What would bring foreign investors back for GCC real estate?

Posted on 31 May 2010 with 2 comments from readers

The real estate crash in many key markets of the GCC since the global financial crisis struck in October 2008 has cast a long shadow over investment by foreigners in GCC real estate.

Crashes are always very off-putting to investors, and particularly the foreign investors who tend to be the last to arrive in the boom time party. Badly burned investors do not generally return very quickly to put their hands back into the fire.

Besides it is not as though the foreign investors who bought off-plan have gone home. Many are still stuck with illiquid, half-completed or not even started investments, especially in Dubai of course, but also across all the nations of the GCC – except in Saudi Arabia and Kuwait where foreign investment was never allowed.

Opportunity knocks

That said one person’s misfortune is another’s opportunity. But presently there are very few serious foreign buyers in the depressed GCC real estate market. One reads of a few delegations from China but these may exist more in the dreams of real estate agents than reality.

Are property prices still too high? The fact that apartments and villas are not selling suggests that prices are too high. There are vulture funds out there looking for real bargains. Whether they could mop up all available supply, even if given the opportunity, is less certain.

The other side of the coin is housing finance. ArabianMoney is attending the inaugural GCC Mortgage Summit in Bahrain this week.

Since the real estate crash 18 months ago there has been a switch from cash purchases to mortgages by house buyers. From 75-80 per cent cash deals and 20-25 per cent mortgages, the position has reversed to the same percentages but in favor of mortgages.

That is to be expected. The cash buyers were off-plan speculators in a bubble market. Today’s buyers are end-users in a post-crash market. Therefore the availability of mortgage finance is critical to the rebuilding of the market.

It should also be noted that the majority expatriate population of the GCC, particularly outside of Saudi Arabia, is by definition a foreign investment class. Delivering mortgage options to these foreign expatriate residents will thus be critical to getting the whole market moving again.

Interest rates too high

Banks and home finance companies naturally realize this. But since the financial cisis started GCC countries have kept interest rates higher than in the United States, despite mostly having dollar pegged currencies. This is not helpful to home buyers who need mortgage finance.

Then there has been the sudden withdrawal of mortgage funds from the market by Amlak Finance and Tamweel in the UAE, for example, which came at just the wrong time and because both were raising money from syndicated debt and not deposits. Former executives of Tamweel were yesterday also sentenced to three years imprisonment for various offences.

Clearly then the local mortgage industry needs to get its act together. Big international banks like HSBC and Standard Chartered are more active now but local banks should be doing more and the long-promised merger of Amlak and Tamweel should be concluded.

Lower prices and a greater availability of mortgage finance, preferably at lower interest rates, would go a long way to start restoring confidence in GCC real estate. But the lesson from past real estate busts is that this cycle requires several years for a recovery, if only because the mess left over from the crash still has to be fully cleared up before a new cycle can start.