Review the new trends in the real estate industry in the Middle East: The impacts on investments and performance

 
Herald Journal Economics and Finance Vol. 1 (1), pp. 001 - 014 May, 2013
Available online http://www.heraldjournals.org/hjef/archive.htm
Copyright (c) 2013 Herald International Research Journals

Full Length Research Paper

 Review the new trends in the real estate industry in the
     Middle East: The impacts on investments and
                     performance
                                                  Dr. Anas A. Al-Bakri
                        Assistant Professor, College of Business and Economics, Qatar University.
                                      Corresponding Author E-mail: anasbakri@qu.edu.qa

                                                     Accepted April 12, 2013

    This paper aims to evaluate the trends of the real estate industry in the Middle East (ME) and its impacts
    on the investment opportunities and performance of this industry. This study explores the property
    markets of: Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and United Arab Emirates. This is
    important because it underscores those issues that are affecting country specific markets and those
    throughout the region. The combination of globalization and specific market factors are affecting how
    much real estate prices fluctuate up or down. In addition, as globalization has fueled the speculative
    fever that often invites large boom and bust cycles. The study adopted the Qualitative and descriptive
    methods used to summarize literature in developed countries about global financial system reforms
    and financial markets; particularly in the emerging property markets.Some of the countries are
    developed while others are emerging markets in every sense of the word. The study analyzed the
    performance of PCs and property markets performance in these countries before, during and after the
    recession. This study concluded that those countries with the most liberalized policies are attracting
    the largest amounts of investors have rapidly seen their real estate markets develop. While, others have
    been slow to adopt reforms, which has allowed for supply shortages. As these markets are less
    affected by what take place in the global real estate industry. The study also concluded that over the
    long term, these markets could see a considerable increase in price appreciation and demand. The
    emerging stock markets in the ME region have achieved considerable improvements in the last decade
    due to several factors such as the achievement of higher economic growth, monetary stability, stock
    markets reforms, privatization, financial liberalization and an institutional framework for investors. Most
    of the stock markets in the ME region have been liberalized during the late eighties and nineties. As a
    result of this liberalization, foreign investors are allowed to purchase shares without restrictions. As
    result, this provides the greatest insights as to what factors are affecting the ME real estate markets.

    Keywords: Real Estate, Investment, Performance, Economic policy, Supply and demand

INTRODUCTION

Over the last several years the property markets of:               years which have contributed to higher economic growth.
Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and              These policies and reforms include trade and financial
United Arab Emirates followed the performance of what              liberalization, privatization programs and openness to
was occurring worldwide. The criteria of selected                  foreign directed investment (FDI). Moreover, these reform
countries depends on the geographical reasons which is             policies are considered as indispensable in order for
easy to access and travel between them. Also four                  these countries to face the growing financial and
countries from the GCC as developed emerging markets               economic challenges that resulted from the 2008 Global
and three countries represented the developing countries           Financial Crisis (GFC) and changes in the global
in the ME. Also these countries that are considered in this        economy. Where, prices are in a steady free fall following
research have adopted several sound macroeconomic                  many years of appreciation. However, due to the overall
policies and financial system reforms over the last ten            amounts of speculation that was taking place meant that
002 Herald J. Econs. and Fin.

many of these once promising markets turned cold rather       markets. Yet, depending upon the country and the real
quickly (AME 2012). To identify the best opportunities as     estate market within a particular country, a variety of
well as risks, requires that careful examination of these     different factors can have major effects. What happened
markets is conducted by: providing an overview of global      was, as the world has become more globalized a new
property markets, the characteristics of these markets,       way to market real estate emerged, the tranche. This is
the challenges of these markets, portfolio diversification,   where investment bankers figured out how to market
transparency / efficiency, property investment vehicles,      mortgages to large institutional investors such as: mutual
property companies (PC’s), real estate investment trusts      funds, hedge funds and insurance companies. (Lamb
(REITS), mutual funds (MF), the risks of investing in         2010) The way it worked is: the different mortgages
global property markets, emerging property markets in         would be bundled into one single group paying a stated
the Middle East, property market performance in the           interest rate. As the mortgage payments were being
Middle East, property companies (PC) performance, the         made to the servicer of these loans, they would pay the
transparency of these emerging markets and the efficient      interest to the owner of these different tranches. As this
market hypothesis. Together, all of these different           became a more common way to of investing, the number
elements will provide the greatest insights as to what        of tranches grew dramatically. Then, when you consider
issues are facing the real estate markets in the Middle       the fact at how globalization improved access to FDI,
East.                                                         meant that investors from around the world could
                                                              purchase these kinds of investments. This is what has
                                                              made the global property market more interconnected
Literature Review                                             than at any other time in recorded history. Beyond, the
                                                              issue of tranches and globalization, the global property
An Overview of the Global Property Markets                    market is still decentralized. This is because depending
                                                              upon the country, a variety of laws, regulations,
Global Property Markets are facing a number of different      demographics and customs are constantly affecting these
challenges as they go through a period of severe              markets. As a result, it has been harder for investors
correction. This is following a steady appreciation in real   using a real estate strategy in one market or country to
estate prices led by the United States. Where, prices         be able to export what they are doing, with the same kind
were increasing steadily between 2000 and 2006 (EPRA,         of success elsewhere. This causes the prices of real
2010a). Then, between 2006 and 2009, prices declined          estate to vary depending upon all of these different
by 33%, following a massive bubble developed in the           factors (Lamb 2010). Together, the combination of
American housing market. This was fueled by easy credit       globalization and specific market factors are affecting
and a speculative fever that would cause home price to        how much real estate prices fluctuate up or down. As
rise by as much as 100% in some markets. (Mullins             globalization has fueled the speculative fever that often
2010) Because many of the different mortgages were            invites large boom and bust cycles. (Lamb 2010) Yet, the
underwritten, bundled together and then sold to investors     severity of the up and down moves in the price of real
around the globe, meant that the effects of the US real       estate depends on the factors affecting specific markets.
estate market would spread worldwide. As many of these        This has caused some real estate markets to experience
investors, were holding mortgages that lost their value,      large amounts of growth during times of expansion; then
because of the bursting of the bubble in prices. This         during times of economic distress these markets
would have a ripple effect on real estate prices around       experience a severe downturn.
the globe, where many markets that were appreciating in
similar a fashion to the United States, began to see a
serious decline in prices. The worldwide real estate          Portfolio Diversification of Investment in Global
markets are following a similar general trend as to what is   Property Markets
occurring in the USA. Newell and Peng (2008) found in a
study of Australian LPTs that the five main motivating        Because the global property markets are affected by
factors influencing the decision to invest in the non-        globalization and specific country / regional factors,
traditional sector properties included: (1) the desire for    means that the overall amounts of risks will vary, the
new product diversity, (2) the strong performance of this     most notable include: transparency and efficiency.
sector, (3) the higher/enhanced yield of this sector          Where, each country / region has different on laws and
compared to the traditional sector, (4) the greater           regulations pertaining to the real estate markets. This
availability and choice of properties, and (5) the            means that the risks in a number of different markets will
significant capital inflows available for propertyHowever,    depend upon specific market conditions themselves,
some of the different markets have their own unique           reflecting these two factors. To protect themselves
characteristics, which provide both opportunities and         against these kinds of risks, many investors will often
risks for investors. The global property market is at a       seek to diversify their portfolio. Diversification is: when
cross roads, where globalization has interconnected the       you are investing a number of different asset classes in
Al-Bakri. 003

