The real estate and construction sector in the Gulf Cooperation Council “experienced severe cancellations” due to the current economic slowdown, Kuwait Financial Centre (Markaz) said in its recent research note. The sector constitutes the bulk of projects in the region at 74 percent, it added. UAE accounts for 91 percent of real estate and construction projects that are either put on hold or cancelled in GCC, it noted. Around 31 percent of the total real estate and construction projects worth $1.1 trillion got cancelled or put on hold, the report said, of which 72 percent was due to the current slowdown and occurred between October 2008 and March 2009. “This quick and huge contraction in supply was mainly on account of Dubai, which accounts for 91 percent of the $249 billion of projects that got put on hold/cancelled,” the report pointed out. Markaz said “project cancellation is a function of market's realization of oversupply, the occurrence of which now depends on the visibility as to how the economy is expected to move forward. Lack of such visibility impedes the judgment of future demand and increases the vulnerability of projects getting cancelled in the process of sharp downward supply adjustment when market realizes the oversupply.” The extent of fall in real estate asset prices in the GCC region clearly indicates the fact that the demand for real estate in the region has contracted and as a part of the dynamic demand and supply adjustment process, holding on or cancellation of real estate and construction projects were inevitable, the report said. “A significant contraction in activity due to cancellation or delaying of the projects should be painful for the sector and the pain would as well be felt in the overall economy depending on the extent of the sector's contribution to the economy,” the report said. Moreover, the report said 54 percent of the total real estate and construction projects in GCC are future projects and 62 percent of them are in pre construction stage. “The sword of cancellation swings above these projects and an assessment of their vulnerability is imperative,” M.R.Raghu and Venkateshwaran Ramadoss, the authors of the report noted. “A stoppage in projects getting put on hold by itself would be a positive sign as that would mean that the supply has adjusted enough and that the market has a clarity on the extent of demand contraction. Rather than doing a micro analysis by attempting a project wide study which would be time and resource consuming, the report intends to figure out macro (country level) factors that could drive more cancellations/holds from here and weigh each country against those factors to estimate their vulnerability for more downward supply adjustment,” the said. A study of factors leading to supply adjustments including degree of economic contraction, reliance on expat population, extent of past oversupply, and lending scenario indicate that UAE and Bahrain may have to go through more pains of project cancellation while Kuwait and Oman may have been done with the adjustment process, the report noted. Cancellations or holds are expected to continue in UAE mainly as a result of past oversupply and huge future supply pipeline while past oversupply with fewer cancellations so far could lead to cancellations in the future in case of Bahrain. In Saudi Arabia, demand clarity in residential real estate should deter major future cancellations, the report pointed out. __
