Tuesday, December 2, 2008

Oman's Real Estate - what's the status?

No real news at all yesterday, at least not in Oman, apart from the visit with HM and the Omani Military of General Petreaus, now US Military head of the Middle East theatre. Totally dulls-ville.

Meanwhile, the impact of the 'global liquidity crisis' continues to reach inexorably towards Oman. The problems:
- Low oil prices lately (and most importantly lower than budgeted by Government for next year),
- Falling demand & low global prices for exports such as copper and aggregate, Aluminium and refined oil products, shipping, LNG, methanol,
- Likely reduced demand from high paying tourists (although that is yet to be confirmed, I think it's likely that intense competition will take place between classical tourist destinations, like Far East, Mediterranean, Caribbean, and ME, lowering profit margins and growth).
- The acknowledged significant reduction in expected future growth, which effects lower NPV for businesses
- Low share prices

On the upside, import prices are plummeting, helped by the stronger dollar, for steel, cement, food, cars, heavy machinery, and oil field services. International contractors will be searching for deals, and skilled expats for jobs. The Free Trade Agreement with the US might help too. Bulk shipping charges have collapsed, making transportation of imports and exports much cheaper (~80% cheaper).

One big question at present is:
what is the status and implications for real estate developments in Oman, especially given the continuing and surprisingly rapid meltdown of the Dubai property bubble?
Obviously, the news is going to be biased to the downside in the short to medium term for all real estate in Oman, but especially the high-end, away from industry, semi-tourism mega-projects.

In fact, the whole "buy off-plan" business model is probably busted. The idea was that by buying off-plan (ie not yet built), purchasers took on some of the development's risk, significantly lowering financing costs and developer risk, enabling them to - in exchange - get a lower than market purchasing price, locked in, and effectively buying a cheaper call option on the future real estate market, which had been so buoyant for so long as to seem a one-way bet. At the Wave recently, people were even fighting for the right just to make a deposit. The greed was palpable.

If I had a house being built right now, I'd be very careful to make sure original specifications are being adhered to. The temptation to cut costs on these pre-partially paid deals must be hard to resist. Contractual minimum will be the rule, and any variations sharply priced, so make sure you have regular independent inspections during construction. I wouldn't rely on the local building inspector to make sure you got the right tiles, kitchen, wall thickness, fittings, water system, etc etc.

And if you haven't yet bought an off plan Middle East house, ...... why, pat your self on the back for a fantastic investment decision successfully completed!! Your foresight has saved you 100,000s of thousands of dollars!

Of course, the bottom line for Oman will mean in the short term, less investment spending (and the total being put on hold right now must be at least 6 billion rials worth, over several years mind you). That's a big hit on the economy, especially when then taking account of the multiplier effect on all the money invested, plus the jobs for people, especially Omanis, that will at best be delayed... Not good. No wonder Galfar shares are down.

As for the specific developments, what's the latest?
The Wave.
Always the most organised and professional of the lot, The Wave has had the advantage of getting in early and having thus completed many houses that are paid for (phase 1), and probably getting reasonable contracts for construction. Secondary sales have collapsed, but perhaps mainly because the prices being asked are still overinflated compared to what they originally cost just a few years ago, and this is exposing those who bought only to sell on. The Wave have probably locked in decent project finance too from Bank Muscat. I don't have any detailed intel yet on their inner-financing status, but as the Wave is owned primarily by the Government of Oman and so much cost is sunk, they will survive. A problem in the short-term would be if houses already sold/constructed come onto the market at lower prices than are profitable for subsequent new phases. They may take this opportunity to renegotiate contracts for construction & fitting, and share the pain a little. Long term I think the Wave will be fine, if you want to live in an expensive house on the Muscat Airport flight path surrounded by construction for several years to come with little upside in investment value. At least you can commute to Muscat to work.

Muscat Hills
The villa/golf course project near Boucher that is already well underway. Recently relaunched, and allegedly refinanced by HM himself, it seems to be progressing too. (Only after purchasers threatened legal action over an attempt by developers to extract more cash from them post-contract, allegedly after someone embezzeled a load of the project cash). As long as they have now locked down construction and financing (which they should have done ages ago) this project should complete OK, although the market prices will might mean a short-term loss on paper for the purchasers and not much profit for the developers. Again, at least you can commute easily.

OHI Qurm/Burhan Heights/Shanfari villas redevelopment
Announced just before the shit hit the fan, and with demolition started of the old houses, this project seems to be in trouble. The sales office is substandard and amateurish, no deal has been concluded on the proposed 4**** hotel, and talk is that the project will be suspended. If you have shit-loads of cash right now, and perhaps own a construction company, this would make a killer purchase right now, BTW. Galfar Developments anyone?

