Continuing population growth and shrinking household sizes will drive the momentum for residential real estate across the Middle East and North Africa (Mena), says a new report. "Population growth continues but at a decelerating rate that is expected to peak by 2020. Owing to changing youthful demographics in the region and average household sizes shrinking from five to 3.5 inhabitants per residence, the trend will be for more families to go nuclear," according to Citigroup's Mena real estate report.

"As Mena markets mature, we expect traditionally large family units to subdivide even in the larger indigenous population such as Saudi Arabia and Egypt. In expat countries such as UAE and Qatar, small young immigrant families are expected to drive the residential growth in the region. Average household size in developed countries range from two to 3.5 inhabitants per residence and in emerging countries it is four to 6.5."

These key drivers will further reinforce the expected residential growth in the Mena region to double in the next 20 years (until 2028). Prices are expected to remain below international benchmarks even in Mena's most expensive city, Dubai. "This suggests that the recent significant price rises should not deter investors as a cause of concern."

Meanwhile, Dubai is expanding its office real estate faster than any all other larger cities in the world, the report says. According to the report, Dubai could be on the verge of "a looming over-supply owing to irrational build plans" from developers in the city.
"Office space per capita is on track to be the highest amongst global emerging markets. However the key long-term driver in Dubai, which balances demand and supply is immigration and this should continue.

"The office build plans in Dubai appear to be without global parallel in terms of their relative growth and absolute scale. Dubai is heading from 14 square feet per capita to 50 square feet per capita just behind Frankfurt and Tokyo," the report points out.

Added to this is the role of the Dubai government exerting a considerable influence to trigger demand in the market. The creation of free zones, encouraging immigration and influencing the availability of land for development, raw materials, financing and utilities have been good enough reasons for an increased supply in office space in Dubai.

The report said in most Mena markets the government influences both demand and supply via policy decisions (covering economic development targets, regulation, taxation, population, tourists, employment and planning permissions) and via its direct ownership of companies involved in real estate.

"The risk of cyclical mismatch of supply and demand is mitigated by the central role of the government in the real estate value chain. The main mechanism for controlling supply intermittently (if need be) is to delay project completion."

Private developers which lack government backing may well bear the brunt of such supply management (their projects end up being delayed) assuming all other operational factors (competence of management) are equal. Well-run government developers should benefit both from the overall management of the market and from the competitive advantage of government support.

"Dubai has near zero office vacancy, rents are up over 500 per cent cumulatively in the last five years and in 2007 alone, office rents increased about 40 per cent. Despite these prices, Dubai continues to be 40 per cent to 70 per cent cheaper than Singapore, Hong Kong and London."

According to the report, the Mena region is also witnessing a major discrepancy between projects that have been announced and those that are actually under way.

According to Middle East Economic Digest data, there are plans for nearly $2 trillion worth of construction projects in the Gulf Cooperation Council (GCC); only 20 per cent by value of those projects announced have begun construction. The 12-month order books of the largest 50 contractors in the region equate to merely 5 per cent of all announced project value (yet most projects likely have a completion time frame well below 20 years). "The discrepancy between announced project spend and actual work in progress may suggest greater value discipline in project planning, rational delays in the face of potential excess supply or, simply, the constraint of high input cost inflation. Whatever the explanation, we argue this data is consistent with the thesis that the region's real estate and construction markets are not rushing into over-supply."

While the reinvestment of the hydrocarbon boom underpins the confidence of many investors in Mena economies, the sheer scale of planned project spend creates concern on the economic efficiency of those plans, in terms of their long-term stability once the current boom has passed.

According to Retail International, mall space (measured in gross leasable area, or GLA) is on track to expand by about 140 per cent in the GCC over the next decade, with most of this coming from Dubai and Abu Dhabi. Absence of leisure facilities suitable for extremely hot climate excluding the children play areas and malls, plenty land space (developed country and other emerging market cities tend to have limited green field space given higher population density); duplication in conservative countries such as Saudi Arabia where there is a need for segregated areas for women and families; branded retail tourist destinations; this is particularly relevant in cities and countries where tourist visitors are significantly greater than the resident population were some reasons cited by the report.

Colliers International, a Dubai-based property consultant firm, forecasts GCC countries already rank highly alongside global benchmarks in terms of GLA per capita. Elsewhere in Mena, Egypt ranks very low. GLA per capita in the GCC (ex-Dubai) is heading towards a range of 0.2 to 1.0 square metre by 2010. These figures are recorded to be above most international benchmarks from 2005, with the exception of the United States and Canada. Dubai is heading towards 2.3 square metres, which is well beyond the US 2005 benchmark of 1.9.

"Of course, we acknowledge that Dubai's tourist industry (hotels, Emirates airline) plays an important contributory role and that many malls in the GCC will likely fail to match 'Mall of the Emirates' stellar performance," said the Citi report.

But this provides an insight into how the addressable market for mall space in the GCC may be larger than global precedents would suggest. Across most of Mena occupancy rates have shown healthy trends (with Beirut an understandable exception in 2007) and, equally importantly, revenue per average room is growing significantly.

The GCC announced plans for hotel construction imply a doubling of rooms by 2015, with tourist visitors per hotel room expected to decline by about 25 per cent. On this basis, average stay will need to increase in order to maintain occupancy levels. In North Africa and Levant, announced plans imply a 20-25 per cent increase to hotel rooms but tourist visitor growth expectations are sufficient to imply an increase of 10-25 per cent in tourists per hotel room. Across Mena tourist visitors per hotel room is expected to remain around 130, which is well below the most successful destinations in the US (Las Vegas 270 and Orlando 320).

In Dubai announced plans imply a 60 per cent increase in the number of hotel rooms by 2010, but tourist visitor growth expectations are sufficient to imply an increase of 20 per cent in tourists per hotel room.

The report further predicts that after 2010 there is a major implied expansion of Dubai hotel rooms by 90 per cent, if developments such as Dubailand and Bawadi come on stream as initially planned. Post 2010 expectations of tourist visitor growth and average stay imply a major over-supply of hotel rooms in Dubai, then the government is likely to bring its influence to bear.
Dubai average hotel room rates are already amongst the most expensive globally in terms of pricing for top end accommodation and average pricing for all the rooms available. However, the purchasing power of a tourist in Dubai is also relatively attractive in terms of the quality of hotel available for comparable price.

The standard of room available for the same price is superior in Dubai compared to several other destinations in the top 10 most expensive cities such as London, Hong Kong, Paris, New York, Moscow.