Middle East and North Africa Focus
The global financial crisis has had a severe impact on real estate markets across the Middle East and North Africa (MENA) region over the last two years. While the magnitude of the impact has varied (being most severe in Dubai where commercial real estate prices have declined by 50% – 60% from their mid-2008 peak), every MENA market has been affected to some degree. Attention has therefore focused on the urgent priorities of cashflow management and project consolidation, rather than on the structural issues of real estate transparency.
This shift in priority has meant that the progress in transparency that was noted in the 2008 Index has largely stalled in 2010. Eight markets have registered a decline in transparency, albeit marginally; Morocco has shown no change while Oman, Syria, Algeria and Abu Dhabi have continued to make progress. In recognition of growing investor interest in the region, the Index has now been extended to include three new markets - Jordan, Tunisia and Lebanon.
There has certainly been a greater recognition over the past few years of the importance of real estate transparency, but many of the measures required to enhance transparency have not yet been fully implemented. The MENA real estate industry is currently going through a process of redefining its business model (which was previously based on off-plan presales to investors) and, as the markets evolve from a ‘development’ to an ‘asset management’ phase, the industry will once again refocus on longer-term structural improvements such as transparency.
The MENA region scores poorly in the transparency of its real estate debt markets. This has recently been brought into focus in Dubai with the widely publicised restructuring of Dubai World. The restructuring increased liquidity and alleviated the market’s nervousness over debt obligations. Dubai’s debt problem has two dimensions—one is the size of the debt itself and other is the lack of clarity on the scale and the timing of these obligations. This is highlighted by the wide range of estimates of how much debt has been run up by real estate based entities in Dubai, which range from US$25 billion to US$40 billion.
Levels of real estate transparency in MENA remain below those in the Americas, Europe and Asia Pacific. There are no markets within either the Highly-Transparent or Transparent categories, and only four lie within the Semi-Transparent level—Dubai, Bahrain, Abu Dhabi and Jordan. Despite recent setbacks, Dubai retains its position as the most transparent market in the region, ranking 37th globally. Neighbouring Abu Dhabi has made one the largest improvements in the region. As part of its drive to increase the transparency, Abu Dhabi has announced various laws and other reforms covering the real estate sector. These include:
- Strata Law: to highlight the roles and rights of property owners in split-occupancy developments and to provide clarification of ownership rights
- Trust-Account Law: to enable and regulate escrow accounts, ensuring that money from investor pre-sales is protected and used in a specified manner by developers
- Market Regulators. Plans have been announced to establish a regulator for Abu Dhabi’s real estate market, similar to RERA in Dubai
- Mortgage Law: to protect financiers
- Land Title Reforms: to ensure developers have acquired the requisite title and permits before launching pre-sales
Though these laws have been announced, they have yet to be fully implemented. Their successful implementation will contribute to improving transparency in Abu Dhabi, with the market now having the necessary framework under which these regulations can function.
Bahrain continues to market itself as a ‘business friendly’ hub with a key part of its marketing message focused on the availability of a relatively large and well-qualified local workforce. The open and transparent nature of the market is also part of this ‘business friendly’ push. In fact, Bahrain ranked 20th worldwide in the World Bank’s Ease of Doing Business Index. The country’s clearly-defined property laws and flexible government regulations on foreign investment have positioned it as the second highest ranking MENA market in GRETI 2010.
More than half of MENA markets are in the Low-Transparency tier, including Oman, Morocco, Egypt, Saudi Arabia, Qatar, Lebanon, Kuwait, Pakistan and Tunisia. With the notable exception of Oman, most of these markets have seen a modest decline in transparency. Saudi Arabia and Egypt, two of the region’s largest markets, have strong domestic-led real estate demand and, unlike other markets in the region, are less dependent upon attracting overseas demand. However, it is evident that both countries suffer from low levels of transparency both through a rigid and challenging business environment as well as significant bureaucratic red-tape. They also suffer from a fundamental lack of real estate data and information, which is difficult to access. However, both score more favourably on some financial mechanisms including bank regulations, transactional information and accounting standards.
Oman has seen the largest improvement in transparency in the MENA region over the past two years, scoring well on facilities management services as well as on tenant service charges, which are now more streamlined. The country’s steady pace of real estate development and its push towards more sustainable eco-tourism have also helped to raise the profile of its real estate sector.
Syria, Sudan and Algeria are classified as Opaque (Tier 5) and they rank among the least transparent markets (covered by GRETI 2010). A common thread passing through these countries is the political and economic instability which have compromised the business environment. Safety and security concerns have also hindered foreign investment. Moreover, business deals are almost always undertaken through personal contacts and require means which would not normally be acceptable in more transparent markets.