real estate, across a variety of countries / regions. The        issues, means that these issues will continue to affect
idea is that if a risk occurs in a specific country or region,   transparency / efficiency. This is problematic, due to the
the other areas that you are diversified in will protect you     fact that the underperforming indexes in relations with the
against the severity of the declines.                            actual market shows that transparency needs to increase
                                                                 even more. Where, if these markets have the right
                                                                 amounts of transparency, the performance of the bench
Transparency and Efficiency in the Global Property               marks will mirror the actual market itself. Then, the reality
Markets                                                          that many countries are slow to adopt such benchmarks
                                                                 is: an indication that increased amounts of transparency
One of the biggest issues facing the global property             around the globe needs to have more far reaching
markets in the past was transparency and efficiency (JLL         effects. Where, those markets that are facing one of
2012). This is because many markets were considered to           these different situations can be able to improve, which
be closed or limited, as far as how much money foreign           will help increase the overall amounts of FDI being
investors can invest in a particular country. Then, the          invested in a country.
various reporting statistics on the market and the difficulty
of buying or selling a property were: the biggest factors
that limited the amounts of investment capital into this         Property Investment Vehicles
area. As a result, many of the real estate markets
benefited the local entrepreneur in the past. However,           As the global real estate market has become more
over the last ten years, globalization has caused                affected by the rapid changes that are taking place. Has
transparency and efficiency to increase in many property         meant, that a number of different investment vehicles
markets around the world (JLL 2012). As a result, foreign        have been developed to provide investors with number of
investors in these markets are demanding increased               options. Where, investors can now invest in numerous
amounts of information on the property before investing          asset classes that will provide them with opportunities in
to include: accurate market information, property rights /       the real estate markers in other countries. As a result, a
contracts that are enforceable, equality during the              number of different investment vehicles have emerged to
transaction process, professional standards and a                address this need to include: property companies (PCs);
reliable benchmark for measuring changes in prices.              real estate investment trusts (REITs) and mutual funds
Once this begins to take place consistently, means that a        (MFs) (Sayce et al., 2006; Spillman 2006). Together,
change will occur in the overall transparency and                these different tools have allowed investors the chance to
efficiency of the various real estate markets around the         participate in a number of different property markets
world. A good example of this can be seen by looking no          around the world.
further than in a report released by JLL (2012), where
they found that transparency / efficiency are increasing in      Property Companies (PCs)
a number of different markets. Because numerous
foreign investors no longer at a disadvantage in many            Hoesli et al. (2004) mentioned that the property company
markets, in comparison to local real estate entrepreneurs.       is: when there is a company that is focused on buying
This is because these improvements were seen in a                land or property that could contain various fixed assets
number of different mechanisms that are helping to               such as: buildings. These companies can either be
increase the overall amounts of transparency / efficiency.       publically traded or private. They will either sell or rent the
To include: improved regulation of many different real           different properties that they purchase, as way to
estate markets, greater public disclosure from real estate       generate revenues. The overall focus of these kinds of
companies and many markets introducing public / private          companies can range from raw land, to some of the more
benchmarks for measuring volatility. While these different       complex commercial real estate projects. During the last
areas have helped improved transparency / efficiency,            ten years, the overall amounts of FDI have been helping
the report also found that there were still many different       to fuel the rise in property companies that are focusing on
challenges faced by these markets. The most notable              investing in a number of different real estate markets
would include: the underperformance of all public /              around the world. As a considerable number of PC’s had
private benchmarks, the fact that many countries have            large holdings of real estate that they could not sell and
still not embraced performance based indexes and the             the occupancy for rental properties were declining (JLL
various taxation issues. (Transparency Improves Around           2010).
the World, 2006). What all this shows, is how the global
property market has seen increased amounts of
transparency and efficiency. However, despite these              Real Estate Investment Trusts (REITs)
different challenges many of these indexes are
underperforming the actual markets and many countries            A real estate investment trust (REIT), is when a publically
still have not adopted performance benchmarks.                   traded company is directly investing in real estate (Harper
Then, when you combine this with the different taxation          2010). This can take place by the purchasing of the
004 Herald J. Econs. and Fin.

