BOOM TIMES: Middle East Real Estate

DESPITE ALL THE EXCITING rhetoric and genuinely positive trends, the Middle East and North Africa’s (MENA) capacity to absorb the wave of new real estate development that has been commissioned during the last 12 to 18 months carries some risks for the region’s banking system. It should cóme as no surprise that in recent years, MENA-based banks have substantially increased their total flow of financing in real estate.

Throughout the Gulf countries, entire cities have been commissioned by the governments and vast swaths of coastline will be reclaimed and developed. King Abdullah City, the largest project to be initiated, cost $26 billion, comprises 592 million square feet of greenfield – or previously undeveloped – land, and stretches 22 miles along Saudi Arabia’s western coastline. Similar developments include the $15 billion Blue City in Oman, which has been designed to accommodate 2 million tourists each year along with 250,000 permanent residents; the New Town and Industrial Projects in Bahrain, which cost more than $2.2 billion and are being constructed on reclaimed land; and Qatar’s $5 billion Lusail development, which will hold 200,000 inhabitants.

Dubai, with all its projects valued at some $200 billion, stands out among the Gulf states. It has four major projects, including the $9.5 billion Dubailand theme park, which is due for completion in 2010, and the World and Palm Islands developments. These two land reclamation projects, comprising hundreds of islands, will increase the United Arab Emirates’ beachfront by more than 160 percent and are being developed by a variety of real estate consortia to construct a mixture of exclusive residential, leisure and commercial developments. The Burj Dubai comes at the top of the list, which, at a half-mile high, is expected to be the world’s tallest building. It will contain a hotel, luxury apartments and a 12 million square feet shopping mall, the largest in the world. Whether Gulf property markets can absorb this quantity of new and high-end development remains to be seen and, with the 1,001 -meters-tall Mubarak al-Kabir Tower under consideration in Kuwait, there is a danger of beggar-thyneighbor competitive development, an international trade policy of competitive devaluations and increased protective barriers where one country seeks to gain at the expense of its trading partners.

Hotel development and tourist infrastructure provide another important driver of real estate growth. The region has enjoyed remarkable success in tourist and business activity – the occupancy and average room rates recorded show substantial growth in 2004 and 2005. The Gulf has been at the forefront of this trend, with average hotel occupancy rates reaching over 70 percent and new hotel projects continue apace with most ofthe large developments inside and outside the Gulf incorporating one or more new five star hotels. Eighty new hotels are planned across the Arabian Peninsula by 2008 and, over the long term, governments project continued and substantial growth, with 30,000 new hotel rooms in Dubai by 2010 and 50,000 in Saudi Arabia by 2020.

The success in tourism has as much to do with a structural increase in international visitors to MENA as a cyclical recovery from recent political events. From 1995 to 2005, international arrivals to the region increased from 14 million to more than 38 million, a compound growth rate of over 12 percent, and Emirates Airline, the UAE’s official carrier, has seen passenger numbers grow from 6 million in 2001 to 12 million in 2005. Such strong traffic growth has been central to the ambition of many Gulf states to become the strategic transportation and business hubs connecting Europe and North America with the burgeoning markets of South and EastAsia.

Further airport capacity is set to come on stream; the Dubai International Airport’s $4 billion expansion was expected to be completed in 2006 and raise the total annual passenger capacity from 25 million to 70 million. Bahrain plans to expand passenger capacity from 10 million to 45 million passengers, a tenfold increase from its actual flow of 4 million. To put these figures in perspective, Chicago’s O’Hare International Airport handled 75 million passengers in 2004, making it the second busiest airport in the world.

What are the overall regional prospects? According to the latest World Bank report, Economic Developments and Prospects 2006, windfall revenues have delayed the perceived urgency for reform in some MENA countries:

As oil prices continued their upward climb, the MENA region grew by an average of 6 percent over 2005, and by an average of 6.2 percent a year over the last three years . . . MENA’s oil exporters have particularly benefited, and unlike in prior oil booms, have demonstrated impressive fiscal restraint. They are building up liquidity through external reserves, oil stabilization funds, and through paying down debt . . . They are also pursing common strategies for the diversification ofthe oil wealth into foreign assets, as a way to transform the finite oil wealth into longer-term revenue streams.

Also according to the report, the oil boom has had important and often positive financial spillovers for the region. Strong credit growth and declining non-performing loans have raised bank profitability and asset quality. In addition, many MENA countries have begun to address long-needed financial sector reforms. But many ofthe recent financial sector developments have also raised the exposure of MENA economies to negative effects. Moreover, for most of the region, financial sectors remain disconnected from die real economy, and as a result, few ofthe assets accumulating to the region are channeled toward productive investment.

Christiaan Poortman, the World Bank vice-president for the MENA region, said, “With rising oil prices contributing to surging liquidity, the efficiency with which the region can manage these resources and channel them to productive uses will depend critically upon the region’s financial sectors. It is thus particularly opportune that this report highlights the state ofthe region’s financial systems, to understand how they are poised to meet some of the region’s development objectives.”

The region’s recent strong financial liquidity creates a window for the governments to either accelerate or postpone the complicated process of reform, within the financial sector and in the economy in general, according to the report. With diminishing positive links to oil economies, the region’s resource-poor countries continue to make progress along all structural reform fronts, including trade, business and regulatory, and governance. While oil economies have made less progress on the trade and business fronts, an important development is the long-awaited progress in governance changes, according to the report.