Financial system reforms and emerging property markets in the Middle East

Financial System Reforms

Over the last several years the property markets of: Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and United Arab Emirates followed the performance of what was occurring worldwide. Where, prices are in a steady free fall following many years of appreciation. However, due to the overall amounts of speculation that was taking place meant that many of these once promising markets turned cold rather quickly. A good example of this can be seen in Egypt, where prices have fallen 37% in 2009. As many homebuyers canceled their down payments, which had a ripple effect on the commercial real estate market. This is despite the fact that on the lower end of the housing market there is a short of 40,000 units per year. (Egyptian Property Plunges 2009) What this shows is: the conflict that exists in these property markets, where there could be tremendous opportunity despite the massive implosion in prices. To identify the best opportunities as well as risks, requires that careful examination of these markets is conducted by: providing an overview of global property markets, the characteristics of these markets, the challenges of these markets, portfolio diversification, transparency / efficiency, property investment vehicles, property companies (PC's), real estate investment trusts (REITS), mutual funds (MF), the risks of investing in global property markets, emerging property markets in the Middle East, property market performance in the Middle East, property companies (PC) performance, the transparency of these emerging markets and the efficient market hypothesis. Together, all of these different elements will provide the greatest insights as to what issues are facing the real estate markets in the Middle East.

3.2 An Overview of the Global Property Markets

Global Property Markets are facing a number of different challenges as they go through a period of severe correction. This is following a steady appreciation in real estate prices led by the United States. Where, prices were increasing steadily between 2000 and 2006. Then, between 2006 and 2009, prices declined by 33%, following a massive bubble developed in the American housing market. This was fueled by easy credit and a speculative fever that would cause home price to rise by as much as 100% in some markets. (Mullins 2010) Because many of the different mortgages were underwritten, bundled together and then sold to investors around the globe, meant that the effects of the U.S. real estate market would spread worldwide. As many of these investors, were holding mortgages that lost their value, because of the bursting of the bubble in prices. This would have a ripple effect on real estate prices around the globe, where many markets that were appreciating in similar a fashion to the United States, began to see a serious decline in prices. A good example of this would be in Israel, as many people experienced tremendous prices appreciations in the properties they owned in North America and Europe. This allowed many them to sell their properties in these markets, then to invest the proceeds into real estate in Israel. As a result, Israel mirrored the housing appreciation seen in the United States, where the strong currency and real estate market around the globe caused prices to appreciate. Then, once the bubble in the U.S. real estate market burst; Israel began to experience a similar decline that was experienced in the United States. (Levin 2009) However, there are some places where the declines in real estate prices have not been as severe. This can be seen in Canada, where the overall decline in real estate prices has not been as severe as the United States. Part of the reason for this is the pace of the increase in prices was not as severe in comparison to the U.S. Recent evidence of this can be found in a report released by the Cleveland Federal Reserve, which found that housing prices rose twice as much in America compared to Canada. Once the slowdown came, the decline was not as severe in Canada in comparison with other parts of the world. (MacGee 2009)

What all of this shows, is how the worldwide real estate markets are following a similar general trend as to what is occurring in the United States. However, some of the different markets have their own unique characteristics, which provide both opportunities and risks for investors. Examples of this can be seen by looking no further than the real estate markets of Egypt and Canada. Where, Egypt has been seeing a sharp sell off in prices, following a period of large increases. While, at the same time they are having a housing shortage of 40,000 units each year in the low end housing markets. In the case of Canada, they saw a slower appreciation in prices during the boom years and are now seeing slower declines. The situation with both countries highlights how real estate prices are affected by local laws / regulations, interest rates and investing traditions. Together, these different elements underscore how the markets are interconnected, yet independent in their own unique ways.

3.2.1 Characteristics of the Global Property Markets

The global property market is at a cross roads, where globalization has interconnected the markets. Yet, depending upon the country and the real estate market within a particular country, a variety of different factors can have major effects. What happened was, as the world has become more globalized a new way to market real estate emerged, the tranche. This is where investment bankers figured out how to market mortgages to large institutional investors such as: mutual funds, hedge funds and insurance companies. (Lamb 2010) The way it worked is: the different mortgages would be bundled into one single group paying a stated interest rate. As the mortgage payments were being made to the servicer of these loans, they would pay the interest to the owner of these different tranches. As this became a more common way to of investing, the number of tranches grew dramatically. Then, when you consider the fact at how globalization improved access to FDI, meant that investors from around the world could purchase these kinds of investments. This is what has made the global property market more interconnected than at any other time in recorded history.