actual properties themselves or it can involve              Market Risks
investing in a portfolio of various mortgages. The way
that REITs are structured, means that they must pay out     Market risk is when: entire asset classes of real estate
to investors at least 90% of what they make to              will decline over time. This is because of changes in the
shareholders in the form of a dividend. This has            underlying market itself or other factors that could cause
caused many entities that are focused on investing in       real estate prices to drop (such as a terrorist attack in an
various real estate markets, to use this type of            area) (Market Risk, 2010). This type of risk can be
investment vehicle. Harper (2010) mentioned that during     focused on more of an intern national scale or it can go
times of economic expansion, many REITs saw a               all the way down to the local level. In general, the overall
tremendous rise in revenues as they were participating      trends in worldwide real estate markets will follow one
in a number of different areas, including mortgages.        another. However, specific market factors in a particular
Once the global property market began to implode in         country can have a dramatic affect on real estate prices.
2007, many of these different REITs would
face a number of financial challenges. Like what
was stated previously, this can have an effect upon how     Interest Risk (Price level Risk)
the various REITs will do depending on the specific
markets.                                                    Interest rate risk is: when the rising or falling of interest
                                                            rates in a particular country will have a dramatic effect on
                                                            how strong or weak real estate prices will be (Seabury
Mutual Funds (MFs)                                          2010).. This is because, the over level of interest rates
                                                            will determine the cost of financing many different kinds
Another way that many investors have been                   of real estate projects. In general, this kind of risk can
investing in the different property markets around the      follow the general trend that is occurring around the
world are: through mutual funds (MFs) (Waggoner,            globe. However, specific factors (such as trade deficits /
2010). A real estate mutual fund is an investment           the levels of government borrowing) will have a dramatic
company        that    is   focused      of    purchasing   effect on local real estate markets.
securities of property companies or REITs. The way they
work is: a large number of investors will pool their
money together. Each investor will own shares of the        Business Risk
mutual fund, equal to their overall total investments
into the fund. At which point, the mutual fund company      Business risk is when: the risks for a specific country or
will take the money they are given by investors and         region could have an effect on real estate prices.
will invest in a number of different property companies /   (Business Risk, 2010) A good example would be when
REITs. While those MFs that invested in emerging            the government in one country decides to nationalize key
real estate markets (such as China) saw an increase         industries. Even though this may not have a direct effect
of 76.1% last year. In the more developed real              on the real estate markets, the risks of such actions will
estate markets, the growth was more restrained in           have ripple effects. As the perception that a particular
comparison to emerging markets. This is because, the        area or region could be less business friendly, may
large inventory overhang and the issues of corporate        create different problems for investors who are investing
debt having been weighing on shares in these areas          in the country. This could cause that the amounts of
(Waggoner, 2010).                                           direct foreign investment to drop because of these
                                                            policies. What this shows, is how various real estate
                                                            markets are affected by specific factors for a particular
Risks Facing Investments in the Global Property             region / country (Seabury 2010).
Markets

Since real estate prices have remained very                 Liquidity Risk
volatile over the last few years, means that
there are number of possible risks to include:              Liquidity risk is when an investor could have trouble
market risks, interest rate risks, business risks,          selling a particular asset. In some ways, this risk can be
liquidity risks and inflation risks. In many ways, these    spread from one county to the next as the overall liquidity
different risks can spread around the globe.                of one real estate market will have an effect on the others
However, each risk factor will depend upon the              (Liquidity Risk, 2010). A good example of this could be
underlying market conditions of each country.               seen in the United States, where as real estate became
This is important, because it helps to highlight how        more illiquid. This overall liquidity risk spread around the
strong or weak the various property markets                 world as bankers were more cautious about lending. This
perform       based    upon      these different risks.     can be seen, by looking at the increase in the LIBOR
Al-Bakri. 005

index during that time. The LIBOR rate is what bankers           slowdown occurred. However, like all real estate markets,
are charging other bankers to borrow money. When the             there are specific country factors that will have various
LIBOR rate increases, it is indicating that there are large      cross current effects on real estate prices. In the case of:
amounts of liquidity risks in the markets. As the various        Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and
bankers, do not want to be left holding assets that are not      United Arab Emirates, they all experienced sharp price
very liquid (Seabury 2010). However, liquidity risks can         increases, followed by a period of contraction in real
also depend upon the real estate market itself. Where,           estate prices. However, once the price of real estate
changes in various issues of supply and demand will              began to implode, meant that the markets would see a
affect the prices in a range of real estate assets.              more severe down turn. As low interest rates and large
                                                                 amounts of foreign investment capital quickly dried up
Inflation Risk                                                   (Laessing, 2010). Once this occurred, real estate prices
                                                                 would decline by as much as 45% (making Dubai the
Inflation risk is when: there is the likelihood that rising      worst performing real estate market in the world last year)
prices for various natural resources will have an effect of      (Sambidge, 2010). This overall trend of volatility in real
the value of different investments (Inflation Risk, 2010).       estate prices has continued to affect nearly every single
For the global property market, rising levels of inflation       country throughout the region. Highlighting, how these
can have a devastating effect on prices, by making the           markets are more subject to the various forces of supply
cost of homes more expensive. Once this takes places, it         and demand in the world economy.
means that the real estate market could see a sharp                  In general, the economies of the ME are dependent
slowdown as demand drops off. However, various factors           upon the exporting of mainly petroleum related products.
could also lead to inflation risk in specific local markets      During periods when oil prices are high, means that the
such as: shortages of various raw materials / supplies. In       overall revenues in the various economies throughout the
either scenario, inflation has the possibility of slowing        region will increase. However, over the last several years
demand by forcing real estate prices higher. At which            many of the different countries have been attempting to
point, it is only a mater of time until the real estate market   diversify their economies into a number of sectors (CIA
will begin to slow.                                              Factbook, 2010). This has caused the various economies
                                                                 to be subject to other macro economic forces that will
                                                                 have a direct impact on the real estate sector. A good
METHODOLOGY                                                      example of this can be seen in Dubai, where Dubai World
                                                                 (a real estate developer that created several high priced
The current study is mainly adopted the explanatory              developments including their own island) announced that
methodology techniques, because the data has been                they were facing a liquidity crisis (Leonhardt, 2009). This
collected through the literature review and financial            is significant, because it highlights how various
analysis and discussion. This study seeks to discover the        economies throughout the region are facing similar
key dynamics of development companies in six countries           challenges in their real estate markets. As many
during the period between 2003 and 2012. The study               countries and developers created large amounts of debt
adopted the Qualitative and descriptive methods used to          in the process of attempting to diversify their economies.
summarize literature in developed countries about global         Then, once the slow down came in the economy, these
financial system reforms and financial markets;                  countries faced a contraction in oil imports and the newly
particularly in the emerging property markets.Some of the        developed sectors. Then, combine this with the large
countries are developed while others are emerging                amounts of debt used to finance the building boom;
markets in every sense of the word. The study analyzed           shows how vulnerable these countries are to various
the performance of PCs and property markets                      changes that occur in the world economy.
performance in these countries before, during and after
the recession. In this study therefore, it will be possible
to establish the impact of the global crisis on the property     The Importance of the Emerging Property Markets in
markets in the ME.                                               the ME

