GCC real estate consolidation likely along with cost cuts; Industry Sources

As the downturn caused by the coronavirus pandemic continues, industry sources suggest that real estate developers in the Gulf Cooperation Council (GCC) region are likely to engage in unit price cuts and lead to mergers. 

Marwa Murad, an engineer and managing director of Maximiliano Development Management Services (MDMS), highlighted delayed payments from buyers as one of the biggest hurdles in the industry which is threatening the sustainability of developers, particularly those with limited capital.

“The risk facing the real estate market is the inability of customers to pay the installments, thus causing a delay in the construction work. As a result, developers may require a shorter period for the installments which eventually leads to an oversupply of units, thereby creating a negative business cycle,” Murad said in a statement.

“Developers are eyeing a reduction in unit prices by as much as 25 percent and company mergers to minimize business risks and significantly increase the ease of doing business,” he said.

Sector Challenges

Consultancy firm Altios, payment delays are indeed at the top of the list of challenges faced by the real estate and construction sector which are is one of the major economic contributors in the GCC region.

It said that companies with high levels of debt and low cash reserves may face a liquidity crisis as a result of the financial fallout of the pandemic. This is being compounded by low oil prices.

“[The] decline in oil prices will have a negative impact on investments in major public-funded development projects. [For example, the] Dubai Department of Finance has ordered a 50 percent cut in capital spending and has called for a freeze on new public construction schemes,” the report said.

In Dubai alone, real estate and construction constitute 6.6 percent and 6.3 percent, respectively, of the emirate’s nominal gross domestic product (GDP) as of 2018.

Path of Recovery

However, Murad said he is confident that the industry could start to recover by next year when an effective vaccine becomes available. He remains optimistic that a complete return of the industry to the pre-COVID-19 levels can be expected once the right COVID-19 vaccine is foud.

Until then the industry member suggests strategies such as the reduction in unit prices by 25 percent in the event of cash sales and mergers by small developers who may face the risk of bankruptcy to sustain in the sector.

As of June 2020, the housing market continued to plunge, with Dubai alone seeing sales activity fall by more than half. During the second quarter of the year, Dubai’s developers sold 4,459 homes, down by 48.8 percent compared to the first three months of the year, according to ValuStrat.

Solutions for the current predicament 

Altios recommends residential real estate developers to invest more in digital sales and leasing processes, do more virtual house tours or video walkthrough and produce digital brochures to boost sales.

As for construction firms, it is vital that they adopt standardized contracts across all projects and improve off-site software capabilities to enable remote working.

And if they want to remain relevant, they can focus on the development of structures with designs that may act as preventive measures in the future and explore contactless technologies, such as automatic sliding doors, voice-activated elevators, and heat map detectors to scan temperatures of building occupants and visitors.

Maximiliano Development Management Services (MDMS)

Saudi-based Maximiliano Development Management Services (MDMS) works closely with developers by providing engineering, design and construction services for real estate projects in the Gulf, and its portfolio includes large-scale government-funded ventures in the kingdom.

The firm had won a contract with Saudi Arabia’s National Housing Company for the “sale work” of the Murcia project, one of the largest projects in Riyadh that includes the construction of more than 5,000 villas and apartments.