Kuwait Financial Centre “Markaz” MENA REAL ESTATE RESEARCH Qatar Residential Premium residential – Mixed bag - Incremental residential demand to grow at a slower rate of c.4.5% during 2012-13; supply growth to slow as well. - Total demand for 1 & 2 BR premium apartments to outstrip supply in 2012 & 13; Pearl to benefit from this emerging trend. Qatar residential – to grow at 4.5% CAGR over 2010-13 We expect population in Qatar to grow by 3.4% over 2011-15 (CAGR), driven by growth in expats at 3.7% over the period, in turn ascribed to the 9% growth projected for the non-hydrocarbon sector over 2011-15. We believe that this would result in incremental residential demand of c.14,500 housing units for 2012 & 2013 combined, growing by c.4.5%, as against the 6.2% growth during 2004-10. We expect supply of apartments and villas to grow at a much slower pace in 2012 & 13 than the 14.6% growth registered during 2004-2010. Key drivers are the slower pace of underlying fundamentals, project cancellations and delays post the recent economic crisis. Current investment landscape – favors premium apartments Qatar’s regulations restrict ownership interests for non-Qataris to 3 select zones and also provides for acquiring leasehold usufruct rights for 99 years in 18 additional zones. Given the landscape of the market, and return expectations from the perspective of a typical non- Qatari investor investing in residential properties, we consider residential properties in The Pearl & West Bay Lagoon as the relevant locations. As these are premium housing locations and as the returns generated by villas are not comparably lucrative, we consider premium apartments as the relevant demand and supply for analysis. Premium apartments – diverse trends Vacancy rates of c.5% were noticed for premium apartments as of Q1-12, as against our ‘relevant demand model’ for premium apartments which indicates the demand to exceed supply. Also, prices and rentals are not entirely reflecting the undersupply scenario portrayed by the model. This conflicting trend is due to the competition from villas for premium apartments with 3 and more bed rooms. This resulted in vacancies of c.20% for premium 3 BRs, while the demand for premium 1 & 2 BR apartments was clearly higher than supply, and were close to fully occupied. We estimate 1 & 2 BR premium apartments supply to be c.8,000 units as of Q1-12, which were almost fully occupied; and we expect demand to be higher at c.10,750 units. Our forecasts for incremental cumulative demand for 2012-13 stands at c.1,750 units, compared to supply estimates of c.3,200 units. We thus expect the total demand for premium apartment to be marginally above supply, and believe 1 & 2 BR apartments at The Pearl to benefit from this trend, based on its locational advantages & superior quality. Rentals, prices and cap rates – stability to continue We forecast premium apartment rentals & prices to remain mostly stable, as the competition in the market still remains high, in spite of improving investor confidence and strong demand side fundamentals. However, we expect Pearl 1 & 2 BR rentals to witness increases ahead of their competition, once further incremental demand for premium apartments is realized. September 2012 Research Highlights: A study to analyze key emerging residential trends in Qatar and provide an outlook for 2012 & 2013 Markaz Research is available on: Bloomberg - Type “MRKZ” <Go> Thomson Research, Reuters Knowledge Nooz Zawya Investor ISI Emerging markets Thomas K. Mathew Senior Research Analyst +965 2224 8051 [email protected]Venkat Ramadoss ACA, CFA Manager +965 2224 8548 [email protected]Bassam N. Al-Othman Executive Vice President +965 2224 8011 [email protected]Kuwait Financial Centre “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 markaz.com
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Kuwait Financial Centre “Markaz” MENA REAL ESTATE RESEARCH
Qatar Residential Premium residential – Mixed bag
- Incremental residential demand to grow at a slower rate of c.4.5% during 2012-13; supply growth to slow as well.
- Total demand for 1 & 2 BR premium apartments to outstrip supply in 2012 & 13; Pearl to benefit from this emerging trend.
