Fast-growing North African economies are feeling the heat of a new rising star: real estate. Regional powers perceive the real estate sector, which is attracting fresh flows of foreign investments in the new millennium, as an important vehicle for economic growth. Real estate development is also seen as a potential cure to epidemic social ills like housing shortages and unemployment. As foundations for megaprojects and high-value real estate are laid across the Maghreb, governments are additionally investing in much-needed social housing units and the creation of new retail, manufacturing, and services ventures. Many real estate projects in development in the region are linked to increasing tourism, and serve the dual-purpose of attracting foreign investments and a steady stream of wealthy consumers.

Experts attribute the recent boom in North African real estate to new investment flows issuing from the cash-flush GCC. Gulf countries are seeking to diversify their economies away from dependence on oil exports, and regional investors, equipped with a petrodollar windfall in excess of $2 trillion, are looking out for high-value real estate investments at home and abroad. Since 2003 the excess liquidity created by rising oil prices in the Middle East has set the stage for oil-fueled investors, predominantly sovereign funds and wealthy families, to make record levels of global investments.

However, investments stemming from the Middle East’s economic boom are not everywhere welcomed with open arms. In 2006, the United States Congress opposed Dubai Ports World’s $6.8 billion acquisition of the British ports management company that handled strategic American ports, citing security concerns. Cultural bias in the developed countries, as well as the volatility of the US real estate market and the credit crunch, have led Arab investors to seek out more opportunities for investment within the MENA region. Many see this concentration of investments in MENA real estate as a private expression of Arab solidarity. Dubai-based Al Noor Holding is even planning to build two futuristic cities worth $200 billion in the unlikely locales of Yemen and Djibouti.

North African countries, with high potential for growth, but major lags in development in key areas like employment, housing and infrastructure, are an obvious destination for these investments. High-value real estate, already a relatively safe investment insofar as it is protected from sudden price surges in today’s volatile global markets, have the added value of promoting sustainable development and a brighter future for the integrating MENA region. In the unevenly developed Maghreb, where shantytowns often are side-by-side with luxury villas, a well-placed megaproject has the power to transform an impoverished area with unemployment into a bustling tourist hub with a services industry to soak up labor.

Morocco

Morocco undoubtedly holds the title of most promising market in North Africa. Experts like Khalid Alioua, CEO of the state-owned Credit Immobilier et Hotelier Bank, estimate that the real estate sector contributes as much as 7% to Moroccan GDP. At a recent conference Karim Baqqali, regional director for North Africa of the leading international real estate consultancy CB Richard Ellis, spoke of a revolution in Morocco’s real estate sector, lauding the sector’s “professionalism, internationalization, and progressive financing.” King Mohamed VI and his coterie of business-savvy technocrats have worked hard to encourage the sector’s development, offering bargains on land to court megaprojects and foreign investments, as well as pushing through legal reforms to open the sector.

The country is counting on the recent launching of numerous megaprojects to boost the kingdom’s economy and bring in more tourists. In 2005, the UAE’s Emaar Properties, one of the world’s largest real estate companies, announced its intention to invest more than $4 billion in shopping malls in the Arab world and the Indian sub-continent. At the time its president, Mohammad Al-Abbar, communicated that his company was particularly interested in Morocco. Soon after, Emaar joined with the Moroccan industrial and financial group ONA, which has close ties to the Moroccan monarchy, in a venture to create five large-scale luxury residential complexes throughout Morocco. The luxurious premises of Tinja, spread out over 300 hectares of land, will be flanked by the Atlantic coast on one side and by natural forest on the other. A short drive from Tangiers, Tinja will hold 2,500 houses in six separate neighborhoods, and is set to include sports clubs, hotels, and shopping plazas. Representing an investment of more than $1 billion, Tinja is widely regarded as one of the most important tourism venues under development in Morocco, and will be followed by four more Emaar mega-projects in the mushrooming Marrakech region, as well as in and around the kingdom’s capital city of Rabat. Aside from Emaar, other Gulf investors like Al Qudra Holding, Qatar Real Estate Partners, Dubai Holding, and Pearl of Kuwait Real Estate have all signed contracts and investment agreements for strategic investments in various regions of the kingdom.

The Arab-led development of residential and touristic complexes will help serve Morocco’s national objective of welcoming 10 million tourists by 2010. So will the national strategy Plan Azur, which outlines the creation of six seaside resorts dotting far-lying regions from Saidia on the northern Mediterranean coast to the virgin, dune-lined Plage Blanche on the southernmost Atlantic coastline. Despite light delays, Plan Azur’s execution has been smooth, with Spain’s Fadesa, the American Colony Capital, Belgian company Thomas & Piron et Colbert Orc, and South Africa’s Kerzner all winning contracts to build and develop sites. The projects, which feature golf courses, luxury hotels, and thousands of villas, are being marketed to French and British buyers, as well as the increasingly sought-after MREs (Marocains Residant a l’Etranger, Moroccans who live abroad). 

But while some companies are excitedly selling not-yet-built villas to wealthy buyers, many in the kingdom are more concerned with the unmet needs for affordable housing for the country’s lower and middle classes. Housing Minister Toufiq Hejira estimates the yearly demand for housing units at between 30,000 and 40,000. An enduring housing deficit, fed by rural exodus and haphazard urbanization, continues to have negative sociological and cultural effects throughout the kingdom, fueling crime and classism between the haves and the have-nots.

Hejira has implemented numerous reforms in the real estate sector to correct the deficit by building 130,000 social housing units by 2012. The state is relying on public-private partnerships to reach ambitious quantitative goals before deadline. Private-public partnerships, an increasingly popular means for doing business in Morocco, are seen as a way to translate the wishes of the monarchy into well-run initiatives, as well as to improve relations between the state and the private sector. The minister’s social housing projects, worth $2.2 billion, will offer units of 50-60 squares meters for around $19,000. New financing options, like the guaranteed loans program FOGARIM are accompanying the construction of social housing in order to assist target-income households (who earn less than $400 a month) settle into new developments. Additionally, the slum-free cities program is a state-led effort to eradicate over 1,000 slums throughout the kingdom and re-house inhabitants.