Beyond, the issue of tranches and globalization, the global property market is still decentralized. This is because depending upon the country, a variety of laws, regulations, demographics and customs are constantly affecting these markets. As a result, it has been harder for investors using a real estate strategy in one market or country to be able to export what they are doing, with the same kind of success elsewhere. This causes the prices of real estate to vary depending upon all of these different factors. (Lamb 2010)

Together, the combination of globalization and specific market factors are affecting how much real estate prices fluctuate up or down. As globalization has fueled the speculative fever that often invites large boom and bust cycles. (Lamb 2010) Yet, the severity of the up and down moves in the price of real estate depends on the factors affecting specific markets. This has caused some real estate markets to experience large amounts of growth during times of expansion; then during times of economic distress these markets experience a severe downturn.

3.2.2 Challenges in the Global Property Markets

The biggest challenges facing the global property markets are: large amounts of oversupply and overbuilding. During the boom years, a variety of commercial real estate projects began. These included everything ranging from the modest single family home to large commercial real estate projects. When prices were continuing to climb, many investors and developers assumed that the property would be worth considerably more in just a few years. Fueled by greed, many began to engage in real estate transactions that were not financially prudent. This caused for overbuilding to take place in both the commercial and residential real estate markets around the globe. Once demand for the various types of real estate began to decline, meant that the price of these different projects would decline. Since so much money was borrowed at higher real estate values, meant that that many individuals and corporations would have trouble maintaining the mortgage payments. This caused foreclosures to rise dramatically in both sectors. An example of this can seen in Cambodia, where prices followed a similar uptrend that occurred until 2008. Then, as the worldwide real estate market began to slow, prices declined by as much as 40%. (Far East Property Markets Expected to take off into 2010, 2010)

United States and Cambodia Real Estate Market Performance for 2009

What this shows, is that the biggest challenges facing the markets are a severe overhang of supply from large foreclosures and overbuilding in the real estate markets. These two factors will continue to affect prices well into the future, as the excess supply will take time to be removed from the various markets around the world. Once, these two issues have been addressed, real estate prices, can resume consistent price appreciation.

3.2.3 Portfolio Diversification of Investment in Global Property Markets

Because the global property markets are affected by globalization and specific country / regional factors, means that the overall amounts of risks will vary, the most notable include: transparency and efficiency. Where, each country / region has different on laws and regulations pertaining to the real estate markets. This means that the risks in a number of different markets will depend upon specific market conditions themselves, reflecting these two factors. To protect themselves against these kinds of risks, many investors will often seek to diversify their portfolio. Diversification is: when you are investing a number of different asset classes in real estate, across a variety of countries / regions. The idea is that if a risk occurs in a specific country or region, the other areas that you are diversified in will protect you against the severity of the declines. For example, someone who invested in the U.S. real estate market might diversify in Canada to reduce their exposure to risks in the U.S. This is because Canada has tougher regulations on real estate investing, which causes prices to remain more stable in comparison to the United States. (MacGee 2009) A prudent investor could theoretically invest in Canada to help mitigate the possible risks faced in the U.S. real estate market. Such a strategy is often used involving a number of different countries. This is designed, to reduce the overall risks that a portfolio of real estate could be exposed to.

3.3 Transparency and Efficiency in the Global Property Markets

One of the biggest issues facing the global property markets in the past was transparency and efficiency. This is because many markets were considered to be closed or limited, as far as how much money foreign investors can invest in a particular country. Then, the various reporting statistics on the market and the difficulty of buying or selling a property were: the biggest factors that limited the amounts of investment capital into this area. As a result, many of the real estate markets benefited the local entrepreneur in the past. However, over the last ten years, globalization has caused transparency and efficiency to increase in many property markets around the world. As a result, foreign investors in these markets are demanding increased amounts of information on the property before investing to include: accurate market information, property rights / contracts that are enforceable, equality during the transaction process, professional standards and a reliable benchmark for measuring changes in prices. Once this begins to take place consistently, means that a change will occur in the overall transparency and efficiency of the various real estate markets around the world. A good example of this can be seen by looking no further than in a report released by Jones Lang LaSalle, where they found that transparency / efficiency are increasing in a number of different markets. Because numerous foreign investors no longer at a disadvantage in many markets, in comparison to local real estate entrepreneurs. This is because these improvements were seen in a number of different mechanisms that are helping to increase the overall amounts of transparency / efficiency. To include: improved regulation of many different real estate markets, greater public disclosure from real estate companies and many markets introducing public / private benchmarks for measuring volatility. While these different areas have helped improved transparency / efficiency, the report also found that there were still many different challenges faced by these markets. The most notable would include: the underperformance of all public / private benchmarks, the fact that many countries have still not embraced performance based indexes and the various taxation issues. (Transparency Improves Around the World, 2006)