Qatar residential – to grow at 4.5% CAGR over 2010-13
We expect population in Qatar to grow by 3.4% over 2011-15 (CAGR), driven by growth in expats at 3.7% over the period, in turn ascribed
to the 9% growth projected for the non-hydrocarbon sector over 2011-15. We believe that this would result in incremental residential
demand of c.14,500 housing units for 2012 & 2013 combined, growing
by c.4.5%, as against the 6.2% growth during 2004-10. We expect supply of apartments and villas to grow at a much slower pace in 2012
& 13 than the 14.6% growth registered during 2004-2010. Key drivers are the slower pace of underlying fundamentals, project cancellations
and delays post the recent economic crisis.
Current investment landscape – favors premium apartments
Qatar’s regulations restrict ownership interests for non-Qataris to 3 select zones and also provides for acquiring leasehold usufruct rights
for 99 years in 18 additional zones. Given the landscape of the
market, and return expectations from the perspective of a typical non-Qatari investor investing in residential properties, we consider
residential properties in The Pearl & West Bay Lagoon as the relevant locations. As these are premium housing locations and as the returns
generated by villas are not comparably lucrative, we consider premium apartments as the relevant demand and supply for analysis.
Premium apartments – diverse trends
Vacancy rates of c.5% were noticed for premium apartments as of
Q1-12, as against our ‘relevant demand model’ for premium apartments which indicates the demand to exceed supply. Also, prices
and rentals are not entirely reflecting the undersupply scenario
portrayed by the model. This conflicting trend is due to the competition from villas for premium apartments with 3 and more bed
rooms. This resulted in vacancies of c.20% for premium 3 BRs, while the demand for premium 1 & 2 BR apartments was clearly higher than
supply, and were close to fully occupied.
We estimate 1 & 2 BR premium apartments supply to be c.8,000 units as of Q1-12, which were almost fully occupied; and we expect
demand to be higher at c.10,750 units. Our forecasts for incremental cumulative demand for 2012-13 stands at c.1,750 units, compared to
supply estimates of c.3,200 units. We thus expect the total demand
for premium apartment to be marginally above supply, and believe 1 & 2 BR apartments at The Pearl to benefit from this trend, based on
its locational advantages & superior quality.
Rentals, prices and cap rates – stability to continue
We forecast premium apartment rentals & prices to remain mostly stable, as the competition in the market still remains high, in spite of
improving investor confidence and strong demand side fundamentals. However, we expect Pearl 1 & 2 BR rentals to witness increases ahead
of their competition, once further incremental demand for premium apartments is realized.
September 2012
Research Highlights: A study to analyze key emerging
residential trends in Qatar and provide an outlook for 2012 &
On the supply side, we estimate that c.3,200 1 & 2 BR premium apartment units would be added over 2012 & 13, higher than the
cumulative incremental demand estimate mentioned earlier. However,
supply tends to get adjusted downwards more than upwards compared to expectations and, this would lead to more evenly
balanced incremental demand-supply trends. Moreover, demand side factors such as strong demand for high end housing over 2012/13 and
the likely upward revisions to demand drivers would contribute its
part, curtailing any concerns of incremental supply not being taken up.
As a result of the factors discussed above, we expect incremental
demand / supply trends for premium 1 & 2 BR apartments to be more balanced than oversupplied. Also, we do not expect relevant supply at
Lusail to compete with Pearl over 2012 & 13, as the completion and handing over of the first few buildings itself is likely to happen beyond
this period.
1 & 2 BR premium apartment demand to
grow 4.9% over 2011-13
Incremental
demand/supply trends to be balanced
Pearl 1 & 2 BR to benefit
from limited competition and superior quality
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 12
Exhibit-14: Incremental supply at Pearl & Diplomatic District
Source: DTZ, Markaz analysis
For premium apartments as a whole, we estimate the incremental
cumulative demand for the period 2012-13 at c.3,200 units, while
supply estimates stand at c.4,300 units, considering the current completion run rate. However, taking into consideration, that supply
would be more back-end loaded in nature, we expect our supply estimate to have more downside risk.
Supply to be more back-
end loaded; downgrades to supply estimates likely
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 13
Premium apartments long term outlook
For the longer term, we expect demand to grow at a CAGR of 3.6%,
with incremental demand of c.15,500 units being realized over 2011-
22, as more highly skilled expats enter Qatar, towards the finishing stages of the major infrastructure projects and, preparations to the
lead up to the World Cup.