State-sponsored measures like these are of vital importance in confronting the blight of urban poverty, particularly as expressions of wealth like shopping malls and mansions become more common in Morocco’s big cities. But as the country rushes to meet quantitative goals for new low-cost homes and living environments, some are concerned that the quality of these accommodations is inadequate. Sociologist Jamal Debbaghi released a study in March 2008 warning that social housing projects run the risk of becoming ghettos, due to high density, unemployment and a lack of socio-economic diversity. Others report that black market developers are charging well above the set prices for housing units.

While most welcome the administration’s commitment to court megaprojects and supply social housing, a recent scandal shed light on negative aspects of the state’s involvement in the sector. In July, Miloud Chaabi, then-president of the Real Estate Federation and CEO of leading private industrial company Ynna Holding, resigned from his post at the federation, publicly accusing the administration of unethical practices and non-transparent handing over of land. He charged the state with favoring certain real estate promoters over others, through offering lucrative no-bid contracts and cessions of public lands at below-market prices to developers Addoha, CDG, and Al Omrane. These companies have denied the charges and local press reports that the administration may respond by suing Chaabi for defamation.

Scandals like this one could jeopardize Morocco’s hard-won reputation for particularly strong investment opportunities. Ranked 129rd among a total of 181 economies by the World Bank’s 2009 Ease of Doing Business rankings, the country ought to accompany the liberalization of its economy with higher standards for transparency within government and business practices.

Tunisia

Tunisia, less well-known in the sphere of global tourism than Morocco or Egypt, is making inroads in the sector through a series of projects aimed to raise its international profile and improve tourism capacities. With a population of just 10 million, Tunisia’s historic medinas, Mediterranean beaches, and friendly, well-educated public have the potential to attract higher levels of tourism. Meanwhile, the country’s steady economic growth, low inflation, and political stability are appealing to investors. Since the 1990s Tunisia has taken a series of steps to liberalize its economy and remove obstacles to international investment.

In 2007, Tunisia’s economy grew by 6.2%, its highest performance in 10 years, and tourism brought more than 7 million visitors to the country. The Tunisian economy ranked 73rd out of 181 on the “Ease of Doing Business” Report, up eight places from the year before. Over $20 billion worth of building contracts were signed in the country in 2006 alone, and Tunisians look forward to seeing an upcoming boom. The country is indisputably an up-and-coming property market.

As in Morocco, Arab financiers are actively seeking out investment possibilities in the country, which has a high potential for tourism development. FDI grew by an eye-widening 60% in the first trimester of 2008, reaching $491.5 million. Partially due to new investments in the services sector, this growth is also attributed to a new wave of investments in tourism and real estate. The Tunisian real estate sector, supervised by the Ministry of Equipment, Housing and Land Development, has become more open in recent years to foreign investments, since the passing of new legislation in 2005 made it easier for foreigners to purchase property in areas designated for “economic and tourist activities.” Increasing levels of private involvement, in particular flowing from Gulf-based companies, are leading to megaprojects and massive infrastructural renovations that target development of the country’s tourism capacities and services sector.

The Enfidha International Airport, which will have a capacity of 30 million passengers as well as an industrial zone, will serve as a platform for Tunisia’s emergence as an international pole for services, trade and tourism. The airport, scheduled to open in 2009, will be developed by a Tunisian subsidiary of the Turkish operator TAV Airports Holding, which in April 2008 received a loan of nearly $585 million to finance the project. The Tunis Financial Port, scheduled for completion in 2010 by the Qatari Gulf Finance House, will become the first off-shore financial center in North Africa, and will feature insurance, consulting, banking and corporate centers, as well as a marina and residential and commercial real estate.

Unexploited tourism potential has mobilized massive investments in several megaprojects throughout the country. Tunis Sports City, whose development was launched in May 2008 by the Emirati Bukhatir Group, is set to become a remarkable city of over 255 hectares. Nine different sports academies, and state-of-the-art stadiums, golf courses and swimming pools will be featured in this multidisciplinary paean to athleticism, where celebrated sportsmen will train young Tunisian and foreign athletes. Residential and touristic complexes will round out Sports City with luxury hotels, towers, high-value villas and shopping malls. The ubiquitous Emaar is transforming a semi-wasteland at Hergla into a $4.5 billion residential and tourist resort, and the construction of various marinas along Tunisia’s 800-mile long Mediterranean coastline will offer tourists an exotic alternative to the saturated French and Italian rivieras. 

Sama Dubai recently unveiled plans for its Porte de la Mediterranee, a $25 billion new city along the banks of Lac Sud. The Emirati company has gone to great lengths to convince Tunisia that the new city serves various national interests. The project is expected to give rise to estimated 350,000 jobs in the region and will serve as a vehicle for valorizing and preserving Tunisian architecture and culture. It is also seen as a means for improving human resources capacity in the country. “Sama Dubai will make every effort to use available local competencies and resources, as much as possible. We are currently working on the lookout for local talent who will contribute not only to the general development of the project, but who will also benefit individually from promotions within their own careers,” Sama Dubai’s CEO Farhan Faraidooni was quoted at a reception celebrating the inauguration of the city’s new sales office.

But many Tunisians worry that foreign investment is already causing dangerous rises in real estate prices. Unlike Morocco, Tunisia does not face a housing deficit and the most recent census stated that more than 80% of Tunisians own their own homes. First-time buyers, however, have limited financing options at their disposal, and are thus poorly equipped to deal with high-interest rates and sizable down payments. With Gulf investments causing land and construction prices to shoot up, in March 2008 President Zine El Abidine Ben Ali pressed the Central Bank to cut interest rates on home loans. A development plan with a horizon for 2011 is aimed at the construction of 300,000 new housing units, 70% of which will be set aside for low-income households.

Algeria

Algeria has drawn a distinctly smaller share of new investment, due to ongoing security concerns and its cumbersome, slow-moving government. Recent attacks on foreign targets like the United Nations headquarters are a major impediment to development of tourism, and thus the investments that are coming in are mainly devoted to infrastructure, not to real estate.

Furthermore, even as the administration publicly invites foreign companies to invest in Algeria, the state has passed measures hostile to FDI. “We call on Arab investors to come up with serious and feasible projects and we commit ourselves to facilitating their entry into our market,” Finance Minister Mourad Medelci told a conference of 200 Arab businessmen in 2006. But the government’s 2009 budget calls for a 20% tax on capital gains on the sale of shares or parts of businesses by non-residents. In a separate move, Algeria is now requiring local and foreign investors to invest a portion of their profits into local markets over the next four years. This waffling is probably due to Algerian economists’ fears that foreign investments, rather than boosting the national economy, could have the harmful effect of exporting capital from the country. Until it manages to impose higher standards of administration, Algeria will see little of the petrodollar windfall that is boosting real estate in Morocco and Tunisia.

