In the wake of oversupply and declining rental yields in Oman’s property market, the Central Bank of Oman (CBO) has cautioned that the weakening in real estate market could expose the banks to considerable risks.

The central bank warned that the banks’ large exposure to the real estate sector remains a potential source of vulnerability. ‘The total real estate exposure of the banking sector continued to be around 30 per cent of the total lending portfolio. This is considered large as a weakening in the real estate market could expose the banking sector to considerable risks,’ the CBO said in its Financial Stability Report.

According to the CBO, vulnerabilities can build-up quickly in the real estate markets, especially the commercial real estate and buy-to-let/built-to-rent segments. ‘The relatively longer tenor of loans and higher leverage in the real estate financing further exacerbates the risks. There are some indications of oversupply in the Omani real estate market based on anecdotal evidence of declining rents, addition of new residential space, and a handful of new large commercial real estate projects.’

Oman’s central bank said the banking sector continues to witness a rise in mortgage financing to households, which in December 2018 formed around 15 per cent of the lending portfolio or 50 per cent of its real estate exposure.

Declining rental yields, the apex bank said, may put pressure on the repayment capacity of those borrowers who count on the rental income to make their mortgage payments. ‘Moreover, declining population of some segments is also exerting pressure on the real estate market. Expatriate population, which is a major user of rental residential properties, declined by 3 per cent during 2018. However, considering a growing and young Omani population, the demand for residential rental property would catch up as more young Omani adults enter in the job market.’

The CBO noted that despite some indications of declining rents, at present there is no sign of a significant stress in the Omani real estate market. ‘However, sizable exposures signify that a turnaround in economic conditions, shifts in the investors’ sentiments, decline in rents or higher vacancy rates for buy-to-let/built-to-rent real estate may rapidly jeopardise the exposure of the banking sector. Therefore, conditions in real estate market remain an area to be watched.’

Banks in Oman have substantial direct and indirect exposure to the real estate sector. However, real estate exposure of banks in Oman is in line with their counterparts in other GCC countries, both in terms of real estate credit to GDP and real estate credit to total credit ratios.

On future outlook for Oman’s real estate market, the CBO said that the government’s new measures like the real estate investment trusts (REITs) legislation and a new proposal to allow foreigners to buy properties in areas other than Integrated Tourism Complexes are expected to support the market and may counterbalance the oversupply situation.