What all this shows, is how the global property market has seen increased amounts of transparency and efficiency. However, despite these different challenges many of these indexes are underperforming the actual markets and many countries still have not adopted performance benchmarks. Then, when you combine this with the different taxation issues, means that these issues will continue to affect transparency / efficiency. This is problematic, due to the fact that the underperforming indexes in relations with the actual market shows that transparency needs to increase even more. Where, if these markets have the right amounts of transparency, the performance of the bench marks will mirror the actual market itself. Then, the reality that many countries are slow to adopt such benchmarks is: an indication that increased amounts of transparency around the globe needs to have more far reaching effects. Where, those markets that are facing one of these different situations can be able to improve, which will help increase the overall amounts of FDI being invested in a country.

3.4 Property Investment Vehicles

As the global real estate market has become more affected by the rapid changes that are taking place. Has meant, that a number of different investment vehicles have been developed to provide investors with number of options. Where, investors can now invest in numerous asset classes that will provide them with opportunities in the real estate markers in other countries. As a result, a number of different investment vehicles have emerged to address this need to include: property companies (PCs); real estate investment trusts (REITs) and mutual funds (MFs). Together, these different tools have allowed investors the chance to participate in a number of different property markets around the world.

3.4.1 Property Companies (PCs)

A property company is: when there is a company that is focused on buying land or property that could contain various fixed assets such as: buildings. These companies can either be publically traded or private. They will either sell or rent the different properties that they purchase, as way to generate revenues. The overall focus of these kinds of companies can range from raw land, to some of the more complex commercial real estate projects. During the last ten years, the overall amounts of FDI have been helping to fuel the rise in property companies that are focusing on investing in a number of different real estate markets around the world. This was occurring because these companies were taking advantage of the increased opportunities, that globalization has created through liberalizing different markets. What happened was: many countries around the world liberalized the regulations regarding who can own real estate. Once this began to take place consistently, meant that many markets that were once closed off from foreign investors began to see increasing amounts of capital. In many of these different emerging markets, this new foreign investment capital along with low interest rates, helped fuel the rise in a number of different real estate assets around the world. However, once the economy began to cool many of these different investments, began to fall apart. As a considerable number of PC's had large holdings of real estate that they could not sell and the occupancy for rental properties were declining. A good example of this can be seen by looking no further than, a forecast provide by the property company Cushman and Wakefield. Where, they found that investment inflows into the United States from property companies are expected to increase by 50% in 2010. However, the reason why such a situation is occurring is many companies are either looking to sell the large inventory of properties that they are holding or make significant purchases at distressed prices. (Global Property Investment Flow Set to Jump by 30%, 2010) What this shows is: how many of the different property companies experienced a similar down turn that is felt in numerous property markets around the globe. Where, some have been seeking to take advantage of this downturn, while others are trying to unload their portfolio of properties in certain markets.

3.4.2 Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT), is when a publically traded company is directly investing in real estate. This can take place by the purchasing of the actual properties themselves or it can involve investing in a portfolio of various mortgages. The way that REITs are structured, means that they must pay out to investors at least 90% of what they make to shareholders in the form of a dividend. This has caused many entities that are focused on investing in various real estate markets, to use this type of investment vehicle. As a result, the total number of REITs has risen dramatically since the 1980's. Then, when you combine this with more liberalized property markets and the favorable tax status (no capital gains taxes or rental income taxes), means that that the total numbers of REITs that invest in a number of different areas has been increasing dramatically. (Harper 2010) During times of economic expansion, many REITs saw a tremendous rise in revenues as they were participating in a number of different areas, including mortgages. Once the global property market began to implode in 2007, many of these different REITs would face a number of financial challenges. A good example of this can be seen in report released by Ernest & Young, where they found that the model of the REITs contributed to the recent challenges. As the requirement to distribute 90% of their earnings to shareholders, caused many to have low cash reserves. Then, the high amounts of debt that they accumulated during the times of economic prosperity created severe financial challenges. However, according to the report, the overall performance of the different REITs will vary. As those REITs that focused on properties in Japan saw a 6.68% increase, Australia a 10.4% increase and the United States saw a 28% increase last year. However, some markets such as those in the UK saw a 20% decrease during the same time. (REITs Leading Real Estate Out of Global Financial Downturn, 2010) What this shows, is how the overall performance of the different REITs will depend upon the individual market forces. Like what was stated previously, this can have an effect upon how the various REITs will do depending on the specific markets. However, when you look at the underlying trend you can see that many markets are interconnected such as: the REITs that focus in the U.S. And Japan seeing growth. This is signaling that the global property markets are interconnected. While at the same time, the different unique factors for each region will affect returns.