Blue City
Ah, Blue City. If you don't know the history, you've got some reading to do. IMHO, this project was in big trouble even before the crisis. Right now, Blue City is in the worst position for a real estate development to find themselves when cash is tight, with a lot of their seed capital sunk or committed, and the likelihood of further off-plan sales (needed to finance construction) now much lower, if not zero.

The borrowed money (via $925 million in bonds) has been substantially spent on a complete re-design, salaries, commissions to the financiers, marketing junkets around the world, advertising, plus building the construction camp and bulldozing some roads. The planned 27 hole golf course had already been pared back to 18 holes, and sales are well below target and apparently in breach of bond covenants. The construction managing company Bovis has quit, claiming non-payment. Lots of churn in other contractors and in senior management. The shareholders [AAJH and Cyclone LLC] continue to battle in the courts for ownership, and as a result of that dispute I'm not aware of an official Board meeting being held lately, thus allowing the development company executive to run independently of formal company Governance. The mega-hospital/medical village sponsers have pulled out. There has always been a lot of silly gossip alleging fishy dealings with money being siphoned off and even reports of a $1 miilion hush payment made to the ex-CEO, all of which I have no evidence for and is almost certainly not true. Not at all.

There has been a long and rather tedious exchange of essentially fact free opinions over the past few days on Sue Hutton's News Briefs Oman site, Blue City Comments, with someone calling themselves 'stakeholder' trying to say everything is fine, despite all the available facts, insider comments and common sense showing is it far from fine. He/She has been commenting on an earlier post here too.

I expect this project will be significantly scaled back to cut losses and rescue what they can. Bonds will be renegotiated, and the project will in the immediate short term turn into a smaller villa-style luxury hotel development combined with a few villas, golf course and an apartment block or two. I predict the principals will now use the crisis as an excuse for the greater project's collapse and seek Government support to fill all the holes. They will claim if it wasn't for the crisis that everything was fine and certainly nothing wrong with the original concept or management. Which I guess if you snort enough PCP-laced Andean marching powder and/or have your own money invested in the project might seem believable.

Salaam Yeti
Now that the village is moved, land reclaimed, mountains leveled and the breakwater built, those in the know say the project is on indefinite hold for now as things continue to develop in Dubai. Developer Sama Dubai have apparently placed all their projects on hold while they reevaluate, but I would expect, given the early stage of the development, that Dubai may have priority in the short-term. However, in the medium term, who knows, perhaps Oman will become a safer bet. Yeti was tipped by some Senior real estate contacts of mine some time ago as 'the one to buy' because of its proximity to Muscat, Shangri La type setting, and the significantly higher total area/number of houses ratio compared to the Wave.

Sama Dubai, which is part of the Dubai Holding conglomerate owned by Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s ruler, has had a few problems of late, with 4 senior executives arrested in the UAE Real Estate corruption probes.


The development company recently claimed (see prev post) "...There is at any rate no shortage of qualified and willing investors in Oman and its surrounding countries (the "Gulf Region") who are ready, willing and able to invest in the Project Company ...money simply isn't an issue..."

I guess we'll see! They claim to have $110 mln in the kitty, less than 10% of the projected project cost, but as no significant capital has been sunk in the ground, and they seem to be using a recycled design, they should have enough cash to wait a few years.

PDO Camp Redevelopment by MoT
The timing of the crisis, and the contraints of both project financing, real estate market, hotel demand and Government budgets, will almost certainly mean this project will be deferred indefinitely until conditions improve. PDO's residents have gotten a stay of execution for quite some time.

Other small retail/residence developments in Muscat: Qurm Wadi, Ghubra, ...
Construction is so far along that if local bank support continues to be available, these should be completed OK, as they are relatively small developments, aimed at the local market which is still significant. Whether they will sell, and at what price, is a different matter. But cashed up local big boys may well be in for a few bargains.


  1. The thing to watch next is the development of infrastructure projects, both by Dubai and Oman (And the rest of the GCC for that matter). In fact, no one has said much about Saudi yet either.

    Construction materials are lower cost than before, and as its been pointed out, shipping prices have dropped significantly, but this of course did not stop Al unFair charging 3 rials, that's right, 3, for a frigging pineapple the other day. Cars will get cheaper, but less people will buy them.

    The Banyan Tree project in Seifa is still going ahead, the thinking there is cheaper cost of construction and by the time it's done in 3-5 years, hopefully tourism will be on the up, and access to Seifa will be improved.

