As a central driver of Kurdistan’s growth in foreign and domestic investment, construction and real estate draws a huge amount of investment—$13.7 billion in Board of Investment-licensed housing projects alone since 2006, which does not include commercial or industrial space. It is also, however, one of the most quickly changing sectors in Kurdistan, with shifting dynamics in the quantity and quality of construction, as well as the quality of residential and commercial space demanded by the foreign companies entering Kurdistan. In many respects, 2014 has seen initial rumblings of many shifts in the sector.

The real estate and construction is one of the most quickly changing sectors in Kurdistan, with shifting dynamics in the quantity and quality of construction.

Trends that have gained steam this year, and will persist in coming years, include a move towards increasingly high quality builds, standardization and enforcement of construction and development standards, and in the longer term, a stronger and more liquid market with the increased use of financing and insurance in the sector. Changing demands, following shifts in the larger economy, drive each of these trends. International oil companies (IOCs), for example, which have flocked to Kurdistan in recent years to begin exploration for hydrocarbons, are moving into production phases. Such a shift means that they will be in Kurdistan more permanently, and will require larger staffs. This translates, in the real estate sector, to higher demand for graded office space and high quality housing (and perhaps less demand for long-term hotel stays and smaller, cheaper forms of housing and office space). Other sectors moving into the Kurdistan Region, as well as small and medium-sized enterprises (SMEs) will likely take their place in temporary or more affordable spaces, demonstrating increased segmentation of the market.

The sector is still met by many challenges. Financing and insurance markets are immature in the Region, leading to perverse and inefficient outcomes. Consumers tend to buy houses and apartments in cash, as there is no mortgage market. Developers are limited in terms of risk and leverage, as they also cannot finance major development projects, stunting the level of quality and quantity of real estate built in Kurdistan. Lack of insurance means that homeowners cannot secure or leverage their properties. While building standards exist, enforcement for such standards largely does not, which ultimately leads some developers to build cheap, shoddy projects, sometimes even leading to safety concerns. High demand and the nascent nature of the market have created a degree of short-termism among some developers, as cheap, quickly built projects are expected to be quickly profitable. And, with the Kurdistan’s high rents, such developments often are. However, this dynamic is quickly changing as the real estate market, and the Region’s economy and business environment overall, are maturing.

Shift in Focus: Quantity to Quality

It is logical that, starting with very little development at all just a decade ago, the construction sector’s focus has been to build—as much and as quickly as possible. As quantity meets demand, however, and global companies set up shop in Erbil, quality is now securely in the spotlight. Major international companies, beginning to establish themselves permanently in Kurdistan, demand graded office space. TAQA, the national energy company of Abu Dhabi, is only the most recent IOC to move from its previous villa in Italian City to a more dedicated, permanent office in Empire World; others, including Gulf Keystone and Standard Chartered, have moved into office space in UB Plaza, established by UB Holding.

As more companies make similar transitions, either initially into the Kurdistan Region, or into high quality permanent space, more developers are pursuing quality in their new developments. The Erbil Business & Trade Tower, a new space slated to open its doors soon, consulted with IKG Property early in the development process to ensure that its floor plans, designs, and safety standards were up to the expectations of global companies.

According to the experts, some of the office space which is imminently due to go on stream still does not adhere to international standards for global organizations. However, quality quickly improving in the Kurdistan Region’s real estate supply. The primary motivator for the change in quality is demand for quality in the market. Factors seen as essential for international businesses are still only sporadically applied. Many private sector changes could move the construction sector in the right direction. Increased use of construction supervision to ensure that design and engineering plans are carried out, true to form and quality, by construction and development firms could improve quality. This would hold builders accountable to designers, as well as the owners of the projects.

Establishing and Enforcing Standards

While market demand is pushing quality higher, this shift to quality is still a work in progress. Low quality building still persists, as unified building standards are still not broadly enforced by the KRG. The sector is unable and unwilling to police itself, and market demand can only do so much to motivate developers to conform to international building standards.

The leading international firms operating in Kurdistan 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 safety. They see the establishment of universally enforced standards as necessary to the progress of the sector.