REIT Performance in Select Property Markets for 2009

3.4.3 Mutual Funds (MFs)

Another way that many investors have been investing in the different property markets around the world are: through mutual funds (MFs). A real estate mutual fund is an investment company that is focused of purchasing securities of property companies or REITs. The way they work is: a large number of investors will pool their money together. Each investor will own shares of the mutual fund, equal to their overall total investments into the fund. At which point, the mutual fund company will take the money they are given by investors and will invest in a number of different property companies / REITs. During the boom years, the returns on investment from various MFs averaged around an 11% growth rate until 2008. (Real Estate Mutual Funds, 2008) Then, these different funds would experience a similar downturn to what was taking place in PCs and REITs. However, by the end of last year these different kinds of mutual funds followed the same kind of performance growth, by averaging 33.9%. While those MFs that invested in emerging real estate markets (such as China) saw an increase of 76.1% last year. In the more developed real estate markets, the growth was more restrained in comparison to emerging markets. This is because, the large inventory overhang and the issues of corporate debt having been weighing on shares in these areas. (Waggoner 2010) What this shows, is a similar trend that is occurring, where the various markets are interconnected. Yet, the overall performance will depend on the specific factors for each market.

3.5 Risks Facing Investments in the Global Property Markets

Since real estate prices have remained very volatile over the last few years, means that there are number of possible risks to include: market risks, interest rate risks, business risks, liquidity risks and inflation risks. In many ways, these different risks can spread around the globe. However, each risk factor will depend upon the underlying market conditions of each country. This is important, because it helps to highlight how strong or weak the various property markets perform based upon these different risks.

3.5.1 Market Risks

Market risk is when: entire asset classes of real estate will decline over time. This is because of changes in the underlying market itself or other factors that could cause real estate prices to drop (such as a terrorist attack in an area). (Market Risk, 2010) This type of risk can be focused on more of an intern national scale or it can go all the way down to the local level. In general, the overall trends in worldwide real estate markets will follow one another. However, specific market factors in a particular country can have a dramatic affect on real estate prices.

3.5.2 Interest Risk (Price level Risk)

Interest rate risk is: when the rising or falling of interest rates in a particular country will have a dramatic effect on how strong or weak real estate prices will be. This is because, the over level of interest rates will determine the cost of financing many different kinds of real estate projects. In general, this kind of risk can follow the general trend that is occurring around the globe. However, specific factors (such as trade deficits / the levels of government borrowing) will have a dramatic effect on local real estate markets.

3.5.3 Business Risk

Business risk is when: the risks for a specific country or region could have an effect on real estate prices. (Business Risk, 2010) A good example would be when the government in one country decides to nationalize key industries. Even though this may not have a direct effect on the real estate markets, the risks of such actions will have ripple effects. As the perception that a particular area or region could be less business friendly, may create different problems for investors who are investing in the country. This could cause that the amounts of direct foreign investment to drop because of these policies. What this shows, is how various real estate markets are affected by specific factors for a particular region / country.

3.5.4 Liquidity Risk

Liquidity risk is when an investor could have trouble selling a particular asset. In some ways, this risk can be spread from one county to the next as the overall liquidity of one real estate market will have an affect on the others. (Liquidity Risk, 2010) A good example of this could be seen in the United States, where as real estate became more illiquid. This overall liquidity risk spread around the world as bankers were more cautious about lending. This can be seen, by looking at the increase in the LIBOR index during that time. The LIBOR rate is what bankers are charging other bankers to borrow money. When the LIBOR rate increases, it is indicating that there are large amounts of liquidity risks in the markets. As the various bankers, do not want to be left holding assets that are not very liquid. (Seabury 2010) However, liquidity risks can also depend upon the real estate market itself. Where, changes in various issues of supply and demand will affect the prices in a range of real estate assets.

3.5.5 Inflation Risk

Inflation risk is when: there is the likelihood that rising prices for various natural resources will have an effect of the value of different investments. (Inflation Risk, 2010) For the global property market, rising levels of inflation can have a devastating effect on prices, by making the cost of homes more expensive. Once this takes places, it means that the real estate market could see a sharp slowdown as demand drops off. However, various factors could also lead to inflation risk in specific local markets such as: shortages of various raw materials / supplies. In either scenario, inflation has the possibility of slowing demand by forcing real estate prices higher. At which point, it is only a mater of time until the real estate market will begin to slow.