                                                                 The Middle East property market is undergoing a
DISCUSSION                                                       transition. Where, the entire region faces increasing
                                                                 amounts of media attention. This is occurring as the
Emerging Property Markets in the ME                              competition for various oil and natural gas reserves has
                                                                 become more intense. At which point, more investors are
The ME property markets have generally followed the              focusing on new investment opportunities throughout the
worldwide trend, where prices were continuing to climb           region (CIA Factbook, 2010). Then, when you combine
for many years in a row (Fetini et al., 2006). Then, prices      this with different economies diversifying outside of oil;
began to decline rather quickly once a worldwide                 has meant that that the real estate markets are becoming
006 Herald J. Econs. and Fin.

a major lynchpin to the different economies throughout         Property Markets Performance in the ME
the region. This is because real estate prices reflect the
overall demand the from service industries that these          The various property markets throughout the Middle East
economies are adjusting to (such as: tourism and               have been affected by the severe slow down in real
financial services). As more nations in the region diversify   estate markets around the world. This has caused many
away from oil, means that there will be greater emphasis       of the large commercial and residential developments to
placed on the real estate market. Where, it will play an       face issues of a large over supply of properties along with
interconnected role in helping to develop these new            falling demand. Together, these two factors have helped
sectors of the various economies. As result, this makes        many of the once hot property markets to see large
the real estate market in the different areas an important     amounts of cancelations or delays. As large institutional
element that will speak volumes about the possible short       and foreign investors are reluctant to spend anything until
and long term economic implications for an area.               demand picks up. However, within the various low and
                                                               middle end markets there is a shortage for properties. In
                                                               general, this can be seen with a number of different
Investment Opportunities in the Emerging Property              countries that are experiencing similar problems
Markets in ME                                                  throughout the region to include: Saudi Arabia, Egypt,
                                                               Syria and Jordan. This is significant, because it shows
Throughout the countries of Egypt, Jordan, Kuwait,             how the high end markets are affected by what takes
Qatar, Saudi Arabia, Syria and the United Arab                 place within the global property markets. While, the low to
Emirates there are variety of investment opportunities.        medium end real estate markets are showing increasing
However, depending on specific country and                     demand that is outstripping the available supply (Middle
demographic factors will determine how strong or weak          East has Opportunity for Property Investment and Jobs,
these markets will be in the future. A good example            2011). The report from Macquarie Research, October
would be in Saudi Arabia, where 70% of the                     (2011) provides the property securities 12- month return
population is under the age of 30. This is fueling a           and volatility - Sept 2011. It is shows in the following
housing shortage in many different areas of the country.       Table 1.
According to a report released by National Commercial          Macquarie Research (2011) explores the Middle Eastern
Bank, they found that by the year 2015 an additional 1.3       Property Securities Markets Composition in 2011.
million units will need to be constructed to keep up with      Findings results have been summarized in the following
this demand. This means that new foreign investment            Table 2.
capital of $160 billion will be required to address the
shortage in this market (Rashid 2008). However, when
you compare this with other markets such as                    Property Market Performance in Saudi Arabia (KSA)
Qatar there are two different types of markets that are
emerging. The high end real estate such as                     The property markets in Saudi Arabia are largely
condominiums, villas and commercial property are facing        undeveloped. This is because over the last 10 years,
severe challenges. Where, the large amounts of easy            there has been an increasing focus on building large
credit and foreign investment capital caused                   developments on the Red Sea. The decision by many
developers to over build these different markets. Yet,         developers to focus on this end of the market has left
beyond this real estate market there is shortage in middle     many of the other parts of country’s real estate market
and low end real estate. This has caused the                   largely ignored. As a result, a shortage has emerged in
Governor of the Qatar Central Bank to predict that the         the number of low to medium end projects. A good
economy will experience 16% GDP growth, as demand              example as to how severe the situation has become can
for real estate in these markets will play a major role        be seen with figures released by the Saudi Arabian
(Morgan 2010). What this shows, is how within each of          government, which found that 500 thousand people will
the different Middle Eastern countries there are cross         require new homes every single year. This means that
currents when it comes to the real estate market. Where,       approximately 100 thousand new homes must be
many countries have an oversupply of high end /                completed to address this demand (Saudi Arabia a
commercial real estate. While, in the middle to low end        Climate for Change, 2010). Together, these two elements
markets there is shortage of available real estate.            have protected the Saudi Arabian real estate market from
Therefore, the short to long term investment opportunities     the volatility that has occurred, with other markets in the
in the sector can be found in the middle to low end real       region. This has allowed the market to see consistent
estate market. While at the same time, the high end /          long term growth of 5% a year, because of these large
commercial real estate market will face short to medium        amounts of demand in the low to medium end markets
term challenges. However, over the long term (once the         (Saudi Arabia’s Real Estate Market Likely to Exceed
inventory is reduced), these markets could see a               SR82b, 2010). Then, when you combine this with the fact
considerable increase in price appreciation and demand.        that the high end development was not as significant in
Al-Bakri. 007

