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Summary: The real estate sector in Muscat is witnessing a correction with rents and sales prices recording a fall, says Muscat Spring 2016, property market outlook published by Cluttons. However, opportunities exist for landlords to secure income by offering prospective tenants additional incentive

opportunities exist for landlords to secure income by offering prospective tenants additional incentives, according to international real estate consultancy, Cluttons.

Cluttons' Muscat Spring 2016 Property Market Outlook report asserts that landlords who are putting tenants first by offering realistic market rents in line with the current economic reality and increasing incentives such as free access to onsite and local facilities, will likely be the first to benefit once the market does pick up.

Philip Paul, Cluttons' Head of Country, Oman said: "We continue to see increased vacancy levels in stock that is perceived to be secondary, presenting landlords with a significant opportunity to take a long term view and refurbish during these emerging void period. With average rents slipping across Muscat, tenants are now benefitting

from choice although Cluttons advises that good quality property correctly priced is still being snapped up quickly. Tenants are focused on good quality accommodation, with well managed facilities and amenities. With that in mind, upgrading stock is certainly advantageous for landlords at this time." The following is an excerpt from the report.


Occupancy levels holding up

Despite the stagnant market conditions and diminished level of demand, most landlords have been slow to react, which has contributed to rising void periods. In some instances, landlords perceive the market to be bottoming out and are therefore reluctant to reduce rents and are happy to allow properties to remain vacant. Others continue to remain reactive, dropping rents only once they realise they are out of kilter with prevailing market rates. This reflects a widespread lack of understanding of market cycles and ways in which returns can be maximised during a falling market.

That said, there is a handful of landlords sensitive to the weaker conditions who are reducing rents, mirroring economic reality. In addition, tenants remain focussed on schemes they perceive to offer good quality accommodation, with well managed facilities and amenities, although waiting lists for these buildings have declined over the last six months.

In addition to rent reductions, a few landlords have also begun to offer additional incentives, for example free access to onsite facilities such as pools and gyms, which would have previously been a chargeable benefit. With the rising popularity of gated community

living, which is still an emerging trend in Muscat, some landlords are conscious of the pull factor of free access to local facilities.

By putting tenants first, these landlords are enjoying low vacancy rates and are likely to benefit first when the market does eventually pick up.

Overall Residential Rentals fall

The residential lettings market has continued to register rental declines, with Q1 2016 marking the third consecutive quarter of rent falls. Average residential rents across Muscat have dipped by 5.9 percent during the first quarter of the year, leaving them 12.7 percent below this time last year. The decline was led by the villa market (-7.1 percent), leaving average monthly villa rents at just over OMR 1,004, 14.1 percent lower than this time last year.

The falling rents across the city are reflective of the slowing economic growth and subsequent slowdown in the rate of job creation. This is being further exacerbated by wide ranging redundancy programmes in key sectors, with the oil and gas sector still shrinking. In fact, the IMF has forecast a slowdown in GDP growth this year to 2.8 percent, from 4.4 percent last year.

Budgets dropping

With organisations globally working their way through consolidation programmes, headcount reduction continues to be a key theme, with the Sultanate's oil & gas sector recording further job losses. Furthermore, housing allowances are being reduced, which is filtering through to the residential market in the form of falling budgets. We have noted a general decline in both corporate and personal budgets of between 10 percent and 20 percent.

Deteriorating outlook for rental market

If the expected bottoming out of the market does not in fact materialise, then demand for rental accommodation will continue to decline over the next six to twelve months, putting further downward pressure on rents.

With this in mind, it is our expectation that rents during 2016 are likely to fall by a further 5 percent to 10 percent, on average, across Muscat. It is worth highlighting that better quality properties priced at the lower end of the budget spectrum, at between OMR 250 per month and OMR 500 per month, are likely to remain stable.

Residential sales market weakening

Away from the rental market, we have seen nervousness creep into the sales market, with prices declining across the board and buyers increasingly cautious about committing to purchases as many perceive the market to be on the verge of a correction.

That said, vendors are aware of the weakening market conditions and are adjusting prices downwards to entice demand. This has resulted in a relatively steady level of transactional activity, especially where buyers feel they are getting a 'good deal'.

In fact, during the first quarter of 2016, transactional volumes across the Sultanate

were slightly lower than the same period in 2015, according to the National Centre for Statistics and Information (NCSI). The figures show that the traded value of property in this period decreased from OMR 1.322 billion in Q1 2015 to 0.922 billion in Q1 2016. The NSCI also reported a fall in GCC buyer activity in the market over the same period, with a near 40 percent decline in the number of properties linked to Gulf buyers.