3.6 Emerging Property Markets in the Middle East (ME)

The Middle East property markets have generally followed the worldwide trend, where prices were continuing to climb for many years in a row. Then, prices began to decline rather quickly once a worldwide slowdown occurred. However, like all real estate markets, there are specific country factors that will have various cross current effects on real estate prices. In the case of: Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and United Arab Emirates, they all experienced sharp price increases, followed by a period of contraction in real estate prices. An example of this can be seen in Dubai, where during the years of expansion a number of large commercial and residential real estate projects began. As this part of the United Arab Emirates, became known for being the play ground of the Middle East. However, once the price of real estate began to implode, meant that the markets would see a more severe down turn. As low interest rates and large amounts of foreign investment capital quickly dried up. Once this occurred, real estate prices would decline by as much as 45% (making Dubai the worst performing real estate market in the world last year). (Sambidge 2010) This overall trend of volatility in real estate prices has continued to affect nearly every single country throughout the region. Highlighting, how these markets are more subject to the various forces of supply and demand in the world economy.

3.6.1 Characteristics of the Emerging Property Markets in the ME

In general, the economies of the Middle East are dependent upon the exporting of mainly petroleum related products. During periods when oil prices are high, means that the overall revenues in the various economies throughout the region will increase. However, over the last several years many of the different countries have been attempting to diversify their economies into a number of sectors. (The World Fact Book, 2010) This has caused the various economies to be subject to other macro economic forces that will have a direct impact on the real estate sector. A good example of this can be seen in Dubai, where Dubai World (a real estate developer that created several high priced developments including their own island) announced that they were facing a liquidity crisis. (Leonhardt 2009) This is significant, because it highlights how various economies throughout the region are facing similar challenges in their real estate markets. As many countries and developers created large amounts of debt in the process of attempting to diversify their economies. Then, once the slow down came in the economy, these countries faced a contraction in oil imports and the newly developed sectors. Then, combine this with the large amounts of debt used to finance the building boom; shows how vulnerable these countries are to various changes that occur in the world economy.

3.6.2 The Importance of the Emerging Property Markets in the ME

The Middle East property market is undergoing a transition. Where, the entire region faces increasing amounts of media attention. This is occurring as the competition for various oil and natural gas reserves has become more intense. At which point, more investors are focusing on new investment opportunities throughout the region. (The World Fact Book, 2010) Then, when you combine this with different economies diversifying outside of oil; has meant that that the real estate markets are becoming a major lynchpin to the different economies throughout the region. This is because real estate prices reflect the overall demand the from service industries that these economies are adjusting to (such as: tourism and financial services). As more nations in the region diversify away from oil, means that there will be greater emphasis placed on the real estate market. Where, it will play an interconnected role in helping to develop these new sectors of the various economies. As result, this makes the real estate market in the different areas an important element that will speak volumes about the possible short- and long-term economic implications for an area.

3.6.3 Investment Opportunities in the Emerging Property Markets in ME

Throughout the countries of Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and the United Arab Emirates there are variety of investment opportunities. However, depending on specific country and demographic factors will determine how strong or weak these markets will be in the future. A good example would be in Saudi Arabia, where 70% of the population is under the age of 30. This is fueling a housing shortage in many different areas of the country. According to a report released by National Commercial Bank, they found that by the year 2015 an additional 1.3 million units will need to be constructed to keep up with this demand. This means that new foreign investment capital of $160 billion will be required to address the shortage in this market. (Rashid 2008) However, when you compare this with other markets such as Qatar there are two different types of markets that are emerging. The high end real estate such as condominiums, villas and commercial property are facing severe challenges. Where, the large amounts of easy credit and foreign investment capital caused developers to over build these different markets. Yet, beyond this real estate market there is shortage in middle and low end real estate. This has caused the Governor of the Qatar Central Bank to predict that the economy will experience 16% GDP growth, as demand for real estate in these markets will play a major role. (Morgan 2010) What this shows, is how within each of the different Middle Eastern countries there are cross currents when it comes to the real estate market. Where, many countries have an oversupply of high end / commercial real estate. While, in the middle to low end markets there is shortage of available real estate. Therefore, the short to long-term investment opportunities in the sector can be found in the middle to low end real estate market. While at the same time, the high end / commercial real estate market will face short to medium term challenges. However, over the long-term (once the inventory is reduced), these markets could see a considerable increase in price appreciation and demand.