Over the last two years, Dubai’s real estate sector has recorded the largest improvement in transparency of any market in the world, according to a recent Jones Lang Lasalle report. The study classified 82 markets into five tiers, the first being ‘highly transparent’ and the last ‘opaque’. Dubai was one of only eight markets to move up a full tier from ‘low transparency’ to ‘semi-transparent’. In the global ranking, Dubai moved from 46th place in 2006 to 32nd in 2008 and it currently heads the three most transparent markets in the MENA region — Dubai, Bahrain and Abu Dhabi — which are the only MENA markets in tier three. Additionally, Dubai’s level of transparency is currently on par with Russia and ahead of the other BRIC countries Brazil, India, and China.

Indicator of openness

With the globalization of real estate markets and the increasing growth in the sector, the transparency index has become a key indicator in measuring the openness and ease of doing business in a particular market. Blair Hagkull, managing director of the MENA region at Jones Lang Lasalle, told The National that transparency “ultimately provides the foundation for the investment climate.” Transparency is very important for tenants, investors, and other real estate stakeholders. It lowers the risk for investors as well as the volatility of the market cycles. At the same time it increases sales activity, foreign participation and leads to stronger demand for corporate real estate.

Dubai’s lead in transparency is mostly due to the Freehold Law issued in 2002 that opened up the market to foreign ownership and resulted in a 12-fold increase in real estate transactions over the last six years. Starting in 2001, foreigners, who make up more than 80% of Dubai’s population, were allowed to take up leases on apartments and villa properties in Dubai for a period not exceeding 99 years. In 2006, a new freehold law allowed foreign buyers and investors to own property for life in large parts of the city, as well as lease, sell, or rent at their own convenience. According to the Dubai Land Department, as quoted in the Jones Lang Lasalle report, real estate transactions at the end of 2007 reached $125.3 billion, up from $10.6 billion at the end of 2002. The freehold law was described in the report as the “single most important factor driving the growth of the real estate sector in recent years.”

Even though the freehold law did a good job in strengthening the market and was by itself a sufficient driver for growth, the government of Dubai did not stop there. In August 2008, a new mortgage law was issued. Marwan Ahmed Bin Ghalita, the CEO of Dubai’s Real Estate Regulatory Authority was quoted by Business Intelligence-Middle East as saying the law will regulate the mortgage process in order to protect the rights of borrowers and lenders and to improve transparency. Additionally, the Regulating Initial Property Registration Law introduced a system of pre-registration for off-plan sales contracts at the Land Department. It also provides the basis for implementation of some of the provisions for Dubai’s new mortgage law. All unregistered off-plan sales will be invalid under the new law and all developers that do not comply with its provisions will be reported to the relevant authorities for investigation.

Speedy Gulf development

According to the Jones Lang LaSalle report the regulatory and legal environment is one of the main drivers of Dubai’s market growth. Craig Plumb, head of research (Middle East and North Africa) at Jones Lang LaSalle, recently said that Dubai’s development is very fast compared to mature cities like London and Hong Kong, which took decades to develop. Additionally, he stated, Dubai should improve the transparency of its real estate market by introducing more property performance indices, making more information available, and offering indirect ways for investing in real estate. If these improvements are made, Dubai is expected to be in tier two by 2010.

Abu Dhabi, another emerging real estate market in the UAE is also witnessing a significant improvement in transparency. The National quoted Hagbull as saying, “Abu Dhabi is three to four years behind Dubai’s real estate boom and what it has achieved in terms of transparency is remarkable.” Abu Dhabi’s main setback is the existence of foreign ownership limitations that keep the market relatively closed and limit the city’s proportion of foreign investment coming to the UAE. Freehold ownership for non-GCC investors is not allowed on Abu Dhabi Island itself. It is limited to 99-year leasehold interests in approved investment zones, like Reem Island and Raha Beach. The city’s environment is expected to gradually liberalize by introducing “structural reforms and more outward oriented business policies,” said Hagbull.

Bahrain’s real estate market is classified in the third tier somewhat less transparent than Dubai but better than Abu Dhabi. Like Dubai, Bahrain also issued new legislation in 2006 enabling foreigners to own property in certain residential buildings, which have been classified as zones A, B and C. The law was then extended to enable foreign ownership in the many new tourist development projects throughout Bahrain. This allows for increased real estate investments by expatriates who have come to live and work in the kingdom and who represent a strong element in the country’s population. The real estate markets in Bahrain and Abu Dhabi were both considered in Jones Lang Lasalle’s report as having “governments and regulatory authorities […] recognizing the importance of improving transparency to enhance their competitiveness.” Continuous efforts are made to strengthen this sector since investors driven by increasing globalization are always in search of new and better opportunities. This creates a strong incentive for governments to open up the markets and allow a free flow of capital in hope of attracting new investments and developing their economies.

The rest of the MENA region remains in the fourth and fifth tiers and is ranked as the world’s least transparent, although it has witnessed the biggest progress since 2006. Egypt and Saudi Arabia (both in the fourth tier) rank among the world’s ten most improved markets, while other countries like Algeria, Syria and Sudan (in the fifth tier) show little or no improvement at all. However, these markets continue to open up and are expected to attract regional interest and make some progress in the next few years.

The up and coming real estate sector of Oman is impossible to ignore. Supported by various positive ingredients, the burgeoning economy of the sultanate faces a bright future in major sectors, and real estate is at the top of the list. The rather liberal Omani government plays a positively emphatic role in opening up the state’s economy through its rigorous modernization, diversification, and liberalization plans.

Coined Oman 2020, the government has devised a reform plan to diversify its economy to make it less dependent on oil production. In order to attract foreign investment, the government passed a law in 2006 allowing foreigners to purchase freehold property throughout tourism-designated resorts across Oman — illustrating its candid attempts towards heterogeneity. Projects such as The Wave, Blue City (Al-Madina al-Zarqa), and Salam Yiti are headlining real estate news in the sultanate, as foreigners are flocking in just to purchase residential properties at comparatively — relative to its GCC neighbors — low prices. The Omani government is also helping locals purchase homes by imposing caps on banks for personal loans (including home loans), at 40% to 45%. Since the demand of available space has outstripped supply, Oman is facing an increase in rental and purchasing prices. According to the Oxford Business Group (OBG), there has been a “shortage of about 2,500 residential units in Muscat annually, and as a result unit prices in Muscat have doubled over the past three to four years, increasing from around $195-250 per [square meter] in 2004 to $390-520 in 2007.” To contain this problem, the Omani state has been notably generous in the distribution of land to mammoth developers, at especially low rental rates for long-term leases. Clearly the government is creating tremendous incentives for both foreigners and locals alike to acquire real estate in Oman.