   Table 1. Middle Eastern Property Securities 12- Month Return and Volatility - Sep 2011

     Listing Countries             Annual    Return       Annual      Return        Annual       Return     Annual    Volatility
                                   RE Equity %            Equity Market %           Relative                RE Equity %

     Egypt                         -53.21                 -31.90                    -31.28                  45.35
     Jordan                        -31.72                 NA                        NA                      46.71
     Kuwait                        -16.45                 -13.94                    -2.92                   38.70
     Qatar                         -26.10                 13.91                     -35.13                  25.26
     KSA                           -14.77                 -1.29                     -13.66                  26.67
     Syria                         NA                     NA                        NA                      NA
     UAE                           -30.15                 -1.63                     -28.99                  31.77
     ME & Africa                   -18.96                 -                         -                       27.87
     Asia                          -19.99                 -                         -                       33.26
     Asia Developed                -20.98                 -                         -                       31.47
     Asia Emerging                 -17.22                 -                         -                       38.21
     Americas                      -2.64                  -                         -                       31.02
     Americas Developed            0.29                   -                         -                       29.92
     Americas Emerging             -25.11                 -                         -                       39.61
     Oceania Developed             -5.86                  -                         -                       23.87
     Europe                        -9.86                  -                         -                       29.85
     Europe Developed              -8.54                  -                         -                       29.29
     Europe Emerging               -30.66              -                            -                   43.27
                                   2011 Annual Return %                             2011 Annualized Volatility %
     Global                        -25.69                                           72.32
     Global Developed              -26.87                                           72.62
     Global Emerging               -22.07                                           71.38

   Source: Developed for this study Bloomberg, Macquarie Research, October (2011)

Table 2. Middle Eastern Property Securities Markets Composition- Sept 2011

countries         # PCs       Market cap        Market cap £100m-          Market cap          Sector Mkt       % of global listed RE
                               £1bn              cap £bn              equity Mkt
Egypt              19             12                     6                      1                 3.9                    0.39
Jordan             20             18                     0                      0                 0.3                    0.03
Kuwait             35             27                     8                      0                 2.7                    0.27
Qatar               3             0                      1                      2                 12.7                   1.28
KSA                 9             0                      7                      2                 6.6                    0.66
Syria              NA            NA                    NA                     NA                  NA                     NA
UAE                 7             1                      5                      1                 4.6                    0.46
MEAE              201            128                    56                     14                 54.8                   5.50
Asia              741            320                   330                     85                416.8                  41.85
Americas          376            144                   146                     85                333.9                  33.52
Europe            532            329                   165                     34                139.8                  14.04
Oceania           106             62                    32                     12                 50.6                   5.08
Global Total      1956           983                   729                    230                995.9                 100.00

 Source: Developed for this study Bloomberg, Macquarie Research, October (2011)
008 Herald J. Econs. and Fin.

other counties, shows how the markets were immune             prices for the various pieces of land remained stagnant in
from the wild price swings that have occurred around the      early 2009, when they were sitting at around $100,000
world.                                                        (Kuwaiti dollars). Then, as the markets began to stabilize,
                                                              the price of land increased to $130,000 (Kuwaiti dollars)
                                                              during the second half of 2009. This is significant,
Property Market Performance in Dubai and Abu                  because it shows that the various government policies
Dhabi (UAE)                                                   are helping the real estate market to recover from the
                                                              severe volatility that has been seen in other markets
The property markets for both Dubai and Abu Dhabi have        throughout the region (2010 A Year of Revival for
experienced even larger amounts of volatility over the last   Property Sector, 2011)
couple of years in comparison to their neighbors. This is
because both countries were seeking ways to diversify
their economy away from oil. Where, they were focusing        Property Market Performance in Qatar
on tourism and financial services. However, as the both
areas were receiving large amounts of investment capital,     Qatar is facing a similar situation as the United Arab
meant that many property development companies would          Emirates, where large amounts of building took place
take on increased amounts of debt to finance these            after the new millennium began. This is because the
different projects Morgan, D. (2010). This lead to an         government began engaging in a policy of liberalizing
oversupply in the markets as builders expanded the            their real estate markets. Where, they made it easier for
number of projects to meet future demand. Once the            foreign investors to purchase real estate. This would
economy began to slow and oil prices dropped, meant           create a building boom in the country for a number of
that both areas would see: declining occupancy rates as       residential and commercial real estate projects. However,
well as tourism. This would lead to a sharp contraction in    what makes the situation in Qatar so interesting is they
both markets, as the oversupply would force property          were in the process of implementing different reforms.
owners to reduce prices dramatically. An example of the       Yet, one of these reforms planned was: the creation of a
overall severity of the slow down can be seen in Abu          mechanism to monitor various real estate statistics for the
Dhabi where prices are down by 45% since 2008.                market. Due to the fact that the economy slowed, meant
Demand in both markets has begun to stabilize, thanks in      that this mechanism was not in place, forcing economist
part to reforms in various commercial laws that reduced       to estimate the rates of growth or decline. As a result,
the capital requirements to start a business. Both            Qatar’s real estate market has experienced extreme
countries are hoping that this could help improve the         boom and bust cycles. Evidence of this can be seen by
levels of demand. (Outlook for Real Estate in Abu Dhabi       looking no further than 30% decline seen in this market
muted after 2009, Report Indicates, 2011) However,            during 2009. This is significant, because it highlights how
there are still large amounts of over supply in the           Qatar is going through a similar situation as the United
markets.                                                      Arab Emirates. Where, large amounts of overbuilding
                                                              have caused prices to implode. Then, when you combine
                                                              this with the fact that they were trying to diversify their
Property Market Performance in Kuwait                         economy, meant that the real estate market was caught
                                                              in a difficult place. As a newly developing industry, would
Kuwait experienced a slowdown in the price of real estate     be exposed to the forces of supply and demand in the
during 2008 and into early 2009. The severity of the drop     world economy. This is because it was not as mature in
was as deep as in other countries throughout the region.      comparison to other countries. As result, this has allowed
This is because the country’s real estate sector is the       the real estate markets to face a number of different
second largest contributor to economic growth behind oil.     challenges at the hands of the world economy.
(Kuwait Property Show, 2011) As a result, real estate
prices fell between 25 to 50%, depending upon the asset
class. (Property Reports Clash Over State of Kuwait Real      Property Market Performance in Jordan
Estate Market, 2011) This is in part because of a
government ban in place preventing private firms from         The property market in Jordan is facing similar
buying certain asset classes of property. Since the           challenges as other real estate markets throughout the
government lifted this restriction and lowered interest       region. Where, prices have dropped between 10% and
rates, the market has began to show signs of stability in     15% since the peak in 2008. However, the exact number
late 2009 (Slow But Sustained Property Revival Predicted      is difficult to determine because there is no official price
for Kuwait, 2011). A good example of this, can be seen        index for the country. Beyond this statistic reveals how
by looking no further than the Khairan residential area.      Jordan is affected by changes that are occurring in the
This was raw land that the government released for            global property markets. Yet, in a number of ways the
development in 2008. Initially                                markets have large amounts of demand that are
Al-Bakri. 009