The decline reflects the squeeze on disposable household incomes across the region as the era of low oil prices beds in. Going forward, we expect this trend to persist, particularly as oil prices appear unlikely to stage a comeback in the near term. With the region's governments rushing to diversify income streams through the introduction of new fees and taxes and the dismantling of energy subsidies, household incomes in the GCC are expected to come under further pressure, with disposable incomes also likely to fall.

That said, Oman still offers the attraction of residency through property ownership and this is a segment of the market that continues to remain active. It is worth noting that we are yet to see any notable rise in interest from Iranian buyers. However Oman, and Muscat in particular, offers those priced out of Dubai, which remains the region's most active property market, a similar lifestyle at a significantly lower price in its integrated tourism complexes.


Shatti Al qurum bucks rental stagnation

Despite economic headwinds, rents across most of Muscat's main office markets have remained steady for the ninth consecutive quarter. In fact, the only submarket that has seen movement in rents in the past 12 months is Shatti Al Qurum, where office rents have risen by 6 percent to OMR 8.50 psm. Shatti Al Qurum is the most expensive of the submarkets we cover and the marginal uptick in rents here is reflective of the limited supply in the area of high quality space; but with weaker economic conditions forecast, this may reverse.

Landlords slow to react

The sharp slowdown in the overall level of requirements since the start of the year is yet to prompt a market-wide downward readjustment of rents, which appear to be on the cusp of a fall. With ongoing redundancy programmes being worked through across many business segments, large scale requirements have all but dried up. Of the few requirements in the market, most hover around the 200 sqm mark.

Furthermore, most occupiers that remain active in the market are opportunistic and looking for the best deals, with many avoiding long term leases. Landlords have, for the most part, been slow to respond to the deteriorating market conditions, with many failing to capitalise on the opportunity to contribute to fit out costs,

or extend rent free periods in order to entice demand.

Where rents are already at the minimum level for landlords to remain profitable, there is also of course the opportunity to improve property management services, which continue to be amongst the top priorities for many occupiers. Buildings with good facilities and property management remain well let and sought after.

Rent falls likely to be minimal

While office rents are still at roughly half the level seen before the Global Financial Crisis in 2008 across most of Muscat's office submarkets, they have remained relatively stable for over two years now. Clearly the diminishing level of occupier requirements is going to put rents under further strain; however any further rental corrections are likely to be moderate rather than substantial, as rents are already relatively very low compared to other


Al Khuwair

Shatti Al Qurum



Source: Cluttons

regional locations. That said, occupancy levels in existing, well managed buildings, remain fairly stable. However, new projects are seeing limited demand.

We are aware of instances where landlords have used the recent increase in the lease registration fee from 3 percent to 5 percent as a way to support asking rents in the first year of tenancies; however going forward we expect to see significant concessions made in order to attract and more importantly, retain existing tenants. With this in mind, it is our view that monthly rent declines of OMR 1 psm to OMR 2 psm are likely across the board over the course of the year as the market adjusts to the challenging economic environment. Well managed buildings may buck the trend, with rents likely to remain stable in popular schemes.


Supply challenges ahead?

After limited growth between 2005 and 2012, recent years have seen the introduction of a significant amount of new retail mall space in Muscat which has increased the supply of leasable space by approximately 75 percent over the last three years alone. The most notable malls introduced in this period are Muscat Grand Mall, Avenues Mall

and Panorama Mall which are all located in Bausher. Despite the marked increase in retail mall space, occupancy levels have remained relatively stable at around 85 to 90 percent.

Additional leasable retail mall space which is expected to be completed within the next 18 months includes approximately 105,000 sqm at the Palm Mall in Al Khoudh and 30,000 sqm in the Muscat Grand Mall expansion.

We also estimate that proposed large scale retail mall space at developments such as Majid Al Futtaim's Mall of Oman in Bausher, Al Futtaim Group's Muscat Festival City in Airport Heights and Al Raid Group's The Boulevard in Al Khoudh, would add a further 300,000 sqm of leasable retail space as and when they are developed, contributing to a potential supply- demand imbalance in the near future.

An increasingly competitive environment

It is clear that the retail mall sector in Muscat is going through a period of rapid expansion and we expect that the significant growth will translate into an increasingly competitive market.

For retail mall owners, we expect the strengthening supply pipeline will prompt the need to carefully consider market positioning, tenant mix and rental values in order to maintain good occupancy levels.

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Publication:OER Dossier
Date:Jun 29, 2016
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