Analysts predict that the value of demand for Omani real estate will top $20.8 billion by 2010. Eqarat.com market research reveals that total investments into the real estate sector have reached $4.2 billion in 2007, up from a low $750,000 in 2005. Currently, residential properties are the highest fruit-bearing investments within the sultanate. In 2007, the average price per square meter grew by 253%, rising to an average of $135 per square meter — a dramatic increase from a mere $42.35 in 2006. Many foresee Oman’s long-term investments into commercial activities, such as manufacturing and tourism, as major drivers on the demand for real estate this year. Other key forces to the proliferation of the real estate sector include: significant population growth, with quite a young demographic — approximately one third of Omani’s population is under the age of 15 — influx of expatriates, stream of international companies, incentives for foreign investors, low cost of land, as well as the luminous growth potential of the sultanate’s economy. With such promising drivers on its side, financial backing from regional heavyweights is sure to increase sooner than later.

So long as the Omani government aspires to diversify its economy and lessen its dependency on high oil prices, the potential of its real estate market will continue to shine brightly. Without a doubt, the Omani real estate sector is bound for exponential growth and great success.

The Gulf is once again pushing the boundaries of architectural innovation by building what will be one of the world’s largest urban developments and the tallest skyscraper. But unlike the past few years where the biggest, largest, tallest and most expensive were monikers applied to projects in Dubai and Qatar, Kuwait is now in on the act with the City of Silk.

The $132 billion project will transform Kuwait as the mega-development rises from the desert over the next 20 years to cover 250 square kilometers. And unlike other projects underway in the Gulf, the City of Silk (Madinat Al Hareer) is to become a central part of Kuwait’s economic future as it moves to diversify away from hydrocarbon revenues, slated to contribute $15 billion to the country’s annual GDP by 2030.

The project also aims at turning Kuwait into a more knowledge-based economy through investment in the media and entertainment sectors at the City of Leisure, a hub for universities and education, and for environmental research at a wildlife reserve at the City of Ecology. Due to the strategic location of the project in northern Kuwait, improved economic ties with neighboring Iraq and Iran are also an aspect of the development’s aims.

“City of Silk is a diplomatic and economic initiative that far outstrips the introverted property developments throughout the Middle East,” said Eric Kuhne of London-based architects Eric R Kuhne and Associates, the firm designing the project.

“It is a port city that will open the closest saltwater port to Central Asia and it is a gateway city that will become a catalyst for the Iraqi and Iranian economies. It will create a new economic development zone for trade in the Gulf,” he added.

To be managed by Tamdeen, funding for the City of Silk is through the private sector and from the state. Currently being discussed in parliament as a new Economic Development Zone, the government is expected to fund primary infrastructure. Part of this is Kuwait City’s need for a new financial district, so the plan is to build a City of Trade and Commerce on Kuwait Bay. A port and airport are also to be incorporated into the project, which ballooned the projects costs from an estimated $86 billion earlier this year to the current $132 billion.

Massive infrastructure projects

“The cost shift is because the new airport to the west and the new port to the east have been folded into the budget,” said Kuhne. “These huge infrastructure projects, which are employment centers unto themselves, are what have contributed to the apparent ‘doubling’ of the budget. All of this is exceptionally good news, as City of Silk is about building primary infrastructure for the region as much as creating a 21st century model of Arabian Urbanism.”

Indeed, with the GCC awash in oil money, Gulf states have invested heavily in mega-projects to build cities and economic zones from scratch. Following somewhat later than the UAE, Qatar and Saudi Arabia in such mega-projects, the Kuwait project will outsize any other such development in the GCC.

With 750,000 people to be housed at the City of Silk and jobs for 430,000, in terms of size the project is behind only China’s re-housing project for one million people at the Three Gorges Dam.

By Arabian Urbanism, Kuhne is referring to the structure of the project, made up of 30 communities averaging 25,000 people, within which are five to seven villages of 5,000 to 7,000 inhabitants. “The molecule of Arabian life is the family and this is a profound difference with planning from North America and Europe that is organized more around the individual. City of Silk replaces antiquated planning philosophy and strategies with one that is inspired by the cultural and behavioral patterns of the Middle East,” he said.

But in keeping with other architectural projects and trends in the Gulf, the City is also at the cutting edge of design, with plans to build one of the highest towers in the world at 1,001 meters. And in such an arid area, cutting edge science is being used for water supplies, such as the Seawater Foundation developed saltwater irrigation system, and from sweet water wells, grey-black water recycling, and desalinization plants.

The demand for residential real estate in Saudi Arabia is fueled by a growing and predominantly young population. According to the Oxford Business Group, 70% of the Saudi Arabia’s population is under 30 years old and 45% is under 15, and this young population will boost the demand for houses and apartments in the upcoming years. Samba Financial Group economists estimated that 2.62 million homes will have to be built by 2020 to keep up with the growing demand.

These facts indicate that a large percent of the population should be actively buying houses since most people would prefer to own a house rather than pay rent. Surprisingly, only one in five Saudis owns their home due to the absence of a clear mortgage law because, according to the Saudi government, mortgages do not comply with sharia. On the other hand, some economic experts say that mortgages without interest payments do not oppose Islamic values. Nevertheless, the government banned banks from giving mortgage loans. Without a clear mortgage law, bank borrowing remained very low and mortgage housing finance in the country represented only 2% of the 2007 GDP. 

In July 2008, the Shura Council finally drafted a mortgage law, which was passed to the Council of Ministers for final approval. It is expected that the law will be issued by year’s end. It is comprised of four components: a system to monitor financing companies, a real estate financing system, a lease financing system and a real estate mortgage system.

The law was highly criticized. Abdul Rahman Al-Azmil, a Shura member and industrialist, was quoted saying that the law would not benefit 85% of Saudis whose monthly income is below SR5,000 ($1,333). He added that the law would mostly benefit “large real estate firms, large real estate investors, large financial institutions and the middle class.” Additionally, the mortgage law does not solve some cultural issues like the actions that should be taken in case someone defaults, since throwing people out of their houses is against sharia, and financing off-plan sales is also not addressed in the law.

