How Oil Prices Are Impacting the Real Estate Market in the Middle East
For decades, the economy of the Middle East has been largely based on one major commodity—oil. The fortunes of countries, companies, and families have been built because of the region’s oil reserves, which comprise a large portion of the world’s supply and are shipped to countries around the globe. However, in recent years the leading countries in the Middle East have sought to diversify their economies in order to become less dependent on oil revenue for their financial sustainability.
In order to ensure long-term economic stability, countries such as Saudi Arabia, the United Arab Emirates, Kuwait, Oman, and others in the area have sought to develop post-oil economies that are diverse, robust, and equipped to weather market fluctuations. Massive investment in tourism, business infrastructure, and real estate have turned these countries into economic powerhouses independent of their oil reserves, and changing regulations on property ownership, residency, and taxation have made many of them attractive destinations for foreign investors and expatriates. This has resulted in a booming real estate market throughout the Middle East, particularly in places like Dubai, Saudi Arabia, Oman, and Egypt.
But although the regional economy has now grown beyond oil and the real estate market is booming, neither are completely impervious to changes in oil prices. Indeed, even relatively small changes in the price of oil can have outsized effects on the real estate sector in the Middle East. The following are some of the factors that have contributed to this dynamic.
Oil Revenue As a Driver of Real Estate Development
While developing a diversified economy that is less dependent on oil revenue has become a major goal in the Middle East, the reality is that the majority of the investment that is occurring on both the governmental and private sector levels has been and continues to be funded by wealth generated by oil. It’s a case of countries using the very assets they aim to move beyond to fund the growth. As such, when oil prices increase and government revenue goes up, there is more funding available for development.
This helps support and grow the various projects that are already planned and underway, such as Saudi Vision 2030. The more revenue that is generated from oil, the greater the opportunities that governments have to grow beyond it—and that means a boon for the real estate market. On the other hand, when oil prices go down, governments have less funding for infrastructure projects, and development often slows down or is delayed, which can have a dampening effect on the real estate market as a whole.
Affordable Housing
While it might seem like more oil revenue and greater investment in development would result in more housing being made available, in reality times of high oil prices tend to see development focused more on luxury and high-end projects. These pull resources and manpower away from the construction of affordable housing, while also growing the economies of large cities, which tend to see an influx of urban migrants seeking opportunities. More people and a housing market that isn’t keeping up with the population means higher sales prices for homes and higher rental prices per unit.
Rising Oil Prices Increase Demand
The main factor affecting real estate markets in the Middle East is demand—and when oil revenue is high, interest from both foreign investors increases. In addition to driving development in virtually all sectors, this also adds to supply-side pressure, with real estate becoming more attractive and sought-after—and therefore more expensive. By contrast, when oil prices decrease and revenue becomes more difficult to attain, investors are less likely to do business in the area, and the real estate market subsequently softens.
When taking all of this into account, it is important to understand that the timelines being discussed are relatively lengthy. If oil prices increase over the course of a month or two, there will likely not be an instant change in market dynamics. Development and investment take time, and stakeholders typically do their due diligence before committing capital to projects (in this case, ensuring that price changes are somewhat predictable, rather than being a short-lived blip). While interest and sentiment might change immediately, large-scale movement in the markets will often be somewhat delayed, so it’s best to look at these factors in terms of quarters and years, rather than weeks or months.
In Conclusion
As previously discussed, part of the reason why the real estate market in the Middle East is so strong is the fact that governments are seeking to move away from oil-dependent economies. There has been a lot of development in that direction, and it is fair to assume that the real estate market is less susceptible to changes in oil prices than it was a decade ago—and that the dynamic will continue to shift as the area’s economies become less oil-dependent. That being said, the price of oil still plays a major role in shaping and setting prices in the real estate market in the region.