How do you foresee the evolution of available real estate in the local market? Will we see differences between residential and commercial real estate in terms of supply and demand in coming years?
We see an increasing supply for both residential and commercial property in Erbil. We have projected future supply of the residential, office, industrial and retail sectors until the end of 2017. Although current built supply in all of these asset classes is starting from a low base, in both quality and volume, we anticipate a significant increase in supply of up to 700% across all sectors. IKG Property recently ran an office demand survey whereby we interviewed eighty of some of the largest local, regional and international occupiers. We found that without exception, the entire survey sample predicted headcount growth in the next three years. Accounting for this growth, the sample would occupy 100,000 sq m office space. Looking further into pent up demand and absorption of future office development we extrapolated that there is approximately 200,000 sq m of pent up demand in Erbil currently, assumed to grow at a similar rate or more to GDP growth per annum. We forecast Erbil office market becoming a 1,000,000 sq m market within 10 years. Currently there is only 50,000 sq m of graded office accommodation available for lease.

As there is significant new development in Erbil and Kurdistan in general, do you worry about oversupply in coming years?
We believe oversupply in the Erbil market is a real threat across the residential, office and retail asset classes. However, it tends to be contained within certain quality parameters of each class. The majority of supply is concentrated in middle market product, leaving a potential development niche at the opposing ends of the quality spectrum. We also believe the market is undersupplied in certain sectors, one of which is industrial. There is a clear requirement for a master-planned industrial zone.

In previous years, property prices have skyrocketed. Is there any worry among investors about overheating in the market?
With regard to residential property, one of the reasons for the increase in market prices, aside from local demand dynamics, could be attributed to developers having the opportunity to secure land on a cost free basis, significantly reducing overall development costs. In more mature markets where developers are required to purchase land prior to commencing development, overall delivery costs are substantially higher. It is common practice in the Kurdistan Region for developers to offer product at a lower price at the beginning of the development cycle to generate sales momentum and attract purchasers accordingly; arguably historic prices have started from an artificially low base.

Can you tell us what IKG’s market research can tell us about real estate pricing?
We are currently working on a project to track property price fluctuations over the past five years in order to contextualize where we are in the property market cycle and its drivers. Besides the obvious economic link, we believe there is a link in the Kurdistan Region between political/security fundamentals and market buoyancy and we would like to see how and if they correlate. Given historical year on year appreciation of property prices, investors will want to know how sustainable this trend is, moving forward. Our view is that the potential supply-demand gap will dampen further price inflation, not only because of the glut of supply but also because, in reality, there is a one dimensional investor base here. We recently surveyed a cross section of residential developers on sales demographics: typically the vast majority of investors are Iraqi, whether from the Kurdistan Region or otherwise. Another facet of this market is that it is almost completely a cash market – it is devoid of financing facilities; those that do exist are for specific developments only. To an extent, this characteristic will prevent a more traditional overheated market where easy access to cheap money can engender more frenetic market activity. If we were to be drawn on “calling the market,” then we would advise caution because of a potential supply-demand gap.

There are several international retailers with huge expansion plans for the Kurdistan Region, to test the market and also as a jump off point for further expansion into central and southern Iraq.

For retail real estate, how would you describe the market for space in premium malls and hotels?
We see a fairly broad base of demand for shopping center space, not only from local retailers, but more interestingly from major international retailers. There is increased market penetration from the latter, and seemingly increasing appetite. There are several international retailers with huge expansion plans for the Kurdistan Region, to test the market and also as a jump off point for further expansion into central and southern Iraq. Relatively speaking, there are three to four shopping centers that would be classified as “premium” in Erbil. Typically they have a more international retail mix, higher build quality, with additional attractions such as cinemas and playzones. They are Erbil’s “destination” malls. We see rental rates vary from turnover provision only (normally for the anchor store) to $18 – $25 per sq m per month for the large format stores up to $90 – $100 per sq m per month for the smaller line shops. Moving forward, we see rental rates remaining relatively flat. There is a substantial development pipeline for shopping centers in Erbil, increasing from a gross leasable area (GLA) of 270,000 sq m currently to 745,000 sq m by the end of 2017. This is a conservative estimate and does not include community malls that we assume will be developed in the majority of master-planned developments.

What changes or improvements would your clients like to see in the Kurdish real estate market?
It is to be expected that there is significant improvement required in how the real estate market in the Kurdistan Region is framed, as this is a nascent market. We would like to see a more robust regulatory and legal environment: planning, building regulations, and building control need to be rigidly enforced in particular with regard to structural integrity and fire safety. A large majority of the buildings we have seen have not adhered to any form of international build code with regard to fire safety. There is also recent anecdotal evidence of slabs and retaining walls collapsing in projects currently under construction. In order to improve this situation, building regulations need to be issued and enforced – typically the standard of construction is left to the individual developer with limited municipal oversight, building control or completion sign off procedures. These are quality control basics that should be addressed.

How would you assess the Region’s financial and legal infrastructure, as it relates to the real estate market?
Our clients would like a more defined legal and financial framework behind the real estate sector – including the enactment of tenant-landlord legislation that protects the interests of both parties; transparent title registration, land zoning, and centralized Land Registry; potentially the creation of freehold investment zones for foreigners and an easier investment process for the individual investor; enforcement of building insurance and improved project finance and mortgage facilities. In addition, we would like to see a more transparent flow of information, which helps our clients make real estate related decisions. To date, IKG Property has spent the best part of a year performing its own market research in the absence of any centrally sourced coherent data. These are all natural steps to be taken for a maturing frontier real estate market for which the government authorities will have to take a leading role. The upside is a more transparent and investment-friendly environment, and increased connection to international investment markets through improved mitigation of the associated physical, legal and financial risks.