Though the mortgage law is not yet approved and the market rules are still unclear, banks and mortgage finance companies, as well as real estate finance companies, have been active in providing sharia-compliant financing, be it through murabaha, whereby the bank purchases the house and resells it to the customer at a higher price in monthly installments, or ijara, a kind of leasing, where the bank buys and resells the house to the customer at the same price on installments plus an extra monthly amount as rent. Al Rajhi Bank launched its program for private and commercial properties in May 2007, and Dar Al-Arkan Real Estate Development Company, one of the largest real estate developers, initiated a mortgage finance joint venture with Kingdom Installment Co. (KIC), Arab National Bank and the International Finance Corporation (IFC). 

Even though one of the mortgage law’s purposes is to increase the demand for houses, this huge increase in the demand for funds might overwhelm the real estate sector in the coming years. More analysis and forecasting is needed and banks will have to find new sources of financing for mortgages in order to meet demand and avoid pushing up inflation or prompting a real estate crisis.

Real estate prices in the Gulf countries have been rising across the board. High liquidity during the last few years and promises of big returns have seen investors from Jeddah to Abu Dhabi and beyond throw money at the sector with remarkable results. Yet the buying frenzy, coupled with double-digit inflation and a global financial crisis, has begun to make investors across the region think twice before dumping even more cash into the sector. Questions about the true value of property and the possibility of a regional credit crunch have begun to crop up almost as fast as the towers punctuating Dubai’s skyline.

The Price of Land

“Waterfront property in Dubai costs between 600 and 800 Dirhams [$160-$220] per square foot gross floor area,” said Abid Junaid, executive director of ETA Star Properties. He added that land in the Business Bay area is selling for a similar amount due to its prime location and that plots around the Burj Dubai demand another 20% on the price tag. These prices represent some of the highest yet seen in Dubai, as residential real estate values in the emirate have risen by over 25% per year over the last few years. And it is not only the exclusive neighborhoods that cost more. “Affordable housing areas range anywhere from 250 to 400 Dirhams [$70-$110] per square foot,” Junaid suggested. While these numbers may fail to impress the Emirati real estate neophyte, it is important to note that plots of land in Dubai are priced according to the projected size of the structure to be built. Thus, if a developer wants to build a 30-floor building on 1,000 square feet of land, priced at 700 Dirhams ($190) per foot, he must multiply the 30 by 1,000 by 700 to discover that the plot of land will cost him 21 million Dirham ($5.7 million). This means the selling price of the land will then amount to 21,000 Dirhams ($5,700) per square foot.

These high numbers have become prohibitive for many of Dubai’s residents, who have begun to seek refuge in the neighboring emirates along the Gulf coast. “Sharjah has always been a bedroom community for Dubai. There is a huge demand for residential apartments in Sharjah because they are on average 30-40% cheaper than those in Dubai,” said Jean Pierre Nammour, managing director of Al Nahda Real Estate and Trading. But the increasingly popular emirate just northeast of Dubai has seen its own share of price hikes in recent years. “The last plot of land we purchased was in 1996 at 65 Dirhams [$17] per square foot. Six months ago, we bought a plot across the street from us at 1,300 Dirhams [$350] per square foot,” Nammour explained. Mercifully, however, in Sharjah the size of the structure to be built does not impact the cost of land, so the price quoted is the final selling price.

Ajman

A little farther up the white sand beaches of the Gulf is the emirate of Ajman. This sleepy little town is slowly being transformed into the new Sharjah as it is an even more affordable home base for those who do not mind the slightly longer commute. “Prices for residential property in Ajman have hit 900 to 1,000 Dirhams [$245-$270] per square foot,” noted Rami Dabbas, CEO of Aqaar Properties. In Ajman the purchaser will again have to deal with the complex mathematics of calculating the land price based on structure size. Four Dirhams ($1) per square foot per floor are added to the final selling price. While this means that prices are still cheaper then Dubai and Sharjah, even this emirate is not immune to rising values. As Dabbas pointed out, “In the past year and a half prices in Ajman have gone up by 30-50% in some cases.”

Other Gulf countries are also feeling the pinch. In Bahrain, just as in other countries in the region, land is no longer cheap. “Even by conservative measures, land prices in Bahrain have seen a consistent increase in comparison to previous years. Some of Bahrain’s prime areas have seen a tripling in prices,” asserted Mahmood al Koofi, CEO of Reef Real Estate Finance Co. Growing interest from foreign and regional investors and petrodollars have been the primary drivers in the market of late. “More developed residential areas garner prices in the range of 45 to 55 Bahraini Dinar [$115-$120] per square meter. Commercial plots today go for as much as 70 to 90 Bahraini Dinar [$185-$240] per square meter and investment lands have reached up to 300 Bahraini Dinar [$800] per square meter,” Koofi said.

Saudi Arabia has seen rising real estate prices as well. Again, oil wealth plays a role, as do the plethora of announced architectural mega-projects scheduled to starting going up in many cities in the country, including the famed coastal town of Jeddah. Rakan Tarabzoni, managing director of Blue Print Communications, a firm specializing in real estate advertising, pointed out that, “Jeddah has a very dynamic real estate market, especially with the announced revamping of the landscape. Depending on the location of the land, prices may vary from 1,000 Saudi Riyals [$265] in distant suburbs to 25,000 Saudi Riyals [$6,600] for mainly high profile locations like the Corniche.”

A Healthy Market?

There is no doubt that average real estate prices throughout the Gulf have been steadily climbing for years and have reached spectacular levels. But many people wonder if this trend will continue into the future. Perhaps one of the most important indicators of what may happen in the regional real estate market is Dubai. With its liberal tax regime, openness to foreigners and a ‘can do’ attitude, this emirate of 2.2 million inhabitants is a local trendsetter.

Most of the current indicators in Dubai suggest that the real estate sector could not be better. Occupancy rates are near 100% and every year over 350,000 new visas are issued to people coming to work in the emirate. Relatively cheap credit for developers and the incredible demand for accommodation lead to a 30% surge in the number of projects planned since the beginning of the year resulting in a total pipeline of $952 billion.

