Qatar needs to follow a prudent real estate credit policy by sticking to the fundamentals of credit allocation, especially in light of the “softening” in the real estate market, KPMG has said in a report.
In Qatar, the real boost in organised real estate market was witnessed around the 2006 Asian Games, and since then it has been growing steadily. In addition, winning of the FIFA bid for hosting football games in 2022 provided a significant fillip to the real estate development market.
“This rapid growth in real estate required huge borrowing in the form of bank funding raising the overall exposure of banks to this sector,” KPMG said in its ‘Qatar banking perspectives 2020’.
Qatar’s economy is unique and is not comparable to developed or diversified economies.
However, compared to its regional counterparts, which possess similar characteristics, KPMG finds that the “proportion of real estate credit to total credit is lower.”
Qatar’s real estate to total credit ratio was hovering around 16% on an average between 2015 and 2018 and reduced to 14.2% in 2019, KPMG said in the report prepared by Anurag Gupta, the firm’s Real Estate and Valuations lead.
Over the past three years, NPL ratio has grown by 38%, reaching 1.8% in 2019 however they are well maintained below the level of 2% in comparison to the global average hovering around 6-7%.
Further to ensure safety, banks have also made provisions to manage the risk. Looking at the provisioning trends, the loans provision ratio had mirrored the NPL ratio, however KPMG witnessed that provisions were 1.4 times of the NPL in 2019, owing to changes in accounting standards over the past two years.
On parameters with adverse implications on banking sector (concerning real estate market trends) KPMG noted, “Firstly, Qatar’s real estate market is mainly rental-dominated due to the presence of a large expatriate population. Owing to a few recent regulatory relaxations, several new locations are announced as “freehold properties” that may bring some fundamental changes.
However, as of now, the market “remains subdued” with most of the asset classes facing over-supply situations, KPMG said.
Secondly, real estate rentals in all investment-grade properties have “fallen”. The real estate index declined 30 points over the past three years in the commercial and residential asset classes. Organised retail (malls) witnessed a smaller drop of 14 points during the same period.
“We believe that the real estate market in Qatar is slowly entering a stabilisation mode with affordability being a prime theme across asset categories. This rising affordability coupled with business-friendly government initiatives can help strengthen demand in the market,” KPMG noted.
It said valuation of real estate properties are also under stress. Both declining rentals and over-supply pressures are not working in their favour.
Also, highly optimistic market assumptions have led to high valuations in the past, which are witnessing corrections. It will be difficult to estimate an average drop in valuations.
However, KPMG has witnessed properties where the value has declined as high as 45% over a 2- 3 year period.
QCB’s credit risk survey with banks reveal that any credit to real estate developers and contractors was identified with a very high risk level in 2018 and 2019. Given the current market conditions, it would remain high in the coming few years, the report noted.
On economic impacts due to Covid-19, KPMG said, “Like most countries, Qatar has also witnessed partial business closure since mid-March 2019. This will have considerable impact on industrial and service productivity along with possible loss of skilled manpower.
“If the closure is prolonged, the real estate segment mainly tourism, hospitality and retail will be highly impacted. Banks with high debt exposure to these asset classes may need to consider impact on provisions from expected defaults.”