No major stress on real estate: CBO

@samuelkuttyvp -

On the back of economy’s positive outlook and other factors, real estate market in the Sultanate of Oman is expected to pick up in the coming months.

“Notwithstanding softening in some segments, so far, there are no signs of significant stress in the real estate market”, says the Sustainability Report 2021 by the Central Bank of Oman.

Considering the correction that already took place, the industry sources foresee limited downside risk in the real estate markets, the apex bank points out while referring to the Omani banks’ real estate exposure and mortgage lending.

According the report, reduction in the demand-supply gap shall be the key for recovery in real estate market and as a result some segments may continue to face challenges.

“The changes in economic outlook and population profile during the pandemic exerted pressure on some segments of the Omani real estate market that had some signs of over-supply even before the onset of the pandemic”, the report points out.

One of the reasons for the fluctuation in rents, according to the report, the decline in the expatriate population, a major user of rental residential properties, by three per cent per annum during 2018 and 2019. During the first 10 months of 2020, the expatriate population further declined by over 14 per cent."

However, points out the report, “there is a reversal of this trend since October 2020 as the economy started to pick up. In addition, the demand for residential rental property would further catch up as more young Omanis enter the job market”.

During 2020, the residential property prices declined on average by 12 per cent as evident from the residential real estate price.

Notwithstanding softening in some segments, so far, there are no signs of significant stress in the Omani real estate market. Considering the correction that already took place, the industry sources foresee limited downside risk in the real estate market.

Moreover, Real Estate Investment Trusts (REITs) may make a crucial contribution to the growth of the real estate sector in Oman as they may ease up conditions in the real estate market by counterbalancing the oversupply situation.

EXPOSURE

However, the report warns the banks against significant direct and indirect exposures to the real estate remain a potential source of vulnerability.

Banks are exposed to the real estate market with a total direct and indirect real estate exposure of about one-third of their lending portfolio. Residential mortgages retain the largest share in the banks’ real estate financing, constituting about 17 per cent of their total lending portfolio, the report points out.

“The contraction in income and employment opportunities caused by the pandemic may weigh on the demand for residential real estate. At the same time, economic prospects will have a bearing on the commercial real estate, thus affecting their valuations and collateral margins”, the report warns.

The loan moratorium allowed by the Central Bank of Oman has dampened any immediate impact on the performance of residential mortgages. Going forward, declining rental yields may put pressure on the repayment capacity of the borrowers who count on the rental income to make their mortgage payments.

Although vulnerabilities may reemerge, any decline in real estate valuations is unlikely to spur strategic defaults due to adequate margins (at least 20 per cent) and the prevalence of recourse debts.

Despite some stability amidst the pandemic, real estate prices remain sensitive to the future course of the pandemic and recovery; and continue to be a source of vulnerability due to banks’ significant exposures to real estate.