“There are many projects in the pipeline and most of them are expected to be completed in 2009 or 2010. There will be excess supply in the market [should all those projects be completed],” said Turker Hamzaoglu, an economist at Merrill Lynch. Perhaps sensing the impending shift in market dynamics, the Dubai government has taken steps to cool the overheated economy and tame the runaway real estate sector with new regulations. Stiffer mortgage laws and the tacit acceptance of higher finance rates are just a few of the actions the government has taken.

Disappearing credit

While these new regulations are significant, the single most important element in the equation is the evaporation of credit due to higher costs. With funding more scarce and a global financial crisis rising, many developers will have to cut their projects. According to a recent report by Merrill Lynch, “approximately $320 billion worth of planned construction projects (a third of all project investment) are likely to be shaved.” This dynamic may be positive in that it keeps supply in check, but it will likely result in the squeezing out of many middle and lower level developers.

Hamzaoglu, however, believes that these bumps “will be a catalyst for normalization of the real estate market.” Noting that Dubai’s economy has been overheating and the monetary policy has been over expansionary, he suggested that these developments may not be such a bad thing. “If this weren’t happening right now, the correction in the future would be much more painful,” he said.

Real estate in the Middle East currently looks like a Greek drama unfolding in twists and stages. Most recently, market assessments for the Gulf region have shifted from a ridiculously positive analyst project to an Emo-fashion sized wave of doom-saying. As observers are viewing the second act, it is not possible to ascertain whether the whole thing will end as tragedy or find happier resolution in a comedy of errors.

The stage for the drama’s current act, that has been unfolding before amazed eyes since July and erupted into a crescendo of action in September, is the region’s stock exchanges. For Lebanese watchers, the actor to keep in focus of attention was the country’s lonesome real estate stock, Solidere, which — by standing in sixth place by market cap among real estate stocks between Cairo and Kuwait City — also is the country’s sole large-cap corporation in regional comparison.

Tightly tied to the surge in security and national stability, Solidere’s share price had defied the tempest of Beirut’s downtown political quarrels in 2007 and the first quarter of 2008. Liberated from the corset of demonstrations after a last test by violence, the stock ascended on the wings of the Doha Accord to unprecedented share price levels in June.

Its price level of well above $30 per share and by local standards good volumes of trade led some pundits to say that this stock has still room to rise further and with the start of the second half of 2008, the stock scraped the $40 per share — but did not go higher.

Instead, the scrip lost almost 30% between the end of the first July trading week and the end of the first week in September. After dipping to a low on September 4, the stock regained its footing but the momentum in the two weeks that followed was not strong enough to return the company on consistent basis to share prices above $30.

Slipping stock

A loss of 30% in eight weeks’ time is more than enough to raise questions on any stock but a closer look suggests that the situation is not a simple response to threats from the usual culprits, namely national politics or security worries. Some of the pressures on Solidere are normal market mechanics. Additionally, as the company has morphed into a regional economic animal with both regional investors and regional projects, it has to be seen in context of regional market trends.

Firstly, the Solidere share peaked just ahead of its dividend date and, quite in line with investor behavior anywhere, the stock would be oversold ex-dividend. This goes towards explaining the rise from $35-36 per share to $38 in the first week of July and the reverse motion in the second week, following the July 8 dividend date.

Later on, local analysts surmised that another setback in the merger discussions between Lebanon’s Bank Audi and Egypt’s EFG Hermes Group exerted downward pressure on Solidere when Lebanese stock market investors shuffled positions.

Other likely factors in the sell-off relate to the region and to global market drivers. Investors who see their portfolios come under stress often consider it their best choice to draw profits from liquidating investment positions in which they can book a gain and use this money to fill holes in their holdings.

Cautious and downcast sentiments can also influence decisions; when investors see that their real estate stocks take a beating in a large market, they may prefer to reduce their exposure to real estate stock, irrespective of the questions if the malady of one stock or one market is going to afflict the other.

Solidere fits the ticket both ways. Investors who bought the stock at any point between November 1998 and May 2008 could realize a lovely return when selling in July and August 2008, using the profit to go fishing, shore up their positions, or relieve the pain of losses elsewhere, for example in US banking or insurance stocks. Smart-money investors equally might have decided that the rally of Middle Eastern real estate stocks just might have been close enough to its crest to liquidate positions.

While Solidere had its steepest loss in many years in July and August, comparison with other large cap real estate stocks in the Middle East shows that seven of its peers also lost 20-30% each. To capture the weakness or strength of Lebanon’s real estate leader more accurately in regional context, it is helpful to compare the performance of Solidere shares in the months of July and August with happenings in the first two weeks of September. 

Compared in context

The average (mean) drop of large cap real estate stocks between Cairo and Kuwait City in the two trading weeks between September 4 and September 18 was 15.6% across 18 companies, with 16 losers juxtaposed by only two gainers — one of them, and the stronger gainer, was Solidere. In one word, it did better than anyone could predict. It advanced 5%, demonstrating no correlation with regional real estate stocks or with global equity trends.  

This does not imply any secret immunity of the Lebanese company to future market downturns. Solidere, by way of its Solidere International affiliate and the participation in the Al Zorah mega-project in Ajman, UAE, has become subject to real estate developments in the GCC. Plus, the company has subjected itself to exposure to Egyptian market sentiments through its collaboration with Sodic in the suburbia projects surrounding Cairo.

The move abroad appeared compelling when it was engineered in 2006/2007. War on Lebanon and political occupation of downtown Beirut, whatever euphemisms company executives could find to sweet-talk the situation in regards to investor interest, were not good for business in the city.

Given that the logic of the original Solidere charter mandates a diminishing role in the Beirut city center in the best-case scenario, reaching beyond the downtown horizon was clearly enticing as it offered double escape from Lebanon’s unstable situation and Solidere’s inherent limitations into the exciting realm of the MENA real estate boom.

But what if the boom goes plop? GCC stock exchanges have been betting on foreign investors to shore up their market caps, on foreign corporations as employers who can’t deny the fact that the GCC is a growth market with growing role to play in international business and finance, and — at least in part — on foreign labor to supply the demand for apartments and homes that is the prerequisite for the GCC real estate boom.

All of this is based on assumptions, and some of them have just been tested with negative results.

