to the United Arab Emirates, Kuwait and Qatar, the world's largest liquefied natural gas exporter, all had ambitious spending plans lined up, counting on energy prices to remain close to the record levels reached in the six or seven years previous.

But prices dropped sharply, plunging more than 50% in seven months. They bottomed out in January 2016 at around 80% from their 2014 peaks and have only slightly recovered since. The energy-rich Gulf nations have been faced with massive holes in their balance sheets.

For Qatar, a country with a population of 2.5 million that is barely the size of Connecticut or Northern Ireland, the check on momentum is perhaps most stark. While the country is in little danger of going bust — it has enough assets in reserve to recapitalize its banks 10x over — it is the most recent of the Gulf nations to embark on a mammoth development program, which has turned the tiny peninsula state on Saudi Arabia's east coast into one giant construction site.

While still pressing on with the major projects it promised to deliver in time for its hosting of the 2022 FIFA World Cup soccer tournament, Qatar is having to find savings elsewhere. This has seen thousands of jobs linked to the government axed in the last couple of years, with foreign workers targeted ahead of the Qatari nationals who make up only around 12% of the population. The government also cut energy and water subsidies in 2015, while indirect taxes are scheduled for introduction by the end of 2018.

For Qatar's real estate market, which has developed at a blistering rate in the last decade to accommodate the millions of foreign workers needed to deliver the country's development plans, the unexpected squeeze is leaving a lot of empty space.

"There is oversupply in every asset class and that would include all the way down to workers' accommodation," Nick Witty, Qatar country manager for international property specialist Chestertons, said in a telephone interview with S&P Global Market Intelligence from his office in the Qatari capital Doha.

"Do I think there is sufficient demand to support everything that is being built in all the asset classes? I think the answer is no — just given the demographics of the population and the fact it's not growing at any significant rate."

Office space

Qatar's office market, almost entirely confined to Doha, has been hit particularly hard by lower energy prices and associated government cutbacks. The city's West Bay area is home to dozens of gleaming skyscrapers that have risen in the last decade to form Doha's new business district.

Between 2008 and 2014, approximately 70% of prime office leases in West Bay were signed by either oil and gas companies or government related bodies, according to a DTZ market report for the fourth quarter of 2016. As a result of the downturn, the vacancy rate in West Bay stood at 17% during the period, the report said, with rents falling by between 10% and 20% in 2016.

While there was renewed leasing activity in West Bay in the fourth quarter as Qatar Petroleum and French oil company Total took space, the future for West Bay looks bleak. Up to 2 million square meters of purpose-built office space is expected to be added to the Qatari market in the coming decade, a 50% increase on current space, the DTZ report said.

Much of this is being built in Lusail, an entirely new city just north of Doha that is under development at a reported cost of $45 billion. If the Qatari government's past behavior is anything to go by, West Bay faces losing out to its shiny new rival.

"The biggest challenge for the office sector in Qatar is that for years — forever, pretty much — it has been underpinned by the government themselves. So the government has always historically taken new buildings as they come on stream," Matthew Green, director and head of research and consulting at CBRE Middle East, said in a telephone interview from his office in Dubai.

Rooms to rent

Qatar's residential market is facing similarly turbulent times after the government's spending cuts sent thousands of foreign workers back home. Rental levels decreased in many residential neighborhoods in the first nine months of 2016 due to reduced demand and increased supply, but stabilized in the last quarter, DTZ's report said.

The "exodus of white-collar workers following the streamlining of government bodies" has seen rents in the premium end of the market such as the West Bay and The Pearl Qatar developments drop between 5% and 10% between the fourth quarter of 2015 and 2016, DTZ found.

Landlords who had been holding out since the downturn, refusing to reduce rents on apartments at prime locations popular with expats, are now scrambling for tenants, said Witty. "They're now reducing rents. They're offering 14 months for the price of 12. There are all sorts of other incentives out there as well just really to get people to sign up," he said.

Residential landlords can expect little respite in the near future either, according to DTZ. "It is unlikely that rents will increase again in the short term due to the pipeline of new supply that is likely to come to the market between now and 2018," it said.

