Poor quality real estate, stalled projects and a lack of project finance could puncture Erbil’s boom.
Erbil now the place to build new hope
When Dubai’s Emaar Properties announced its US$3 billion Downtown Erbil development in October, the spotlight once again shone on the capital of the Kurdish region of Iraq and its role as the Middle East’s latest great economic hope.
With 541,000 square metres of houses and apartments, offices, hotels, mall and parks the development was lauded by the Emaar chairman Mohammed Alabbar as a true business hub for Erbil, one that would “promote the local economy, bring in investment and create hundreds of jobs”.
Few would doubt Erbil is in good stead going into this year. The city is not only a hub for international business looking to capitalise on the Kurdish Region of Iraq’s (KRI) solid growth, stability and relative safety, it is also a growing base for firms looking for a solid base to exploit opportunities in the unstable south.
With a population of some 5.2 million, the KRI has an estimated 45 billion barrels of oil reserves as well as unknown quantities of natural gas, a fact which, as of the start of last year, has attracted some $20bn since the Investment Law threw open the door to international oil companies in 2006.
But the concrete shells of unfinished construction projects are an all-too familiar site in the city, looming from the sand on almost every vacant plot of land within Erbil’s numerous ring roads. These projects, many of which are abandoned, demonstrate that while Erbil’s momentum is obvious, in many ways this is still Iraq.
Ed Carnegy, the managing director of Kurdish-based property consultancy IKG, is one of the pioneers to this fledgling boomtown. A former employee of CBRE in Abu Dhabi, Mr Carnegy’s firm published the first wide-ranging report on Erbil’s property market at the end of last year, and he is currently advising a number of high-profile international firms on property in the city.
Sitting in the glitzy lobby of Erbil’s Rotana Hotel, Mr Carnegy reflects on the vast unfinished projects — one of which looms just across the sand from the hotel car park.
“Project finance — in the true sense of it — is virtually nonexistent in KRI, so developments are financed by cash and off-plan sales. So the developer clearly has a cash-flow problem — he is either waiting for the next-stage payments from investors, if sold off-plan, or has simply run out of funds,” he says.
There are other issues, too. Often developers in the region will build a generic shell structure of a building before deciding on what type of development to put in it — a hotel, a block of flats or a suite of offices, for example. Not only is this a nightmare for end-users, Mr Carnegy says, it can also prove costly for developers who may need to retrofit an entire building to convert it from offices to flats, for instance.
Another problem is legal. The Kurdistan Investment Board (KIB) investment licences are time-sensitive, and if a developer has not commenced building within a given time, he may lose his licence altogether. In light of this, it makes sense for developers to begin projects and leave them half-finished, rather than wait and risk losing the land.
The Kurdistan Regional Government (KRG) is aware of the problem, however, and at a meeting in November set out new guidelines for developments in the region. In future, developers will be expected to submit details of construction materials and engineering as well as settle on asset classes before commencing work.
A lack of project finance remains the most significant hurdle for KRI, says Paul Bailey, the managing director of Definitus, an Erbil-based investment company. Kurdish banks have traditionally only provided mortgage finance for private-villa projects, which have short construction times, low loan values and quick payback times. For medium and large-scale developments, repayments on large sums would be impossibly large and rapid, likely even before the development is completed.
“It is worth noting that many developers would eschew debt finance in any case due to an aversion to paying ‘ribaa’ [interest]. There is little availability of Sharia-compliant mortgage or debt finance instruments and so many developers do not feel that they have the option to borrow, hence the reliance on off-plan sales,” Mr Bailey says.
A side effect of the need for off-plan sales has been a lack of development of commercial office space, as offices are typically leased, and only leasable when completed and all costs already paid. The upshot of this is companies often operate out of residential units, such as villas, instead of office space.
“The office sector is underdeveloped and a lack of conventional office space has resulted in companies leasing converted residential accommodation, both villas and apartments,” Mr Carnegy explains.
“But the inherent inefficiencies of converted residential buildings, lack of brand integrity and less commercially minded individual investor landlords, means international corporates are beginning to move to conventional office space.”
The problem is completed office buildings in Erbil tend to be poor quality, low-rise buildings, with the majority of development both completed and under construction in the city nowhere near the standard required by international firms.
The residential sector in Erbil is seeing huge oversupply. In its report last year into Erbil’s property market, Colliers International said if all planned apartment developments were delivered on time, Erbil apartment supply would increase by 700 per cent within the next few years. It warned available stock could increase to more than 15,000 units compared with just over 2,000 units last year.
But, as with the office sector, much of this supply is below par, says Mr Carnegy.
“Prime residential developments are currently in short supply. As with any market there is, of course, risk of developments remaining uncompleted — or never even breaking ground, of which there are a couple of examples,” he says.
“The risk here is arguably more acute as large-scale development experience among local developers is limited — poorly planned, funded and executed developments will always have a higher failure rate.”
There is hope yet, however, and those on the ground in Erbil see it in developments such as Downtown Erbil. Like the five-star Rotana and Diwan hotels on Gulan Street, or Empire World tower, Emaar’s new project is one of a handful of high-end developments springing up in Kurdish Iraq’s frontier hub.
In a city with significant property challenges, analysts hope such developments are a sign of what is to come. Indeed, IKG says some local developers have already entered the high-end space, where international oil companies and ancillary service companies will want to be.
“We are seeing some of the major local landlord developers aspiring to develop true international Grade A offices and are employing international consultants to help achieve this. Khoshnaw Tower on 100m Road is one such example,” says Mr Carnegy.
And as Mr Alabbar told The National at the launch of its project in October, the business case for Erbil is strong. This will probably only be enhanced by the oversupply of substandard property in the Kurdish capital.
“The Kurdish region of Iraq is among the fastest-growing economies in the Middle East, recording double-digit growth rates,” Mr Alabbar said.
“Emaar’s decision to invest in Erbil is a perfect fit to our global strategy.”