According to a research note by investment bank EFG Hermes, foreign capital has exited GCC markets en masse. Whereas non-Arab investors held 13-18% of market capitalization in the UAE bourses in June 2008, their net sales of stock through the first half of September cut the Dubai and Abu Dhabi shareholding by foreign investors to significantly less than 10% in the two national bourses. With 7% in Dubai and 4% in Abu Dhabi, the presence of international money in the exchanges was the lowest since 2006, EFG Hermes observed.   

The reasons for the withdrawal can be manifold and specifically do not need to be local issues in the GCC. Shifting of portfolios by international investors can be related to performance problems in developed markets where positions need to be balanced. Some exit of foreign cash can also be related to the currency market and a reversion of speculation that GCC central banks would de-peg from the greenback. But in a wider sense, the way the global economy is going makes the Middle East real estate outlook unpredictable and suggests that the shares of regional developers are not as safe as many thought earlier in the course of this year.

On the sidelines of current markets volatility — or, if you wish, quite at the center but ignoredly so — is the minor matter of integrity. Transparency is another word for it, governance another just as appropriate, but one has to keep switching words as weapons in the war against wasta. This is true for Gulf stock markets (quod erat demonstran- dum) and also the Beirut Stock Exchange. To begin with, the BSE is yet to emerge as a paragon of timely disclosures and one can argue, neither has Solidere on the corporate level. 

What about new life?

There are opportunities out there, optimists declare. True. But the structural issues of regional economic culture have to be solved. This is not about sharia-compliance or prohibitions against gambling. The challenge is about earning trust and developing a homegrown platform of institutional expertise. 

Attempts at predicting share prices have been proven futile many times under many different situations. With share prices now in the trough, regional smart money can be expected to seek out opportunities that follow upon a panicky market. However, there are real estate stocks out there that look cheaper than Solidere at the current level of valuations.

Real estate in Lebanon is a strange thing. It seems to defy all logic. In good times things are good, but in bad times things are better. For example, take the three years since the slaying of Lebanon’s former prime minister and billionaire construction magnate Rafiq Hariri in 2005. In years prior, the country was riding a wave of post-war reconstruction and was quickly reestablishing itself as a regional banking and tourism hotspot. After Hariri’s assassination the country witnessed a quick succession of terrible and violent events including many gangland-style political assassinations, sectarian infighting, an armed Islamist insurgency and a full-scale war with Israel. One would expect the real estate market in Lebanon to suffer from this instability, just as the remainder of the economy did.

Yet, as Raja Makarem, managing partner at RAMCO, pointed out, “real estate [in Lebanon] has been doing between 25 and 30% growth in the last three years on average, which is an amazing record,” adding that, “30% [growth] a year is already a lot and this is without the Gulf element. If the Gulf element is added to this, then we will be expecting much higher prices.”

Exorbitant rental prices in the Beirut Central District suggest that Gulf investors are already part of the market. “Office space in the Beirut Central District [rents for] around $200 per square meter per year,” asserted Elie Harb, president and owner of Coldwell Banker Lebanon. He added, however, that much of the office space in the area often referred to as Solidere sits empty. Several factors contribute to the high vacancy rate, according to Harb. Although political instability and a yearlong sit-in during 2007 did much to deter renters, prohibitively small floor plans and lack of parking are some of the more fundamental issues with the properties. Strangely, the loss in opportunity cost has not yet brought down prices as it would in more predictable markets. Harb suggested that the people who own the office spaces for let in Solidere do not use the rental of that property as their bread and butter. “If the property doesn’t rent because it is too expensive, they don’t take action to recuperate that opportunity loss and they will likely leave the price as it is,” he said. This unflinching attitude to renting suggests investors backed by Gulf-flavored petrodollars command much of the quaint but quiet BCD.

Glittering gold

Other areas of Beirut are less calm. Occupancy frenzy seems to have taken hold of some of the more exclusive neighborhoods in the capital. Known as the Golden Triangle, the area between the Sodeco, Sassine and Sofil intersections has seen sky-scraping residential towers and sky-high prices in recent years. “Finished property in the Golden Triangle sells for $3,500-4,000 per square meter. This is almost double the price compared to last year due to higher prices for commodities and the huge rise in land prices,” said Chafic Saab, of Jamil Saab & Co. And anecdotal evidence suggests that much of this property is occupied. Professional real estate agents, local simsars and even the neighborhood hang-abouts on the trendy streets of Abdul Wahab al-Inglizi, Monot and Furn al-Hayek say the same thing: “Sure we have apartments in this neighborhood. But they are all occupied.”

Another glimmering area with high prices and perhaps more availability is the drag of flashy shops and apartment buildings on the sea running east from the marina. This Golden Strip, as it is called, is replete with high-end clothing shops and sports car dealerships, so it is logical that the luxury flats in the area will carry big price tags. Buyers who are looking for apartments above the 15th floor will be seeing prices of up to $10,000 to $12,000 per square meter for finished property.

On the other side of town in West Beirut, prices have been climbing to new heights as well. A square meter of land right at the water’s edge is going for the same prices as on the Golden Strip, asserted Karim Ibrahim, marketing and sales manager for Jamil Ibrahim Establishments. The main attraction for this part of town is the cliff-top Corniche overlooking the famed Pigeon Rocks, which undoubtedly helps drive up the price. Just inland, the Verdun district sports much lower prices of between $5,000 and $6,000 per square meter.

Alternatively, buyers seeking more approachable prices will look at the capital’s suburbs where prices are substantially lower, or even outside Beirut. Some chic countryside developments have been hit by price hikes as well, however. Chahe Yeravanian, chairman and general manager of Sayfco Holding, has discovered this with one of his developments in Faqra Club. “When we bought the land for the Clouds project in 2005 and 2006, it was running at $250 to $300 per square meter.  Today, the market is at $1,200 per square meter,” he said.

Challenges

In the view of Pierre Abou Jaber, general manager for Veninvest, “The number one problem [for real estate] is political instability.” He added that, “we need to overhaul the legal structure and corruption must be solved.” Many of the major players indicated that political stability was of the upmost importance as it helps to reassure investors and to facilitate construction, in addition to the passage and enforcement of new legislation pertaining to real estate. Echoing those concerns Karim Bassil, chairman of BREI, said, “There are two main problems facing developers in Lebanon today: political instability and growing construction costs.”