3.7 Property Markets Performance in the Middle East

The various property markets throughout the Middle East have been affected by the severe slow down in real estate markets around the world. This has caused many of the large commercial and residential developments to face issues of a large over supply of properties along with falling demand. Together, these two factors have helped many of the once hot property markets to see large amounts of cancelations or delays. As large institutional and foreign investors are reluctant to spend anything until demand picks up. However, within the various low and middle end markets there is a shortage for properties. In general, this can be seen with a number of different countries that are experiencing similar problems throughout the region to include: Saudi Arabia, Egypt, Syria and Jordan. This is significant, because it shows how the high end markets are affected by what takes place within the global property markets. While, the low to medium end real estate markets are showing increasing demand that is outstripping the available supply. (Middle East has Opportunity for Property Investment and Jobs, 2008)

Egypt, Jordan, Kuwait, Qatar, Saudi Arabia, Syria and United Arab Emirates

Middle East Real Estate Property Market Performance in 2009

County

Percentage Gain / Loss for 2009

Saudi Arabia

+ 5.0%

Egypt

-37.0%

Jordan

-10.0% to -15.0%

Kuwait

-25.5% to -50.0%

Qatar

-30.0%

Syria

Restricted

United Arab Emirates

- 45.0%

3.7.1 Property Markets Performance in Saudi Arabia (KSA)

The property markets in Saudi Arabia are largely undeveloped. This is because over the last 10 years, there has been an increasing focus on building large developments on the Red Sea. The decision by many developers to focus on this end of the market has left many of the other parts of country's real estate market largely ignored. As a result, a shortage has emerged in the number of low to medium end projects. A good example as to how severe the situation has become can be seen with figures released by the Saudi Arabian government, which found that 500 thousand people will require new homes every single year. This means that approximately 100 thousand new homes must be completed to address this demand. (Saudi Arabia a Climate for Change, 2010) Together, these two elements have protected the Saudi Arabian real estate market from the volatility that has occurred, with other markets in the region. This has allowed the market to see consistent long-term growth of 5% a year, because of these large amounts of demand in the low to medium end markets. (Saudi Arabia's Real Estate Market Likely to Exceed SR82b, 2010) Then, when you combine this with the fact that the high end development was not as significant in other counties, shows how the markets were immune from the wild price swings that have occurred around the world.

3.7.2 Property Markets Performance in Dubai and Abu Dhabi (UAE)

The property markets for both Dubai and Abu Dhabi have experienced even larger amounts of volatility over the last couple of years in comparison to their neighbors. This is because both countries were seeking ways to diversify their economy away from oil. Where, they were focusing on tourism and financial services. However, as the both areas were receiving large amounts of investment capital, meant that many property development companies would take on increased amounts of debt to finance these different projects. This lead to an oversupply in the markets as builders expanded the number of projects to meet future demand. Once the economy began to slow and oil prices dropped, meant that both areas would see: declining occupancy rates as well as tourism. This would lead to a sharp contraction in both markets, as the oversupply would force property owners to reduce prices dramatically. An example of the overall severity of the slow down can be seen in Abu Dhabi where prices are down by 45% since 2008. Demand in both markets has begun to stabilize, thanks in part to reforms in various commercial laws that reduced the capital requirements to start a business. Both countries are hoping that this could help improve the levels of demand. (Outlook for Real Estate in Abu Dhabi muted after 2009, Report Indicates, 2010) However, there are still large amounts of over supply in the markets.

3.7.3 Property Markets Performance in Kuwait

Kuwait experienced a slow down in the price of real estate during 2008 and into early 2009. The severity of the drop was as deep as in other countries throughout the region. This is because the country's real estate sector is the second largest contributor to economic growth behind oil. (Kuwait Property Show, 2008) As a result, real estate prices fell between 25 to 50%, depending upon the asset class. (Property Reports Clash Over State of Kuwait Real Estate Market, 2010) This is in part because of a government ban in place preventing private firms from buying certain asset classes of property. Since the government lifted this restriction and lowered interest rates, the market has began to show signs of stability in late 2009.( Slow But Sustained Property Revival Predicted for Kuwait, 2010) A good example of this, can be seen by looking no further than the Khairan residential area. This was raw land that the government released for development in 2008. Initially prices for the various pieces of land remained stagnant in early 2009, when they were sitting at around $100,000 (Kuwaiti dollars). Then, as the markets began to stabilize, the price of land increased to $130,000 (Kuwaiti dollars) during the second half of 2009. This is significant, because it shows that the various government policies are helping the real estate market to recover from the severe volatility that has been seen in other markets throughout the region. (2009 A Year of Revival for Property Sector, 2010)

