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QNB: Falling land prices in Qatar should keep a lid on rental inflation

QNB Group expects falling real estate prices to slow down the rate of increase in rent prices. The Qatar Central Bank (QCB) produces a Real Estate Price Index with data going back to 2006. This index shows that prices spiked in 2008, before collapsing in 2009 as the ripple effects from the global financial crisis spread around the world. Following the crisis, Qatar’s real estate prices picked up steadily, rising 109 percent from July 2009 to May 2013. However, from May to September this year, the QCB’s real estate index shows a drop in prices of 6.2 percent. Accordingly, QNB Group expects rents to increase at a slower rate going forward.
QNB Group has analyzed data purely on land transactions in Qatar, based on weekly statistics published by the Ministry of Justice (MoJ), which indicates that the cost of land has fallen in the last five months. This is likely to ease upward pressures on rental inflation, enhancing the competitiveness of the Qatari economy and relieving concerns that the real estate sector is again experiencing an asset-price bubble like in 2007-08.
The QCB index includes prices for land, villas and residential buildings. According to QNB Group, the fundamental driver for real estate prices is the cost of land. If land prices rise, the price for villas, apartments and other real estate prices are also likely to go up.
According to QNB Group, the rise in the QCB Real Estate Price Index up to May 2013 was mainly related to the acquisition of land for major projects that are being implemented in Qatar, particularly land for the Doha metro, large shopping malls and mixed-use real estate developments, such as Msheireb and Lusail. Now that these projects have reached the construction phase, much of the land is already secured and this could be leading to an easing in real estate prices.
QNB Group’s analysis of land transactions indicates that the price of land has been falling from July 2013 through the first half of November (on the basis of a 12-month moving average, which reduces the impact of seasonal factors and single large transactions).
QNB Group also examined the impact of changes in land prices on inflation. Land prices are a fundamental driver of rents in Qatar. Land is the main component of the cost of building, developing and buying real estate. To recoup costs, landowners and real estate developers need to raise rents in line with rising land prices. Therefore, after land is purchased and construction is completed, rents are likely to move in the same direction as land prices. QNB Group confirmed this relationship in Qatar, finding that there is a strong positive correlation (84 percent) between land prices and the rental component of CPI lagged by six months. In other words, rents tend to follow land prices with a six month delay.
Rental prices are a key component of domestic inflation, accounting for 32.2 percent of the consumer price index (CPI) basket. Most of the remainder of the CPI is determined by international prices. Rents in Qatar fell consistently from the beginning of 2009 until the second half of 2012, but since then they have risen. Annual inflation in the rental component of CPI averaged -6.9 percent in 2010-12, but reversed in 2013 to reach 6.7 percent in the year to August.

Average land prices changed direction before rents, beginning to rise in the first half of 2012 rather than the second half. Therefore, the drop in land prices since July 2013 is a leading indicator that the increase in rents is likely to slow in the next few months. In line with this, annual rent inflation slowed to 6.2 percent in October 2013 from 6.7 percent in August. QNB Group expects to see a further slowdown in rental inflation going forward to below 6 percent.
The rapid population growth could potentially drive up rents owing to stronger housing demand. However, based on QNB Group’s analysis, population growth appears not to have had a significant impact on land prices or rents. This could be due to oversupply of real estate or because a large share of incoming laborers is going into low cost temporary housing, which reduces demand pressures in the main rental markets. Therefore, QNB Group expects rent inflation to slow over the next six months owing to lower land prices.
Low rent inflation in Qatar has important implications for macroeconomic stability, financial soundness and competitiveness. A slowdown in real estate inflation should alleviate any concerns that the sector is entering an asset-price bubble or that the economy is overheating. Furthermore, more stable rent inflation should help keep the cost of living down, making Qatar a more attractive relocation destination for expatriate workers, drawing in more talented labor and helping to raise the competitiveness of the Qatari economy. Low rent inflation and stronger competitiveness should help encourage investment and lending, supporting economic growth and the diversification of the Qatari economy.