Exhibit-15: Long term premium apartment demand
Source: Markaz analysis
Lusail to dominate long term supply
On the supply side, premium apartment stock is expected to grow by
over 45,000 units over the next 11 years, largely ascribed to the
additional supply from Pearl (c.12,100 units) and Lusail (31,000 units). However, these supply estimates are subject to project delays as is
evident from current project trends, and therefore future supply is likely to be more back-end loaded in nature. Also premium apartment
supply estimates from Lusail run the risk of downward revisions, as project developers could deviate from the initial plan of constructing
premium apartments, depending upon trends that emerge in future,
which could further tighten the demand/supply situation and lead to lower future competition for Pearl apartments.
Exhibit-16: 2011 vs. 2022 relevant supply
Source: DTZ, Lusail, Markaz analysis
We consider the premium residential segment to be the most sensitive
to a shift in the underlying drivers and believe that our forecasts
reflect close to a conservative scenario as we expect potential 1) upward bias to GDP forecasts 2) upward revisions to our population
forecasts and 3) future migration & second home preferences of existing households living in villas with much higher disposable
incomes to upmarket residences like Pearl.
Premium apartment demand to grow by 3.6%
CAGR over 2011-22
Long term premium
apartment supply to mainly come from Lusail
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 14
Trends in rents, cap-rates and prices
Overall apartment rents in Qatar have declined c.24% on an average
since its peak in Q3-08, with 1BHK and 2BHK declining c.25% &
c.28% respectively while 3BHK declined lower at c.20%. Furthermore, rentals at Diplomatic District & Pearl have declined 23% & 17%
respectively, on an average since the start of handing over of units in these developments. Asteco reported that rentals in Pearl & Diplomatic
District have remained stable since Q1-11 and that 1 & 2 BR premium
apartment rentals had increased in Q2-12 by c.8%.
Exhibit 17: Apartment rental trends
Source: Asteco, Markaz analysis
Rents to remain stable
We forecast premium apartment rentals to remain mostly stable, as
the competition in the market still remains high, in spite of improving investor confidence and strong demand side fundamentals. However,
we expect Pearl 1 & 2 BR rentals to witness increases ahead of their
competition, once further incremental demand for premium apartments is realized. Asteco highlighted that demand for 1-BR
apartments at Pearl & Diplomatic district was beginning to outstrip supply, mainly from the recent influx of expats from mature markets,
who prefer quality residences.
Exhibit-18: Premium apartment rental trends
Source: Asteco, NAI Qatar, Markaz analysis
Average gross cap rate for a typical 2 BR at the Pearl based on sale
prices & rents quoted by market reports stands at c.7.0%, remaining fairly stable at those levels since Q1-11, while net cap rates are at c.
5.1% after considering the service charges. Although the rate appears low compared to some other markets in the region, we believe the low
cap rate is justified by underlying factors that drive fair cap rates.
Apartment rentals
recovered post Q3-11
High competition for 1 & 2 BR to keep Pearl rentals
stable
Borrowing-cap rate spread
of +0.8% & Pearl 1 & 2 BR apartments
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 15
Fair cap rates are understandably a function of macro, sector & property specific expectations of investors & the prevailing investment
climate. The current cap rates at Pearl reflect macro factors such as
the current low interest rate environment that prevails both in Qatar & globally, and the lack of many other attractive investment avenues of
the same risk grade for capital flow. Pearl’s existing cap rates, also takes sector specific expectations of more balanced demand/supply
into account, and factors in the property specific investor view of lower risk from higher construction quality, both in respect of
amenities offered and expected life of buildings.
Exhibit-19: Pearl - 2 BR average cap rates and prices
Source: QCB, Asteco, Markaz analysis
The current mortgage rate for a typical creditworthy borrower stands at 4.3%, indicating a spread of +0.8% over the cap rate for a typical
2 BR apartments in the Pearl. We do consider the presence of a spread between cap rates and borrowing rates as natural, typical of
the region’s dynamics of being a renters market. Further, current
borrowing rates represent close to trough level rates leaving limited headroom to exploit the borrowing –cap spread going forward.
However, investors are likely to benefit from even a marginal cap rate contraction, given current mortgage rates and rentals trends.
