The Institute of International Finance indicated that the excess supply of residential and commercial real estate, as well as weak demand for property in the countries of the Gulf Cooperation Council (GCC), have caused a steady decline in real estate prices since 2014. It considered this trend to be a consequence of a supply-driven real estate market, amid rising global interest rates, appreciating exchange rates, and regional tensions. Also, it pointed out that there is a risk that the drop in real estate prices is self-perpetuating, as lower prices would make acquiring property more affordable, but potential buyers might hesitate to buy if they expect their purchase today to lose value over time. Further, it anticipated the decline in prices to persist in the near term. In this context, the IIF indicated that a downward trend in real estate prices increases the risk of deflation in the region, and that central banks are limited in their capacity to control deflationary pressures as GCC currencies are pegged to the US dollar. It also noted that a weakness in the real estate sector poses a threat to the profitability and stability of regional banking systems, given the significant size of loans extended to the sector.

However, the IIF considered that there are some signs of market adjustment and that GCC governments are implementing reforms that would raise the prospects for a real estate turnaround. It added that a sustained increase in global oil prices would raise government revenues and support non-oil economic activity, including in the real estate sector. It indicated that the development of lower-priced projects is picking up despite subdued demand for higher-priced real estate. It noted that developers are slowing the pace of new projects in favor of marketing their existing inventory.
Source: Institute of International Finance