    Blue City is everyone's favourite one to hate. In my opinion its certainly suffered from crippling in-fighting between the owners and to be quite frank terrible management. BLL walked from the job, rather cavalierly by some reports, citing non-payment. I've see no proof of this but wouldn't be surprised if that's true, considering what happened to AAJH. But now it appears BLL doesn't have any (or enough at any rate) replacement work for the army of staff it had on the job. I hope it wont happen, but I wouldn't be surprised if some lay-offs happen there. :(

    My advice to anyone in the development industry here is to run for Government projects. Oman Wastewater will be loving this, as it will mean the price for all that pipe they're buying will drop, and they'll be able to re-negotiate their un-started Contracts (of which there are many)for a better deal.

    Roads, Atkins & Parsons (the two big Roads engineers in Oman) should probably be doing ok too... but who knows - Atkins Dubai just had significant lay-offs.

    The estate agents are always the first to go, but that's why they are blood sucking vampires, because if they have any brains, they should know they're the first ones to suffer in a downturn.

    Oman (and Dubai for that matter) still need more power plants, so there will be work there too, but again, infrastructure. The Airport expansion is going on too.

    It might be a good time for the Government to get some school refurbishments done, or new wings on some of the hospitals. But who knows.

    The real teller will be the oil price. People far cleverer than me suggest a realistic price is about $75 a barrel, and as has been mentioned on this blog before, that's plenty to keep Oman ticking along, and if oil can be sold for that amount, then things should be OK here.

    I wonder how long before the price at the supermarkets drops? I bet never!

  2. We've seen the inflation, now comes deflation. Like ALurker said - stuff will be cheap but no one will be able to afford to buy it.

    Infrastructure too won't go anywhere if the budget can't be justified due to lower-than-expected prices for crude.

    Though I am certain that we'll see oil prices in the 100's by summer time.

    As for real-estate... It's a dud. If you're sitting on a "buy off" then pull your money and invest into oil-call options as far as the eye can see.

  3. flights don't go over the wave they go parallel to it. as far as i'm aware the noise heard in azaiba is not heard from anywhere on the wave as the planes come over the mountains and turn over azaiba to the landing path - sea breeze helps this too i suppose.


  4. AL
    Thanks for the update on A Sifa.

    Lets hope for $80 oil...

    What about after the new airport?

  5. A little update:

    Huckle & Partners, the Architects on the Sama Dubai job in Yiti, just laid off 6 staff members, and no one there has received their pay checks yet, and its already December 3rd.

  6. "the noise heard in azaiba is not heard from anywhere on the wave as the planes come over the mountains and turn over azaiba to the landing path"


    While The Wave does indeed run parallel to the existing runway at Seeb, it will definitely be exposed to noise from landing aircraft, arriving on the "MCT 08" arrival sequence.

    I won't go into the raw details but:

    Planes don't turn over the mountains very much (for CFIT reasons), and the preferred method is to bring them in above the airfield and then turn them toward the coastline, with either a right or left turn after that to approach whichever end of the runway is in use (dictated usually by wind).

    You also have a lot of military aviation activity during the day, with transport aircraft flying around in a circle practicing "circuits".

    And then the best of the best:
    F-16s, Jaguars and Hawks performing the ever-so-popular "run and break" manouvers, which can be deafening if you gave a group of three or four.

    It's a high speed run in to the runway at low-level, followed by a high-G turn directly over the coast and then landing.
    Used to limit exposure to the aircraft in case of threats from below.

    The new, parallel runway is going to bring planes much closer to The Wave.

    Truly a plane spotter's dream location.


  7. Here's a video of the "Run and Breaks" that you will be seeing around The Wave.

    Welcome to your new home!


  8. What will always drag down projects in Oman are fraud, and in the case of the Blue City rank petulance from the front-men trying to run the show. Has there ever been so many toys thrown out of the pram?

    Right now everyone's current fav fairy godmother (Abu Dhabi)has come to the 'rescue' at the death - but at what cost? All this for the sake of 'face'. Omanization? More like Emiratization to me.


  9. If oil prices continue running in the 40-50 range in 2009, I believe the real estate industry will look completely different. What we are witnessing now is just a taste of what is yet to come.
    Even if the government keeps the budget high (big) enough, the overall sentiment of the market is getting worse by the day. People just feel that the worst is yet to come and are holding on to their money.

    I work for a building materials company and get to hear about some of these projects from the contractors and I think:

    1. The wave: This is the only project going ahead as planned as of now. The last offering attracted more than 500 interested buyers (which shows quite an interest in the wave). MAF and the government should be able to keep funding the project, even if cash flow worsens.

    2. Murya: They are delaying the payments to the suppliers already for their seifa and salalah projects (used to pay us in 7 days now running 45) and their engineers keep mentioning that they are scaling down the project.