3.7.4 Property Market Performance in Qatar

Qatar is facing a similar situation as the United Arab Emirates, where large amounts of building took place after the new millennium began. This is because the government began engaging in a policy of liberalizing their real estate markets. Where, they made it easier for foreign investors to purchase real estate. This would create a building boom in the country for a number of residential and commercial real estate projects. However, what makes the situation in Qatar so interesting is they were in the process of implementing different reforms. Yet, one of these reforms planned was: the creation of a mechanism to monitor various real estate statistics for the market. Due to the fact that the economy slowed, meant that this mechanism was not in place, forcing economist to estimate the rates of growth or decline. As a result, Qatar's real estate market has experienced extreme boom and bust cycles. Evidence of this can be seen by looking no further than 30% decline seen in this market during 2009. This is significant, because it highlights how Qatar is going through a similar situation as the United Arab Emirates. Where, large amounts of overbuilding have caused prices to implode. Then, when you combine this with the fact that they were trying to diversify their economy, meant that the real estate market was caught in a difficult place. As a newly developing industry, would be exposed to the forces of supply and demand in the world economy. This is because it was not as mature in comparison to other countries. As result, this has allowed the real estate markets to face a number of different challenges at the hands of the world economy.

3.7.5 Property Market Performance in Jordan

The property market in Jordan is facing similar challenges as other real estate markets throughout the region. Where, prices have dropped between 10% and 15% since the peak in 2008. However, the exact number is difficult to determine because there is no official price index for the country. Beyond this statistic reveals how Jordan is affected by changes that are occurring in the global property markets. Yet, in a number of ways the markets have large amounts of demand that are protecting it against some of volatility. What is happening is a large number of foreign nationals (mainly Iraqi and American) are aggressively purchasing properties in the high end markets. While, there is shortage in the low to middle end markets. As far as the high end markets are concerned, the War in Iraq has caused nearly 500,000 people to move to the country. Then, when you combine this with a large demand from American investors, means that the overall number of high end sales to foreigners has continued to increase despite the recession. This can be seen in the total number of real estate purchases conducted by foreign investors, as they increased by 22% from January to August 2009. Then, in the low to middle end markets, they are facing a housing shortage. This has caused the government to spend $7 billion on building 100,000 units a year. (Jordan Housing Market Remains Fragile, 2009) What all of this shows, is how the Jordanian real estate market was affected by the global economic recession with the drop in prices. However, because of large amounts of demand from foreigners and the low to middle end markets; have helped to protect the country from a more severe decline in prices.

3.7.6 Property Market Performance in Egypt

The property market in Egypt has been affected severely by the global property markets, as prices have dropped by 37% since peaking. The luxury property markets were hardest hit as investor canceled orders on a variety of construction projects. This would lead to a sharp oversupply, following a trend throughout the region and around the globe. At which point, the Egyptian government announced a series of stimulus packages designed to reinvigorate the markets. However, like many countries throughout the region Egypt has an oversupply of 1 million high end properties. While at the same time, there is a shortage in the low to middle end markets of 40 thousand units per year. This inequality in the markets has meant that more than 11 million people out a population of 82 million are living slums. This is because the lack of regulation of these markets, have allowed for poorer structures to be built for the low to middle income markets. While the high end markets receive increased amounts of regulations (as far as the building codes are concerned). Then, the mortgage market for the country is fairly young, with nearly 57% of all purchases for property conducted with cash. Despite all of these different issues, the majority of real estate transactions conducted in Egypt is concentrated on the local markets. In many ways, this has allowed the country to experience a less severe decline in prices outside the luxury markets. Evidence of this can be seen by looking no further than prices declining by 3.7% since peaking in 2006. (Egyptian Property Plunges, 2009) What this shows, is how certain aspects of Egypt's real estate markets are affected by what happens with prices globally. Yet, because the majority of transactions are conducted by local investors, means that the country has been shielded to a certain extent from sharp declines in prices.

3.7.7 Property Market Performance in Syria

The property market of Syria has been expediting a large amount of growth over the last several years. As the government relaxed rules on owning real estate and several large foreign property companies have been investing in the country. However, the markets in Syria are still very young. This is because of the strict demands that were placed on property ownership until 2000. Then, after the various rules were relaxed many property companies in the various Gulf States began to invest in the country's property market. They quickly experienced bureaucratic delays on a number of different projects. (Syria: In Demand, 2009) As a result, the demand for real estate has continued to increase. A good example of this can be seen by looking no further than a report conducted by Cushman Wakefield. Where they found, that because of the shortage, real estate price in Damascus are the eighth highest in the world. Then, when you combine this with the fact that the mortgage market is new and there are no formal building codes, means that nearly 38% of the population will live in slums. (Syria: In Demand, 2009) These different factors have protected the Syrian real estate market from the volatility in real estate prices that are occurring worldwide. However, because of the bureaucracy, the long delays in building the different real estate projects and poor planning, has meant that prices have continued to climb.

