Rising Land Prices Could Stop the Slowdown in Rent Inflation


09/02/2014 11:10 AST

Rent inflation has slowed in recent months in line with QNB Group projections, tracking movements in the underlying price of land. However, a recovery in land prices in December and January could reverse the slowdown in rent inflation by mid-2014. QNB Group therefore predicts overall inflation to accelerate from 3.1% in 2013 to 3.8% in 2014.

Rent inflation slowed from 6.7% in the year to August 2013 to 4.8% in the year to December 2013, based on Consumer Price Index (CPI) data released by the Ministry of Development Planning and Statistics (MSDP). QNB Group has analyzed data purely on land transactions in Qatar, based on weekly statistics published by the Ministry of Justice (MoJ). This data suggests that the slowdown in rent inflation tracked land prices with a six-month delay. Land prices fell from March to November 2013 on the basis of an average of prices for the last 12 months (which reduces the impact of seasonal factors and single large transactions). As rents tend to follow land prices with a six-month delay, we expect rent inflation to continue to slow to below 4% between now and May 2014.

As outlined in the QNB weekly commentary on November 21, land prices are a fundamental driver of rents in Qatar and falling land prices are likely to slow rent inflation. Land is the main component of the cost of building, developing and buying real estate. To recoup costs, landowners and real estate developers need to raise rents in line with rising land prices, or vice versa. Therefore, after land is purchased and construction is completed, rents are likely to move in the same direction as land prices. Our analysis confirms that there is a strong relationship between land prices and rent inflation. Rents tend to follow land prices with a six month delay (with a correlation of 88%).

However, updated transaction data suggest that land prices may have changed direction in December and January, which, in around six months, could create upward pressure on rents. Looking ahead, QNB Group expects land prices to continue to rise moderately, based on strong population growth, which should underpin demand for land in order to develop housing and commercial real estate projects. Population growth averaged 10.1% over the last 12 months, based on data on the number of people in the country. Therefore, in the second half of 2014, we expect rent inflation to pick up again to between 4.0%-5.0%. This level of rent inflation is moderate and should alleviate any concerns that the real estate sector is entering an asset-price bubble or that the economy is overheating.

Overall, rental inflation accounts for around 32% of Qatar’s CPI basket. The remainder of the CPI basket mainly relates to global inflation and international food prices. Global prices are expected to remain moderate through 2014. This will result in overall CPI inflation in Qatar in 2014 of around 3.8%.

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