Is Qatari Real Estate Booming towards a Bubble?

Property prices in Qatar have been growing at an explosive pace, with banks stepping up lending as the real estate market heats up. Real estate prices rose 18% in the year to September, according to Qatar Central Bank data, beating the previous 2008 in June last year and continuing to rise at a double-digit rate.

Activity in the property market has been fueled by increases in the amount of credit provided by local banks to the real estate sector. Commercial credit to Qatar's property market grew by 17% from June 2014 to June 2015, now accounting for around one sixth of all lending by Qatari banks, according to the central bank.

However, this is only part of the lending story in Qatar right now. The data doesn't give a clear indication of how much credit to the public sector and private individuals is spent on real estate. It is likely that mortgages and government building projects account for a significant chunk of this lending, making the overall amount of credit directed at the sector much higher.

Jason Tuvey, emerging markets economist at Capital Economics said: "If you look at Qatar now it looks like the UAE in 2008 and 2009 – rapid price rises in housing, high lending and banks borrowing from abroad to sustain credit growth".

The IMF, in its annual report on the Qatari economy, singled out price rises in the real estate sector as an area that needs closer attention paid. "Although the banking system as a whole appears cushioned from real estate sector volatility, developments at weaker banks need to be closely monitored," the Fund said.

A considerable part of the spending on real estate is focused on Qatar's hospitality sector and with the country aiming to attract 7 million tourists by 2030, adding 60,000 hotel rooms to existing stock, it is likely to be significant. This is a red flag to analysts. "The 2009 property bubble in the UAE wasn't just a real estate bubble," says Sanyalaksna Manibhandu, senior researcher at the National Bank of Abu Dhabi. "You also had an overheated hospitality sector".

Nevertheless, the mortgage business continues to attract investment because of significant demand in some housing market segments in Qatar. Dr. Raghavan Seetharaman, chief executive of Doha Bank said there is "a need to be cautious of property market prices because land prices in the recent past have been climbing and a time will come for it to stabilize or correct".

There are indications that price growth may starting to slow in Qatar's real estate sector, as the low oil price hits deposits. Year-on-year price increases were close to 40% in September 2014. As the oil price drop has led to project slowdowns and redundancies in the hydrocarbons sector, demand for mid-range real estate and office space has taken a small hit.

Housing supply is expected to more than double in 2018 compared to current levels which could lead the Qatari property market from undersupply to oversupply in just three years. However, many analysts believe that housing supply is driven by government policy rather than demand for real estate. For that reason, growth in Qatar's real estate sector is not considered dynamic which places another element of risk into the equation for property investors.