3.7.7.1 Property Companies in Syria

The majority of the property companies that have been investing in Syria have been mainly from the Gulf region. A good example of this can be seen by looking no further than Al Kharafi Group out of Kuwait. Where, they have experienced long delays in breaking ground on many projects. This is because of: bureaucratic delays, confusion about the various regulations surrounding financing and difficulty obtaining clear deeds. Together, these different elements have meant that the majority of property companies that come to the country and announce various projects will have trouble getting started because of these issues. This has helped to hold back large amounts of foreign direct investment in the country. As a result, nearly 95% of all real estate transactions are conducted by Syrians that are living or working overseas, according to the real estate firm GS Real Estate. What this shows is that the Syrian real estate market has tremendous opportunities. This is attracting some of the foreign investment capital from various countries. However, because of the different issues surrounding the titles, financing and the bureaucracy itself; has meant that many property companies have become frustrated. This is the biggest road block that stands in the way of having property companies, begin to address the demand that is occurring for a variety of properties. (Syria: In Demand, 2009)

3.7.7.2 Trends of Property Prices in Syria

Because of the large amounts of demand in the real estate market, has meant that Syria has continued to see consistent increases in prices. This is because the various reforms that the government has attempted to initiate over the last several years, have failed to increase the overall number of building projects. Then, the country is experiencing an increase in the number of Iraqis since the war began in 2003. Where, a total of 1 million Iraqis currently call Syria home. This situation has added to the overall pressures that the Syrian real estate market is facing. Where, the increased numbers of Iraqis are highlighting the ineffectiveness of the government reforms for addressing the housing issue. (Butters 2007) As a result of these different factors, Syria will continue to see increasing prices. This is problematic because the delays of new projects and then more increases in prices are making it harder for the majority of Syrians to afford a home. Therefore, it would not be surprising to see the Syrian real estate market continue to face a situation of rising prices, until effective reforms are enacted to address the supply and demand issue.

3.8 Property Companies (PCs) Performance in the Middle East

The overall performance of the different property companies will highlight how the various market forces are affecting Middle East real estate prices. However, when examining these different situations, it is clear that many of these companies have been aggressively investing outside of the Middle East. A good example of this can be seen by looking no further than the large amounts of direct investments into a number of real estate markets around the world. Where, various entities have been aggressively investing in opportunities overseas such as: the Qatari Diar Real Estate Investment Company (an investment unit of the Qatar Investment Authority) investing $150 million in the Tajikistan real estate market. (Gulf Real Estate Companies Looking Abroad for New Projects, 2010) This provides the greatest insights as to what global factors are affecting the various markets. It will also highlight how various local factors are affecting the overall performance of property companies. This is significant, because it will underscore how and it what ways these markets can be adapted to address the various imbalances.

3.8.1 Introduction

The various property companies throughout the Middle East have faced a number of different issues depending upon the markets. This is because of the cross currents of the effects of globalization and specific markets factors, are affecting the overall amounts of profits at the various companies. When you analyze those property companies that were involved in the higher end real estate markets, they are facing severe financial challenges. As the overall amounts of debt and a declining value in their portfolio of properties is: creating a liquidity crisis. This has caused some companies to push for various mergers, in an effort to adapt to the changing realities of the markets. A good example of this can be seen with the proposed merger between Dubai Holding and Emaar Properties. Where, combining the two entities was supposed to significantly reduce the overall amounts of debts. However, because the debt levels were so high, meant that any kind of merger was called off. (Dubai Property Companies Called Merger Off, 2009) This is significant because it shows how some of the property companies could be too big to fail. What this shows, is that both companies will more than likely require a series of government bailouts to overcome the short-term challenges.

Yet, when you examine other property companies throughout the region, a different situation is occurring. A good example of this would be the Saudi Arabian property company Dar Al Arkan. Where, the company said there is strong demand for properties in the Kingdom of Saudi Arabia. This caused the company to keep the product mix the same as it was last year. With Managing Director Abdullatif al Shelash saying, "We still believe the market is very good. It is a rich country, a very young population. There is a real demand (for residential property)." (Laessing 2010) What this is showing, is how the overall regional / demographic factors within a particular country will determine how strong or weak the underlying market could be. This is significant, because those builders who are rapidly expanding that were not in these markets are feeling a severe down turn. While those property companies that are more focused on addressing local supply and demand issues are more stable. Over the course of time, this means that the number of property companies in the high end markets will become larger, as there is less competition. While at the same, time the demand for housing in the various local markets could spur an increase in the number of property companies in these markets.