Our quick calculation shows that Pearl 2 BR apartment investors,
leveraged c.80% are likely to realize an IRR up to 14.7 % over 2012 & 13 from even a marginal 10 bps cap rate contraction. We estimate an
IRR sensitivity of c. 4.0 % per 10 bps change in cap rates, funded by 80% debt financing.
Exhibit-20: IRR from Pearl 2BR -cap rate contraction (-10bps)
Source: Asteco, Markaz analysis
Pearl cap rates factor in
lower risk from better construction quality, &
lower future depreciation
Pearl prices have
remained stable from Q1-11
10bps decrease in cap rates could lead to an
investor IRR of c.15% over 2012 & 13
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 16
Real estate sector liquidity
Real estate lending had increased significantly on a relative basis in
2011 over 2010, growing by c.49% (+ c.89% vs. 2009), and we
expect this to be a function of the extent to which the real estate and construction sectors contributed to non-hydrocarbon economic
activity. However post 2011, the growth in lending has stabilized, growing c.7.5% in Q2-12 over Q4-11. Credit lending to real estate as
a percentage of total credit grew from 14.4% in 2010 to 19.7% in Q1-
12, surpassing peak 2009 levels, before marginally declining in Q2-12 to 17.9%. Furthermore, RE credit grew from c.23% of private credit in
2010 to c.35% in Q2-11 and increased from c.9.0% of total assets in 2010 to c.11.6% in Q2-12, both witnessing minor declines Q-o-Q and
stabilizing in Q2-12.
The liquidity to the sector is expected to remain healthy, as real estate
prices stabilize (in some cases possible moderate gains) and further demand is realized from Govt. investments into infrastructure. It is
also noteworthy that in 2009, the Govt. purchased QAR 15Bn worth of real estate investment portfolios that local banks had on their books,
to enable banks to provide additional liquidity to the real estate sector.
Exhibit -21 provides an indication of real estate lending trends provided by banks in Qatar.
Exhibit-21: Trends in RE sector credit
Source: QCB, Markaz analysis
We expect the liquidity situation for the Qatari banking system to not
be vulnerable to an external funding crisis, as liquidity is supported
predominantly by internal deposit funding. This is evident from the fact that internal funding from banks and customer deposits
constituted c. 50% of the overall asset position as on Jun-12, and has remained over 50% since Q1-09 mostly. Also, resident customer
deposits amount to c.93% of overall customer deposits and has remained above 90% of total customer deposits mostly since Q1-09.
The total liquid assets-to-total asset ratio remained over 36% over
2009-2011, providing ample room for lending activities. These factors eliminate the fear of liquidity bottlenecks, from sources of funding
which are transitory in nature and confirms our view that, credit lending to the real estate sector would remain healthy and is unlikely
to witness any major setbacks.
Real estate lending grew
c.49% in 2011 over 2010
Liquidity supported by internal deposit funding of
c.50%
Liquid assets remained over 36% over
2009-11
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 17
Exhibit-22: Qatar liquidity funding position
Source: QCB, Markaz analysis
Transaction trends also give an indication of the liquidity environment
prevalent in real estate markets. An analysis of the Qatar RE transactions shows a healthy trend in the real estate sector, as the
value transacted has increased by over 90% in Q2-12, as compared to
Q1-11. The value transacted has been increasing steadily since Q1-11, likely due to improved sentiment and likely aided by higher lending to
the sector which grew from 26% of private sector credit in Q1-11 to 35% in Q1-12, benefiting from higher credit to the private sector
which grew c.18% in absolute terms.
Exhibit-23: Transactions* on trailing quarter summation basis
Source: MOJ, Markaz analysis, * MOJ does not include Pearl transactions data Note: Transaction data before W13 2011 is not publicly available
Qatar real estate
transactions improved by over 90% between Q1-11
& Q2-12
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 18
Appendix 1 Relevant demand estimation methodology
Using our proprietary relevant demand model, we analyzed and forecasted demand potential for high
income households likely to consider Pearl apartments as a residential option. QSA census statistics for our base year-2010 indicate that 779,246 people resided in 146,707 households, while the number of
households defined as “high income households” based on the head of household income, amounted to 72,949. We ventured to model high income households by considering key additional factors such
as family sizes and income generated by working dependents. Exhibit 24 depicts our demand
estimation methodology.
