The dual shock of COVID-19 and lower oil prices has placed the GCC real estate sector under substantial pressure, leading to fears of bankruptcies and market collapse. To prevent further damage, governments can take measures to support existing players, and then attract investment, and facilitate tourism demand to stimulate recovery.
Real estate is a major direct contributor to the economy in the region, contributing about 6% of GDP in the UAE and 7% in Saudi Arabia in 2018. Its fortunes are closely connected to other important sectors, such as construction, retail, and hospitality. The GCC real estate sector employs around 200,000 people while the construction industry as a whole provides more than five million jobs. As such, the real estate sector can play a major role in the region’s recovery and support the broader diversification of its economies.
However, the sector’s ecosystem is facing major challenges during this pandemic. Many tenants have found themselves unable to pay their leases. Tourism has collapsed. Demand for office space has also plummeted, while many retail sites lie empty due to shop closures and a huge reduction in the number of visitors. As a result of these developments, the exposure to non-performing loans of financial institutions serving the real estate sector has increased markedly.
“The real estate sector can play a major role in the region’s recovery and support the broader diversification of its economies.”
Governments must first respond to the gravity of the situation by supporting the players operating in the sector, and prevent a downward spiral.
For example, governments could help avert a market collapse in the residential segment. They could establish a salvage fund to purchase some upcoming housing units which would otherwise have remained empty on completion. Such a move would soak up excess supply of housing, generate revenue for developers, and stabilize real estate valuations. This would make housing mortgages more secure, and thereby protect home owners and banks.
Purchasing mortgages from banks could be another potentially useful initiative for governments. This would safeguard banks while boosting the availability of funding for new real estate investments. Residential owners would benefit if governments offer to reduce capital and interest payments, or even defer those payments.
Governments could also inject capital into selected strategically important entities, as the government of Dubai has already done with Emirates in the aviation sector. Governments should also encourage mergers between government-owned developers to increase efficiency, strengthen balance sheets, and streamline the supply of assets to the market. An early example has been the merger of the developer Meraas with Dubai Holding.
Favorable financing and credit solutions would assist key players, and help with the wage bill. With lower revenue, companies find it hard to continue paying salaries to the workers they will need when the economy recovers. An example of government assistance comes from Singapore, which announced in March that it would subsidize up to 75% of salaries in the tourism sector for up to nine months.
Along with direct financial support, governments can use various other measures at their disposal to ease the burden on market players. Reducing taxes and other charges is one example. In the UAE, commercial and industrial real estate registration fees have been suspended for the rest of 2020, while a temporary decrease in water and electricity bills for all residential, commercial, and industrial customers was also introduced. All restaurants in Oman are exempt from paying tourist and municipal taxes until the end of August 2020.
“Foreign investors can play a major role in the real estate sector’s return to health.”
Once they have implemented measures to support players, governments can turn their attention to stimulating investment and accelerating the recovery. For example, they can increase the threshold for the loan-to-value ratio on mortgage lending and for banks’ exposure to the real estate sector. In the UAE, banks’ exposure to real estate lending has been increased from 20% to 30% of their total loan portfolio. These measures make it easier for people to buy property, while increasing sales for developers.
To boost the travel sector, a key driver of real estate demand for hospitality and retail, governments can expedite bilateral discussions with selected countries to resume tourism in a safe manner by creating travel corridors, particularly with those countries that have achieved very low growth in new COVID-19 infections.
Foreign investors can play a major role in the real estate sector’s return to health. However, if more expatriates are to invest in property, they will need to know they have a long-term future in the region without their residency rights being vulnerable to loss of employment. Governments can consider extending residency permits. They can even offer permanent residency to foreigners who have been living in the region for many years and to those foreign investors, both those already in the region and those currently living abroad, who buy into the real estate market.
By following this two-pronged strategy of stabilization and then stimulus, GCC governments can soften the blow to the real estate sector and maintain its central role in the region’s ambitious development strategy.
Ramy Sfeir and Karim Abdallah are partners, Charly Nakhoul is a principal, and Zahi Awad is a manager, with Strategy& Middle East, part of the PwC network.