SNL Image

Qatar's malls face a tough year as Doha Festival City adds almost 30% more retail space to the market.
Source: Associated Press

Shoppers wanted

In the retail sector, this year promises to be decisive for many properties. Retail trade had grown strongly in the years prior to the fall in energy prices as the country's rapidly growing population, combined with what the World Bank estimated in 2015 as the world's highest disposable income per capita, drove consumer spending. However, retail spending was estimated in 2016 to be down by between 10% and 15% from the previous year as the economic slowdown hit, DTZ's report said.

On top of that, the supply of organized retail mall space increased by 30% in December as the Mall of Qatar opened, the country's 15th such outlet. Another eight new retail malls are under construction throughout Doha and its outskirts. But it is the opening of Doha Festival City on April 5, adding almost 30% to Qatar's total mall space, that is the biggest threat to Qatar's current stock, said Green.

"It's going to take away demand from some of these other centers," he said. "It's going to put pressure potentially on rents in any center which is secondary or underperforming. It will probably force some centers to rethink what their brand offer or offering is."

Witty warns that if the current pipeline of retail projects slated to be delivered by 2021 materializes, Qatar's retail sector will "self-cannibalize." He said it would mean the per-capita retail in Qatar would equal that of Dubai — a city that attracts millions of tourists from around the world each year and is home to a larger population with a more even distribution of wealth. "That's just ridiculous. It just won't work," Witty said.

Qatar's Gulf neighbor can perhaps be seen as both the inspiration and biggest problem for the country's real estate sector. Dubai has established itself as the Middle East's business, finance, aviation and tourist hub, attracting untold amounts of international and regional capital as it opened its economy to foreign investment and became a magnet for the Gulf's petrodollars.

Doha and other cities in the region are trying to emulate aspects of its model, but appear to have too much ground to make up. "Dubai is capturing a lot of this market for itself," Jason Tuvey, Middle East economist at Capital Economics, said in a telephone interview from his office in London.

"How many business and tourism hubs can you have in the Middle East?"

Room at the inn

This is the question being posed to Qatar's hospitality sector, in particular. Having relied primarily on business travelers for its income as the country's economy grew rapidly over the last 15 years, the downturn and the extent of the supply now available means it must begin to attract millions more tourists if it is to be sustained.

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Al-Wakra Stadium is among the eight stadiums being built or
redeveloped for Qatar's hosting of the 2022 FIFA World Cup.
Source: Associated Press

Occupancy rates at Qatar hotels in 2016 averaged 63%, according to a survey by EY, down from 65% the year before. The supply of hotel rooms is scheduled to more than double by 2020 if all projects under construction are delivered, DTZ's report said, as the country races to deliver the 60,000 hotel rooms it promised FIFA in its winning bid for the World Cup.

Outside of the soccer tournament, Qatar's hospitality sector is going to struggle to attract the numbers of tourists it needs to fill all those empty rooms, said Witty. "There's nothing here. There's not even religious tourism here. It's not on the road to anywhere. There's no reason for people to actually stay here," he said.

The government's Qatar National Tourism Sector Strategy Plan 2030 hopes to address this by getting the millions of tourists willing to fly Qatar Airways, but reluctant to leave Doha's spectacular Hamad International Airport as they transit to another flight, to stay in the country and enjoy themselves for a few days. It plans to invest $45 billion in tourism projects over the next 13 years, with a target to increase overall annual arrivals to 7 million by 2030 from around 3 million currently.

"They need to do a lot if they want to change their tourism demographic towards something which is more leisure-orientated," said Green.

With the eyes of the world on Qatar in 2022 when it welcomes many of the world's greatest soccer players to its shores, the country will be hoping that it can make a favorable enough impression that millions will want to pay a visit, even if just for a few days. In the meantime, it appears that the country's real estate sector is going to have a lot empty space gathering dust.

"The IMF has warned for quite a while that this sort of development could lead to overheating of the economy in the short term," said Tuvey. "But what we've warned is that in the longer run there are concerns about overcapacity.

"Maybe it's a case that low oil prices and weaker growth have caused that to come around a bit sooner than previously expected."