Recent spikes of up to 50% in the price of commodities like steel and concrete have made life difficult for real estate developers and contributed to the growing cost of finished property. Yet some developers view the startlingly high price of land as an even bigger concern, claiming land prices outweigh the cost of commodities. According to Sherif Aoun, of Mouin Aoun Contracting, “Commodity prices are a problem, but they are nothing compared to the high price of land. The major challenge now is to find land to develop.” Karim Ibrahim, of Jamil Ibrahim Est., echoed that thought: “Commodity prices in Lebanon haven’t been that big of a challenge. In other developing countries, the price of the land constitutes 5-10% of the apartment. In Beirut it is 60-70%, so the higher commodity prices are diluted [by the land prices.]”

Real estate developers are also concerned about the lack of regulation in the country. Karim pointed to the ever-popular balcony as an example. In Lebanon developers are required to make 20% of their building into balconies. “Yet people are allowed to glass in their balconies as they chose,” he said. “Why do they oblige people to have balconies and then let them be closed in? They should really let the architects and designers handle this. Because honestly, you finish a building and it looks great, and then half the people close their balconies, the other half don’t close their balconies and it ends up looking like the ugliest building in the world.”

Beyond developers, real estate brokers have their own set of problems. As one observer put it, anybody can sell real estate in Lebanon. Christian Baz of Baz Real Estate said that property is something of a national pastime in a country where everyone has something for rent or sale. “There are no rules, there is no certificate, there is nothing [to qualify a real estate agent],” he said and added that improved transparency and regulation would have a positive impact on the industry by making life easier for the customer and broker alike.

Trending towards the future

Lebanon is a land of heritage and its architecture is no exception. While many of the villas and their gardens that once defined Beirut have been torn down, others have been saved by strict zoning laws or developers intent on preservation. “The building is not classified, so it could have been destroyed,” said Karim Saade, general manager of Greenstone Real Estate Development, about his new L’Armonial Project. Instead, the company decided to incorporate the 1930s era building into their newest residential project on the historic Abdel Wahab al-Inglizi Street to help safeguard the street’s historic atmosphere. Other developers have also stayed true to a neighborhood’s feel by maintaining the heritage of the area. For example, BREI is trying to help the famed Gemmayze street maintain its traditional character by refraining from building towers and focusing on projects inspired by the existing architecture, such as its Convivium series. Often these same architects also speak of the need to master plan areas because ‘architecture without an urban plan is nothing.’

Elie Harb of Coldwell Banker was quick to point out, however, that pitfalls can beset master planned areas such as the Beirut Central District as well. “The concept of the Solidere area, that whole design is a mistake. Shops and offices work well together to an extent, but they should have left some room for apartment buildings,” Harb contended. Furthermore, he said, “the footprint of the buildings that were in the area before the Civil War was an average of 200 square meters, some as small as 100 square meters. They are not equipped to handle medium-sized or international companies. You can’t fit forty to fifty employees in such a small footprint.” He added that the areas currently being built up with residential towers near the marina could have been emphasized as commercial districts and the Solidere area could have looked as it once did: shops on the bottom and residential on top.

One trend mentioned by many industry players is the move towards smaller apartments. “We only work with small apartments between 140 and 170 square meters. This is a very important new trend. They are proving popular with newlyweds, Gulf residents looking for vacation homes and Lebanese expatriates who would like to own a piece of land in their own country,” Aoun explained. Smaller apartments also make owning land in the city more affordable.

When a pied-a-terre in the heart of the city does not satisfy, then potential homeowners often look to the outskirts of Beirut. Baz pointed out that “the new Hazmieh highway is fantastic, and that has really boosted the real estate in that area.” He also said previously overlooked areas like Sioufi were seeing renewed interest as well.

Whether it is in the suburbs or the heart of the city, the future of Lebanese real estate appears to be secure. A limited supply of land and a quickly evolving industry, coupled with a massive and successful diaspora, means that it is highly unlikely the sector will take a massive tumble in a copy of the American real estate market. While some stabilizing of prices is expected over the next few months, most of the country’s real estate brokers and developers feel they have a very safe bet.

The Middle East has learned that petrodollars mean nothing until they are spent, and what better way to spend then on property and its development. The proliferation of countless master planned communities, shopping malls, residential towers, sprawling ports, and even artificial islands bears witness to this new currency. Yet the phenomenon has come in fits and starts. Some countries appear to have mastered the trend, while others struggle. In Saudi Arabia, for example, only one in five people own their house due to the absence of a clear mortgage law. Realizing that the young and rapidly growing population is in need of home finance, earlier this year the Shura Council finally drafted a mortgage law. It should be issued by year-end, opening the door to more ownership and development of property for the country’s young and rapidly growing population.

Just across the border, Kuwait is going a step or two farther by redefining development and planning philosophies with its $132 billion City of Silk project. The 250 square kilometer megaproject will take 20 years to build and be home to 750,000 people. The developers claim to depart from the North American or European model of focusing on the individual by making the family unit the essential ingredient. Other countries in the region have their own megaprojects going as well. This year the United Arab Emirates’ project pipeline was scheduled to be $952 billion worth of developments. Unfortunately, however, the cheap credit and market confidence that were the driving force behind this incredible investment have begun to dry up and will likely result in a $320 billion reduction in that figure. While a slight correction in the country’s real estate market may be in the offing, most likely for Dubai, it will be welcomed by analysts who seem to have taken a ‘better now than later’ attitude.

The cooling off appears to be contagious as well, with Lebanese real estate prices expected to stabilize over the coming months. Twenty percent growth in prices over the last three years has culminated in a 50% spike for some areas of Beirut in the six months since the peace-making Doha Accord was signed. Real estate developers in the country seem to welcome a temporary mellowing of prices, as one of the biggest challenges currently is simply affording new land to build on. The high prices, however, have benefited other Lebanese players, specifically ones holding large swathes of real estate in the capital city. Antithetically, one Lebanese stock that is tied to real estate has not kept pace with the price of land: Solidere. Over the last couple of months the stock has been down by as much as 30%. While analysts are at pains to explain this development, it has been suggested that the primary drivers here are “normal market mechanics.” The stock is said to be slightly undervalued currently, so it is possible that we will see the price of land in Beirut hold steady or drop slightly, while the price of a real estate pegged stock climbs.

These are the realities of Middle Eastern real estate. From North Africa, where Morocco and Tunisia are echoing the booming developments of the Gulf with petrodollar fueled megaprojects sponsored by the same wealthy benefactors as the quickly maturing market of the Emirates, to the tried and true Levant. This sector maybe struggling, vibrant, complicated or confusing, but it is most certainly never boring.