protecting it against some of volatility. What is happening   what happens with prices globally. Yet, because the
is a large number of foreign nationals (mainly Iraqi and      majority of transactions are conducted by local investors,
American) are aggressively purchasing properties in the       means that the country has been shielded to a certain
high end markets. While, there is shortage in the low to      extent from sharp declines in prices.
middle end markets. As far as the high end markets are
concerned, the War in Iraq has caused nearly 500,000
people to move to the country. Then, when you combine         Property Market Performance in Syria
this with a large demand from American investors, means
that the overall number of high end sales to foreigners       The property market of Syria has been expediting a large
has continued to increase despite the recession. This can     amount of growth over the last several years. As the
be seen in the total number of real estate purchases          government relaxed rules on owning real estate and
conducted by foreign investors, as they increased by          several large foreign property companies have been
22% from January to August 2009. Then, in the low to          investing in the country. However, the markets in Syria
middle end markets, they are facing a housing shortage.       are still very young. This is because of the strict demands
This has caused the government to spend $7 billion on         that were placed on property ownership until 2000. Then,
building 100,000 units a year (Jordan Housing Market          after the various rules were relaxed many property
Remains Fragile, 2009). What all of this shows, is how        companies in the various Gulf States began to invest in
the Jordanian real estate market was affected by the          the country’s property market. They quickly experienced
global economic recession with the drop in prices.            bureaucratic delays on a number of different projects
However, because of large amounts of demand from              (Syria: In Demand, 2009). As a result, the demand for
foreigners and the low to middle end markets; have            real estate has continued to increase. A good example of
helped to protect the country from a more severe decline      this can be seen by looking no further than a report
in prices.                                                    conducted by Cushman Wakefield. Where they found,
                                                              that because of the shortage, real estate price in
                                                              Damascus are the eighth highest in the world. Then,
Property Market Performance in Egypt                          when you combine this with the fact that the mortgage
                                                              market is new and there are no formal building codes,
The property market in Egypt has been affected severely       means that nearly 38% of the population will live in slums
by the global property markets, as prices have dropped        (Syria: In Demand, 2009). These different factors have
by 37% since peaking. The luxury property markets were        protected the Syrian real estate market from the volatility
hardest hit as investor canceled orders on a variety of       in real estate prices that are occurring worldwide.
construction projects. This would lead to a sharp             However, because of the bureaucracy, the long delays in
oversupply, following a trend throughout the region and       building the different real estate projects and poor
around the globe. At which point, the Egyptian                planning, has meant that prices have continued to climb.
government announced a series of stimulus packages            The majority of the property companies that have been
designed to reinvigorate the markets. However, like many      investing in Syria have been mainly from the Gulf region.
countries throughout the region Egypt has an oversupply       A good example of this can be seen by looking no further
of 1 million high end properties. While at the same time,     than Al Kharafi Group out of Kuwait. Where, they have
there is a shortage in the low to middle end markets of 40    experienced long delays in breaking ground on many
thousand units per year. This inequality in the markets       projects. This is because of: bureaucratic delays,
has meant that more than 11 million people out a              confusion about the various regulations surrounding
population of 82 million are living slums. This is because    financing and difficulty obtaining clear deeds. Together,
the lack of regulation of these markets, have allowed for     these different elements have meant that the majority of
poorer structures to be built for the low to middle income    property companies that come to the country and
markets. While the high end markets receive increased         announce various projects will have trouble getting
amounts of regulations (as far as the building codes are      started because of these issues. This has helped to hold
concerned). Then, the mortgage market for the country is      back large amounts of foreign direct investment in the
fairly young, with nearly 57% of all purchases for property   country. As a result, nearly 95% of all real estate
conducted with cash. Despite all of these different issues,   transactions are conducted by Syrians that are living or
the majority of real estate transactions conducted in         working overseas, according to the real estate firm GS
Egypt is concentrated on the local markets. In many           Real Estate. What this shows is that the Syrian real
ways, this has allowed the country to experience a less       estate market has tremendous opportunities. This is
severe decline in prices outside the luxury markets.          attracting some of the foreign investment capital from
Evidence of this can be seen by looking no further than       various countries. However, because of the different
prices declining by 3.7% since peaking in 2006. (Egyptian     issues surrounding the titles, financing and the
Property Plunges, 2009) What this shows, is how certain       bureaucracy itself; has meant that many property
aspects of Egypt’s real estate markets are affected by        companies have become frustrated. This is the biggest
010 Herald J. Econs. and Fin.