Breaking New Ground

Amid these changes, new ground continues to quickly be broken in the sector. IKG Property project a 700% increase in supply across all subsectors by 2017. High-profile commercial and residential projects are going up quickly. New hotels are scheduled to open their doors on and around Gulan Street in 2015, big residential developments on the outskirts of Erbil are in progress, set to expand residential real estate supply hugely in 2-3 years, and much-needed office space is increasingly coming online. Empire World, the highest-profile mixed-use development in Erbil, is incrementally rolling out new space, with international oil companies quickly relocating to the premier office and residential spaces.

Space for Industry

In addition to these eye-catching developments, investment in industrial space is also gaining steam. In addition to Erbil’s four current industrial zones, four new zones are slated to open, including a Heavy Industrial Zone, Agro-Industrial Zone, a Petrochemical Zone, and the Hawler Industrial City. Much new industrial space is occupied by the oil and gas industry, with 270,000 square meter of industrial space explicitly allocated to the sector.

The primary challenge faced by industrial real estate relates to the way that land is zoned in Kurdistan. Much industry is developed on land zoned for agriculture. While this has yet to present serious challenges to industrial companies operating on this improperly zoned land, it does create concern for companies planning to invest over the long-term. Farmland remains at risk of being compulsorily taken back by the government, according to IKG. International tenants are starting to vigorously assess land title and implications on long term tenure. Public-private cooperation to re-zone and redefine land for industrial use could ameliorate this challenge and clarify the issue.

Beyond Erbil

While Erbil has largely paved the way in the real estate and construction sector, drawing more international investment in the sector than elsewhere, Slemani is seeing major property development as well. Qaiwan Group is investing hugely into real estate, opening Qaiwan Towers, a premier commercial space this year—one of which will, in 2015, house Slemani’s Rotana Hotel. Qaiwan is also investing into residential real estate, with Sulaymaniyah Heights, a premier luxury development housing 2,200 units, office and retail space. Qaiwan Group is also developing multiple projects for high and mid-level housing, including the Qaiwan City and Qaiwan Heights projects. In total, Qaiwan Group has over 9,000 new housing units slated to come online in Slemani soon, with several hundred already completed and occupied. Additionally, international malls, long present in the Erbil market, are now opening in Slemani, with a Majidi Mall and Family Mall under construction, as well as City Center Mall, which recently opened its doors in the city.

High-profile commercial and residential projects are going up quickly. New hotels are scheduled to open their doors on and around Gulan Street in 2015, big residential developments on the outskirts of Erbil are in progress, set to expand residential real estate supply hugely in 2-3 years, and much-needed office space is increasingly coming online.

Finance and Insurance

Perhaps the most significant limiting factor in the sector is Kurdistan’s weak and nascent finance and insurance markets. Alternatively, buyers can pay in installments for housing, but previous to receiving the house. Effectively, there is no mortgage market. Ultimately this leads to suppressed demand for housing and real estate. For developers, the lack of financial markets also means suppressed supply of real estate. Developers in the Kurdistan Region must self-finance most of what they build, translating to much less risk-taking on their part—and therefore fewer major, ambitious projects.

Weak insurance markets compound each of these challenges. Homeowners are at risk of losing a significant portion of their assets, and are unable to leverage their properties for further investment. “Once assets are insured,” notes IKG Property Chairman Mario Al-Jebouri, “investors can then look towards monetizing the assets and releasing cash to reinvest in other projects or sectors.” However common in more developed markets, this is not easily possible yet in Kurdistan.

There is reason for optimism, however. The lack of a financial sector has not been solely negative. The lack of a mortgage market creates conditions where a real estate bubble would be impossible to create—a serious concern in such a hot and dynamic market. Of course, this positive aspect does not outweigh the negative. In the longer term, development of the financial and insurance markets will be key to unlocking additional growth and value in real estate. While these markets are deepening, thanks to the efforts of capable and ambitious local and foreign banks and insurers, this will likely present challenges to the broader economy over the medium to long term.