    The blue city: started in a problem and now is in an even deeper one. AECO still manages to pay on time, but their purchases have slowed down. I know a few guys who stopped paying their installments, because they believe if they continue paying the full amount they will end up losing more than what they would lose if they stopped paying (losing only the 10% advance).

    Qaryat Qurum: "Better late than never" didn't work here. Came in really late and a guy told me that while visiting their sales center at PDO, the salesperson told him they have managed to sell only 22 of all the flats. Guess that made him run away.

    Salam yiti: it looks like the project is on hold.

    I hope 2009 will be better for all of us. Things tend to look bad initially, but then people (companies, markets and countries)wake up from the shock and start working toward a better tomorrow hopefully. Thanks

  10. I heard in the bars tonight two conflicting rumours:

    1. Yiti is BACK ON, as a result of a decision YESTERDAY (DEC 3, 08).

    2. From the Contractor on the job, "its as dead as a duck"

    So, who knows.

  11. Thanks guys.
    I like that Mr T has actual data too.
    MoT announced another development going ahead just a few days ago.

  12. If Yiti is dead/on hold, what on earth will they do with that massive sales palace on the Motorway?

  13. Lurkie Loo - I think thats why it might be back on - The word is that about 8 million rials has already been sunk on the job, and they need to push through to get a return.

  14. "8 million rials has already been sunk on the job" compare that to the money already sunk by Nakheel on its Trump international tower & hotel and still they announced that the project is on hold (canceled). The 8 million is nothing compared to how much they have to pay to finish the project.

    I believe the massive sales center can be turned into a hotel for the time being or rented to the government as offices (I know i would love it if my company could rent it out :)

  15. I think all the little fries are going down the drain..... the big boys will be around but bruised and battered.... provided banks do lend them......... if banks are around in 2009 :)

  16. Thanks for the information


  17. Thanks for the update. What is the status of the 70 odd Residences at the Shangri-La Hotel in Barr al Jissah? Anyone got any news?

  18. “I can calculate the motion of heavenly bodies, but not the madness of people.” - Isaac Newton quotes (English Mathematician and Physicist, "father of the modern science",1642-1727)

    This adage from Newton could not be truer than in the present times, particularly last week where we saw the MSM fall sharply by 15% to close at 5199 (12/24/08). A lot of this panic was due to technical or forced selling that send the market in a free fall due to lack of buying on the other end. The markets should bounce back once the entire selling is absorbed and shares move from weak to strong hands. The man who gave us the law of gravity also unfortunately lost money in the stock markets to the tune of being on the edge of ruin. A lot of investors in the market learn it the hard way that there are no shortcuts to overnight richness in the stock markets. The only way to make money is to buy companies when they are available at bargain prices and hold them till they become overpriced, the name of the game is inactivity for most of the times and the need for a lot of patience all the times.
    Stock markets are driven by psychology and sentiment in the short and medium term, but rationality in the long run. While the stocks markets face wild swings from time to time, investors with the right temperament can benefit from such situations like what we are witnessing now.
    Last year IPOs were the rage and investors just could not get their share of the firms being floated to be flipped at huge profits on their listing. One saw companies attracting oversubscriptions over 100 times the offer value and more than a couple of billion US Dollars in some cases. A leading company in the country with a decent track record and market leadership position soared 4 fold in the course of 1 year as investors excited by its prospects bid the shares higher and higher. Today while the macro picture has changed and one is looking for more realistic growth in the economy in the coming years, the shares of the company have been hammered below the IPO price. What a difference a time span of 1 year makes.
    Investors also love to chase growth and are willing to pay a premium to firms that grow above market rate. At the same time slow growing or shrinking companies are shunned by investors even though they might offer better value. Today a leading bank in the country with more than 15 years track record of profitably and dividends is available at a big discount to its peers for the reason that it did not grow its balance sheet aggressively during the past couple of years when the economy was on a roll. The scrip is available below its book value, yield of more than 11% and will continue to make profits and reward shareholders in the years to come both in a booming and slow moving economy.
    "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!" - Extraordinary Popular Delusions and the Madness of Crowds is a popular history of popular folly by Charles Mackay, first published in1841. Once normalcy is restored and the senses are recovered, rewards will follow without many efforts.

  19. To my last message, prices in Wave are already down by 10%, Some of owners are ready to offer at 10% discount.

  20. I want to buy an apartment in Muscat but no seller has come forward and offered any discount. Everyone is still asking for premium.

  21. There is no doubt that last World Credit Crisis has a bad effect on all economical fields specially in real estates. But oman real estate market recovered rapidly and started to take good steps towards the right way. The real estates market contributes in the recovery and growth of the economic all over the world and in Oman in Particular.


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