road block that stands in the way of having property             amounts of debt and a declining value in their portfolio of
companies, begin to address the demand that is                   properties is: creating a liquidity crisis. This has caused
occurring for a variety of properties (Syria: In Demand,         some companies to push for various mergers, in an effort
2009). Because of the large amounts of demand in the             to adapt to the changing realities of the markets. A good
real estate market, has meant that Syria has continued to        example of this can be seen with the proposed merger
see consistent increases in prices. This is because the          between Dubai Holding and Emaar Properties. Where,
various reforms that the government has attempted to             combining the two entities was supposed to significantly
initiate over the last several years, have failed to increase    reduce the overall amounts of debts. However, because
the overall number of building projects. Then, the country       the debt levels were so high, meant that any kind of
is experiencing an increase in the number of Iraqis since        merger was called off (Dubai Property Companies Called
the war began in 2003. Where, a total of 1 million Iraqis        Merger Off, 2009). This is significant because it shows
currently call Syria home. This situation has added to the       how some of the property companies could be too big to
overall pressures that the Syrian real estate market is          fail. What this shows, is that both companies will more
facing. Where, the increased numbers of Iraqis are               than likely require a series of government bailouts to
highlighting the ineffectiveness of the government               overcome the short term challenges. Yet, when you
reforms for addressing the housing issue (Butters 2007).         examine other property companies throughout the region,
As a result of these different factors, Syria will continue to   a different situation is occurring. A good example of this
see increasing prices. This is problematic because the           would be the Saudi Arabian property company Dar Al
delays of new projects and then more increases in prices         Arkan. Where, the company said there is strong demand
are making it harder for the majority of Syrians to afford a     for properties in the Kingdom of Saudi Arabia. This
home. Therefore, it would not be surprising to see the           caused the company to keep the product mix the same
Syrian real estate market continue to face a situation of        as it was last year. With Managing Director Abdullatif al
rising prices, until effective reforms are enacted to            Shelash saying, “We still believe the market is very good.
address the supply and demand issue.                             It is a rich country, a very young population. There is a
                                                                 real demand (for residential property)” (Laessing 2010).
                                                                 What this is showing, is how the overall regional /
Property Companies (PCs) Performance in the ME                   demographic factors within a particular country will
                                                                 determine how strong or weak the underlying market
The overall performance of the different property                could be. This is significant, because those builders who
companies will highlight how the various market forces           are rapidly expanding that were not in these markets are
are affecting ME real estate prices. However, when               feeling a severe down turn. While those property
examining these different situations, it is clear that many      companies that are more focused on addressing local
of these companies have been aggressively investing              supply and demand issues are more stable. Over the
outside of the Middle East. A good example of this can be        course of time, this means that the number of property
seen by looking no further than the large amounts of             companies in the high end markets will become larger, as
direct investments into a number of real estate markets          there is less competition. While at the same, time the
around the world. Where, various entities have been              demand for housing in the various local markets could
aggressively investing in opportunities overseas such as:        spur an increase in the number of property companies in
the Qatari Diar Real Estate Investment Company (an               these markets.
investment unit of the Qatar Investment Authority)
investing $150 million in the Tajikistan real estate market
(Gulf Real Estate Companies Looking Abroad for New               Performance of Emerging Property Companies in the
Projects, 2010). This provides the greatest insights as to       ME
what global factors are affecting the various markets. It
will also highlight how various local factors are affecting      The overall performance of all property companies will
the overall performance of property companies. This is           depend on their business model and their exposure to
significant, because it will underscore how and it what          various markets. This is important because it highlights
ways these markets can be adapted to address the                 the performance of the different property companies over
various imbalances. The various property companies               the short and long term, which will be affected by the
throughout the ME have faced a number of different               various forces of supply as well as demand. Where,
issues depending upon the markets. This is because of            those companies that have exposure to local markets in
the cross currents of the effects of globalization and           select countries and the high end markets, have the great
specific markets factors, are affecting the overall amounts      chance of out performing the other in the property
of profits at the various companies. When you analyze            companies over the long term. That being said, the short
those property companies that were involved in the               to medium term performance will depend on how much
higher end real estate markets, they are facing severe           exposure a particular company will have to both markets.
financial challenges. As the overall                             Then, the overall way that companies are accounting for
Al-Bakri. 011