Exhibit-24: Relevant demand methodology
Source: Markaz analysis
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 19
Exhibit-25: Qatar 2010 households Exhibit-26: Households based on household income
Source: QSA, Markaz analysis
Our analysis of 2010 Qatar household data indicate that, despite 72,949 households having high
income head of households, the relevant demand for premium residences was significantly lower at 43,972 households. This is due to the fact that c.40% of the high income households as per the
Census classification (high income head of households) would not be able to afford premium residences or, avail similar residential options. Of the 43,972, relevant demand for premium
apartments was c.31,000 constituting only c.21% of overall household demand. As evident from Exhibit 26, majority of the households were in the QAR 26,000-39,000 household monthly income
bracket, and households with a monthly household income of QAR75,000+ amounted the least.
Size of the households is the primary determinant factor to estimate the demand for 1 & 2 BR premium apartments, estimated at c.16,600 units from our model, based on a 30% allocation of household
income towards housing. This estimate primarily considers high income earning households with a family size less than 4, along with a factor adjustment to consider the psycho – economic factors for
willingness to seek a premium apartment as not all high income households with small family size
should choose to live in premium apartments.
Exhibit-27: 2012 & 2013 premium apartment trends
Source: Markaz analysis
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 20
Relevant demand sensitivity
Key variability factors in our model that allocates/cuts off number of households from the affordability
bracket include, budget allocated for housing, number of families with only non-working dependents
etc. Furthermore, our model also incorporates movement of households from apartments to villas and villas to apartments based on the sensitivity of household income to aforementioned parameters. The
incremental/erosion of demand, as a result is not linear when moving across affordability levels and only non-working dependent families percentages, as can be seen in Exhibit 28. Our analysis further
incorporates the sensitivity of apartment preference of 4-6 member households who 1) can afford high end villas, but prefer premium and 2) cannot afford high end villas, but can afford high end
apartments, but still prefer non-premium villas. Our relevant demand model derives relevant demand
for premium apartments to be c. 21% of the aggregate households in 2012, and estimates premium residential sensitivity of close to 328 units to a 1% change in population growth.
Exhibit-28: Total premium apartment units sensitivity
Appendix-2 The 18 areas where 99 years ‘usufruct rights’ can be acquired:
Musheireb
Fereej Abdul Aziz
Al Doha Al Jadeeda
Ghanim Al Qadeem
Al Rifa Al Hitmi
Al Salata
Bin Mahmoud
Rawdat Al Khail
Al Mansoura & Bin Dirham
Najma
Umm Ghuwailina
Al Khulaifat
Al Sadd
New Mirqab & Al Nasser
Doha International airport
Al Dafna & Onaiza & Al Qitar
Lusail, Al Kharaij & Jebel Thiya
MENA REAL ESTATE RESEARCH
September 2012
Kuwait Financial Centre “Markaz” 22
Disclaimer
This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is
regulated by the Central Bank of Kuwait. The report is owned by Markaz and is privileged and proprietary and is subject to copyrights. Sale of any copies of this report is strictly prohibited. This
report cannot be quoted without the prior written consent of Markaz. Any user after obtaining Markaz
permission to use this report must clearly mention the source as “Markaz”. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a
solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction.
The information and statistical data herein have been obtained from sources we believe to be reliable but no representation or warranty, expressed or implied, is made that such information and data is
accurate or complete, and therefore should not be relied upon as such. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report.
They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz
has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein,
changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn.
This report may not consider the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice
regarding the appropriateness of investing in any securities or investment strategies discussed or
recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each
security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past
performance is not necessarily indicative of future performance.
Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking
deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. This report may
provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of Markaz, Markaz has not reviewed the linked site and takes no
responsibility for the content contained therein. Such address or hyperlink (including addresses or
hyperlinks to Markaz’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such
website or following such link through this report or Markaz’s website shall be at your own risk.
For further information, please contact Markaz at P.O. Box 23444, Safat 13095, Kuwait; Email: [email protected]; Tel: 00965 1804800; Fax: 00965 22450647.