GCC Real Estate Projects - A Survey

With all the discussion about the fall out from real estate  in Dubai and the declines in real estate elsewhere in the GCC, I thought it would be useful to provide a bit of macro context. 

Luckily, Global Investment House has recently issued a report on the GCC real estate sector. You'll have to register to get the full text.  Click here to do so.

Based on information from MEED Projects, they've compiled a comparable table across the six members of the GCC.

Amounts in Billions of US Dollars

Country	Nov 2009	Nov 2008	% Change	Held Projects	% Held
Bahrain	$ 68.3	$ 57.7	+18.3%	$ 9.1	11.8%
Kuwait	$ 271.5	$ 298.7	- 9.1%	$ 41.0	13.1%
Oman	$ 104.6	$ 106.4	- 1.7%	$ 6.7	6.0%
Qatar	$ 204.8	$ 216.9	- 5.6%	$ 7.9	3.7%
Saudi Arabia	$ 609.4	$ 606.5	+ 0.5%	$ 39.2	6.0%
UAE	$ 915.9	$1,228.2	-25.4%	$368.2	28.7%
TOTAL	$2,174.5	$2,514.5	-13.5%	$472.1	17.8%

At 42.1% the Emirates' share of real estate projects seems outsized relative to their population as a percentage of the GCC total or to their economy as a percentage of GDP total. When the held projects are factored in, their share goes to 48.5%.

That level of activity could be the sign of several things:

1. Severe underdevelopment relative to the rest of the GCC.  I think we can rule that out.
2. A speculative boom.  From the nature of the projects, this is the leading candidate.
3. The development of needed infrastructure.  For anyone who has endured the traffic jams in Dubai or elsewhere in the GCC,  the Dubai Metro seems a worthwhile project.  But this does not seem to me to the major driver of the activity.
   

I suppose an argument related to #3 above is that they are developing the next London or Manhattan.   To paraphrase  "Field of Dreams":  If you build it, they will come.  

Not sure I buy that there is a need for a major financial center between Hong Kong and London.   Nor that there is any "natural" location for any such additional center.  Capital is highly mobile these days.  There are few to no impediments to cross border flows.  And the state of today's communications has eroded whatever earlier benefit there was from having a physical presence in a specific location.  If the new center must have a "seaside" location, Shanghai or Mumbai could serve as well as Dubai.

It's more likely that a regional center will arise in the GCC, but I doubt that at present it would need to be as large or as elaborate as London or Manhattan. 

The critical work that needs to be done is building another form of infrastructure:

1. The creation of a set of appropriate laws and regulations
2. The development of a cadre of trained judges and lawyers to implement them
3. Enhancements and actual implementation of accounting standards and regulations
4. Establishment of a sovereign bond curve as a benchmark for pricing other issues in the debt markets
5. Greater institutional participation in local stock markets 
6. More liquidity in both debt and equity markets - not only in terms of demand but also on the supply side. 
   
7. On the debt side many of the issues are not traded, particularly the Islamic structures.  Or to be more precise not traded in local markets.
   
8. The free float on many equity issues is rather shallow.   Relatively small transactions can move the price disproportionately. 
   
9. And in certain markets there are sadly issues with brokers and market makers - who seem more focused on making a market for themselves than for their customers.  Though to be fair this is not just a GCC phenomenon.  
10. Finally, there is the "silo" nature of the GCC.  At this point, countries by and large stick to their own national business.  There isn't a lot of cross border investment. 
    

Governments in the area are not oblivious to these issues as evidenced by the initiatives launched QFC, DIFC, the Saudi CMA and in Bahrain. 

There is also another issue and that is the nature of the market.  Is the market intended to be one that  primarily mobilizes capital for local use?  Or one that provides funding to other geographic regions?  

For the first alternative, Saudi Arabia would seem the natural site given its population and major share in GCC GDP.  One could I suppose argue that as happened with commercial lending in the 1980's, a nimble neighbor with a more congenial regulatory regime and living conditions could play this role.  There are two major differences between then and now.  First, GCC nationals have the primary role in financial firms - at all levels.  There is less need for Western experts to be parachuted in.  And thus less need for concern about their life style preferences.  Second, the Kingdom is not sitting on the sidelines watching others develop an offshore center to serve the Kingdom.  New regulations - particularly those from the Capital Markets Authority are designed not only to foster the development of the market  but also to "encourage" foreign firms to open offices in the Kingdom. 

Is there a role for a regional Hong Kong?  Perhaps.  And several contenders as well.