various debts and assets will play a role in                   Transparency of the Emerging Property Markets in
determining how profitable a company will be in these          the ME
different markets. What happens is Islamic financing is
increasingly being used by the various property                The ME has been showing mixed results as far as
companies throughout the region. Islamic financing is          transparency is concerned. Where, the JLL Real Estate
when: a property company is investing based                    Transparency Index showed, how in Dubai transparency
on ethical principals that will benefit everyone. This         increased dramatically. As the real estate market in the
means, that the overall amounts of greed and going into        country saw some of the largest gains in the world.
projects loaded with high amounts of debt are ignored          However, when you look at the Middle East region as a
under this kind of thinking (Islamic Financing Gaining         whole, the index shows that the real estate market is one
Popularity, 2011). As a result, this would have a major        of the least transparent. The reason why this is occurring
effect on how the various property companies throughout        depends on the overall openness of the market to foreign
the region are performing. A good example of                   investors, effective ways to obtain deeds, improved
this can be seen with the Qatari property company Barwa        mortgage / real estate brokerage markets and favorable
Real Estate, where profits for 2009 increased by 154%.         tax policy. These different reforms enacted in certain
This is thanks in part to: increased revenues from rent,       markets have helped to fuel the large influx of foreign
revaluation of the property and purchasing a weaker            investment capital (JLL 2012). In the ME markets, the
competitor. The company also announced that they have          biggest transparency improvements were found in Dubai,
been aggressively entering the housing markets of Saudi        Abu Dhabi (UAE), and Qatar. Syria is the only country
Arabia and Jordan (Barwa Real Estate, 2011). This              from the ME whose transparency is not categorized
refocus on the low end markets is helping to provide           within these five levels. The ME attracts more global
earnings stability and then the using of the principals of     attention from property investors which brings the
Islamic financing is providing stability to the balance        transparency issue to the forefront of the regional
sheet. The reason why this is significant is because it is     government’s      agendas.     Further,   the    improved
helping to mitigate some of the negative effects felt in the   transparency of Dubai has certainly been one of the
country’s high end real estate market. Then, you have          major driving forces behind this trend. Dubai has
those companies on the other end of the spectrum that          witnessed the greatest improvement in transparency over
do not follow the principals of Islamic financing. An          the past two years of any market covered by the property
example of this can be found by looking no further than        transparency index. Following Table 3 shows the
Emmar Properties. This company has a large portfolio of        transparency levels of property markets in the ME.
real     estate   holdings    ranging   throughout       the       JLL (2012) reported that the UAE has reinforced its
Middle East, the United States and Europe. As a result,        position as the most transparent real estate market in the
the high amounts of debt and their exposure to the global      region with progress being recorded in both Dubai and
real estate market has placed the company in the               Abu Dhabi. This reflects the UAE's status as one of the
challenging position of dealing with different liquidity       most stable and secure real estate markets in a still
issues. This is significant, because it highlights             volatile region heavily affected by the social unrest and
how the different property companies account for               political turmoil resulting from the Arab Spring of
financing and their overall exposure to different markets,     2011(JLL 2012).
which will play a role in determining their earnings               As a result, the openness of these different markets
stability. As those companies such as: Emmar                   allowed for the development of the real estate markets in
Properties, experience extreme boom and bust cycles            these different countries. Once this takes place, the
based upon the macro economic factors. Then,                   transparency within the markets will rise, as builders can
there are those developers that are more exposed to the        easily be able to meet the demand within these markets
local markets in specific countries. Such as:                  (JLL 2012). Some real estate markets that would fit into
Dar al Arkan, who reported earnings stability during 2010      this category would include: Jordan, Kuwait and Saudi
and had positive comments about the local                      Arabia (JLL 2012). What all of this shows, is how a mixed
Saudi Arabian real estate market going forward (Emaar          real estate market will continue to exist throughout the
Properties UAE, 2010). This is significant, because it         region. However, if more countries can engage in reforms
shows how those builders, who are more focused                 of their markets the overall levels of transparency will
on the local markets, have been able to weather the            begin to rise. As their real estate markets begin to
financial storm (better than those property companies          become more interconnected to the global property
who are investing aggressively in the high end and             market.
overseas real estate markets). Then, when you
combine this with the fact, that those companies are
more conservatively choosing their investments;                Efficient Market Hypothesis (EMH) and the Property
highlights why there is such a disparity in the                Markets in the ME
performance of the different property companies.
                                                               The efficient market hypothesis states that all markets
012 Herald J. Econs. and Fin.

Table 3. Transparency of Property Markets in the Middle East – Composite Index 2012

     Transparency Level           2012 Composite Rank                           Market                      2012 Composite Score

  Transparent
                                  47                                    UAE – Dubai                                3.05
                                  52                                  UAE - Abu Dhabi                              3.05
                                  63                                      Bahrain                                  3.62
      Semi
                                  64                                    Saudi Arabia                               3.63
                                  66                                      Lebanon                                  3.75
                                  67                                       Kuwait                                  3.76
                                  72                                       Qatar                                   3.82
                                  74                                       Oman                                    3.85
      Low
                                  77                                       Egypt                                   3.88
                                  80                                      Jordan                                   3.97

    Opaque                        91                                         Iraq                                  4.44

Source: JLL (2012)

are efficient, reflecting current valuations and                      CONCLUSIONS
expectations about the future. In general, this theory can
be effectively applied to the property management                     The ME property markets have generally followed the
companies, REITs, and mutual funds that are invested in               worldwide trend, where prices were continuing to climb
the real estate markets around the world. Where, the                  for many years in a row. Then, prices began to decline
price of these different securities will reflect valuations           rather quickly once a worldwide slowdown occurred.
that are occurring in the markets. However, when it                   However, like all real estate markets, there are specific
comes to the real estate markets, this theory is not as               country factors that will have various cross current effects
efficient, as a number of different factors that affect how           on real estate prices. In the case of: Egypt, Jordan,
efficient the markets will be (The Efficient Market                   Kuwait, Qatar, KSA, Syria and UAE, they all experienced
Hypothesis, 1999). The biggest factor in determining how              sharp price increases, followed by a period of contraction
efficient or open these markets are is: to look at overall            in real estate prices. Clearly the ME real estate market is
flexibility that the market gives to investors. In the case of        one that is full of a number of different possibilities. This
the Middle East, the overall efficiency of the different real         is because in many countries their markets are more
estate markets depends upon the country that you are in.              liberalized and open to investors. Over time, these
This is because some countries will have liberalized                  policies have allowed for these markets to attract large
policies in regards to the market in comparison with                  amounts of foreign capital, as these funds help develop
others. As a result, this has caused some real estate                 the real estate industry. However, because of these
markets to be more efficient than others. Some good                   changes, these real estate markets will be affected by the
examples of this would include: the United Arab Emirates              forces of supply and demand in global property market.
and Qatar. Where, these markets react to forces of                    Some good examples of this would include the real
supply and demand that are occurring in the global                    estate markets in the UAE and Qatar. However, there are
market place. While, there are those countries who have               those markets that have more restrictions on ownership
implemented limited reforms or no reforms at all. An                  and limitations on investors have created a situation
example of these markets would include: Egypt, Jordan,                where there is a supply shortage of housing. As any
Kuwait, Syria and Saudi Arabia. Depending upon the                    reforms imposed by the government are: new, ineffective
country, the overall levels of reforms will vary. As result,          or non existent at all. Some good examples of these real
this has allowed foreign capital investment to generally              estate markets would include: Egypt, Jordan, Kuwait,
be less than in the United Arab Emirates and Qatar. This              KSA and Syria. Together, all of the different real estate
has helped contribute to the supply shortages that are                markets highlight a region that is going through a
being seen in these different markets, as the ability to:             transformation. Where, slowly the different real estate
obtain mortgages, have access to titles, the ability of               markets are becoming more liberalized one step at a
foreign investor to purchase property and various                     time. The overall extent of these changes depends up
restrictions on builders have contributed to the problem.             the country that you are discussing. This is because the
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