Negative outlook for Arabian Gulf property driven by supply-demand imbalance

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The supply-demand imbalance remains a key driver of the continued negative outlook for the property industry in the Arabian Gulf, Moody's Investors Service said in a new Industry Outlook.
"The supply-demand imbalance in commercial property and to some degree in residential units, depending on the city or country, is likely to grow worse as vast supply meets slack demand and is a major driver of our negative outlook," said Martin Kohlhase, author of the report.
Moody's noted that the other drivers of the outlook remain the same as in 2009, namely funding and the preservation of cash, which includes potential disposals of non-core assets, cash collection and debt standstill agreements. Moody's believes that these factors will remain in place for the rest of 2010, albeit with a different emphasis from the previous year.
The rating agency further noted that it has downgraded the ratings of all GCC issuers with real estate exposure over the past 12 months. The average rating of A2 at the beginning of April 2009 now stands at Ba1, a five-notch drop. This is largely a reflection of lower government support assumptions that had underpinned a number of ratings.
However, although Moody's industry outlook for the region as a whole is negative, it noted that significant differences continue to exist across the region, with Saudi Arabia seen as the brightest spot of the six Gulf Co-operation Council (GCC) countries.
"The large, growing and young population of this kingdom continues to support the local residential market," explained Kohlhase. "Furthermore, rent and sale prices have remained stable in prime areas, while limited price correction has been
witnessed on the outskirts."
The rating agency said that several factors could prompt a revision of the outlook to stable, including government spending for public infrastructure work; government intervention; a shortage of low- and middle-income housing and international expansion.
"However, we do not envisage moving to a stable outlook in the near term," Kohlhase cautioned.