Syria Today | Nominal Appreciation but Real Depreciation

Unrest interrupted the development of the real estate sector.

By Abdul Kader Husrieh

Photo Carole al-Farah

As 2011 started, the Syrian real estate sector was stagnant after an economic downturn caused by the global financial crisis. Although prices in some areas of the capital were on the high end compared with other cities in the region, the accelerated development of this sector through 2008 was driven by excess regional liquidity, lowered property taxes and the entry of banks and insurance companies.

Demographics also significantly affected economic growth. Prices increased partly because supply did not match demand due to market imperfections. The newly-established Real Estate Development and Investment Commission started to license developers, while the Real Estate Financing Commission was working on issuing laws related to housing finance companies.

But while the policy of economic liberalisation during the last five years encouraged many Arab and international companies to enter the Syrian market with some large-scale real estate projects, very little was achieved because the market was not prepared. Many of these projects targeted the upper class and have not been finished yet.

After the political crisis broke out, all projects announced earlier were either frozen or cancelled. The unrest weakened state control and illegal housing spread at an unpredented rate, with the number of new illegal units estimated at 0.3-0.5m. The market was also suffering from all the distortions of decades of a central command economy which caused 30 to 40 percent of housing stock to be located in informal housing areas and a shortage of proper commercial real estate in bigger cities. Housing and unemployment are even believed to be two main causes of protests, especially in informal housing areas. Expropriation of large areas of land around the larger cities and delays in issuing zoning plans for new areas are two reasons behind the problems.

The regulatory environment was not prepared for housing projects, as land supply is monopolised by the state, while the supply of private land is constrained by laws and regulations which have practically frozen the zoning of new areas. In Damascus and Aleppo, almost no new areas have been zoned for 20 to 30 years. Agrarian land reform has also subdivided ownership; as a result, there are no areas large enough to zone or to satisfy the requirements of new residential areas.

The market also suffers from low gross rental yield, which is gross annual rental income expressed as a percentage of current property purchase price. Rental yield is one useful yardstick of whether property is over- or under-valued. Property costs in high-end districts of Damascus average USD 10,000 per square metre, and Damascene owners who rent out their properties typically earn gross rental yields averaging between 2 and 5 percent, with commercial properties yielding up to 7 percent. These rates are lower than most other cities in the region. Given economic sanctions and the departure of many foreigners from the country, they will be even lower.

However, the positives are still there. The sector still enjoys low taxes, especially capital gains, which on properties are nominal. The devaluation of the Syrian Pound revived buyer interest in real estate. Nominal property values are expected to appreciate in reaction to currency devaluation and macro-economic mismanagement. Housing units are considered to be a good store of value after the Syrian currency devalued by more than 35 percent since the beginning of the crisis. The government has announced the launch of 50,000 units.

The way forward should focus on implementing the new regulations, as well as continuing to improve existing ones, which comprise one of the most crucial areas for reform of the Syrian real estate market. Such reform plays a key role in increasing the supply of financing, infrastructure and developable land. Zoning, tax, rent controls and building standards are other obvious regulatory areas to study for possible changes.

Abdul Kader Husrieh is a Damascus-based financial consultant.