Global alternative investment firms are keen to invest in Dubai’s property market but are limited by the lack of institutional-grade opportunities and clear regulations.
Speaking at the Dubai Real Estate Forum organised by MEED and Mashreq, one such investor says that there is a need for more quality stock that can bring more mature types of investments to Dubai in the form of institutional investments, pension funds and REITs.
With a long-term presence in the region with multibillion dollars’ worth of exposure in the UAE alone, the investor says they have a view to form partnerships instead of pursuing “one-off” transactions.
“We are opportunistic investors. We don’t invest for yield; we invest to do a lot of work. Unlike some of the other investors coming to the region, we take full equity risk here in Dubai. We want to win and lose with the government.”
The investor says given the consistency recorded in Dubai over the past three to five years, the city’s property market can shed its image of a “risky market”.
With existing investments in office spaces and retail locations, the investor expects segments such as logistics hubs targeting Warehousing 2.0 concepts as well as multi-generational assets emerging as prime investment opportunities.
“Changes are taking place in the market, and institutions are recognising the opportunities that Dubai real estate offers,” says the investor. “Yields and valuations don’t reflect the true situation yet, and that might be because people haven’t spent enough time to understand the market here. But it is changing.”
Delivering quality stock
A Dubai-based real estate analyst at the forum said the city is “reaching a stage where we’re running out of quality office stock”.
He adds: “It is harder and harder to secure Grade A and prime stock in the market for international tenants. A lot of businesses are now opting to set up headquarters in Dubai instead of just having a branch office.”
Stock being built now and in the future, the analyst adds, needs to be of better quality, which could be ensured through regulation. Moreover, the cost of such stock needs to be managed to make it more attractive for investors.
A developer attending the event cites financing and loan-terms, and capitalisation (cap) rates as challenges linked to delivering institutional-grade properties.
“Most loan terms sit around a 10-year mark, which is as comfortable as banks in the region are ready to go,” says the developer. “With counterparts in the US or Europe, we’re seeing 20- to 30-year loan terms, which makes a big difference in what a buyer can pay.”
Cap rates of 7 to 8 per cent are good for a developed market such as Dubai, but the developer notes that it falls behind global markets.
“It’s a chicken and egg situation,” responds the global investor. “Developers were able to sell institutional-grade products at an attractive cap rate when they had the edge a few years ago. To get higher cap rates now, there needs to be more demand. And for that, you need more quality stock.”
Pension funds and REITs
The investor says attracting pension funds is another lucrative opportunity for Dubai’s market. Globally, investments in real estate serve as a way for pension funds to diversify their asset portfolios and distribute risk.
In the GCC, pension funds are the second largest category of institutional investors after sovereign wealth funds, according to the Asset Allocation Insights 2021 report by asset management firm Mercer.
In response to market declines across 2020, GCC pension funds made investments into areas such as equities, listed infrastructure and real estate. For instance, Abu Dhabi National Oil Company (Adnoc) signed a real estate partnership with Abu Dhabi Pension Fund in 2021, as part of which the fund will acquire a 31 per cent stake in Adnoc’s Abu Dhabi Energy Real Estate Company for $900m.
“Regional pension funds, like global ones, don’t want to take the development risk. Instead, they want to assign their allocation to products with higher yields,” says the investor.
“The question is how many assets are primed to attract such funds, or even available for sale?”
A similar challenge deters real estate investment trusts (REITs) in the region. The investor notes that while there is plenty of stock available, it is not always for sale.
“We need to develop an ecosystem that is self-sustaining and allows for mergers and acquisitions with institutional investors. As asset investors and developers, we want to create products for a future investor like government-related entities, pension funds or REITs.”
A mall developer based in the region notes that while financial institutions are more open to asset-based lending with residential projects, similar practices in the commercial and mall real estate segment are still nascent.
“You do not see the level of commercial transactions here that you might in more developed cities,” he said. “Eventually, Dubai will get there because there is huge potential, but institutional investors are simply not there yet. You see them on the residential side, but not as much on commercial projects.”
Dubai’s current focus is on raising population numbers, which it can do through recently introduced legal reforms, long-term visas and lifestyle incentives, according to the mall developer. However, the need prevails to build greater trust and transparency to attract more institutional investors.
“Emerging markets such as Dubai know that to be taken seriously, they need to tighten up the regulatory environment,” says a senior financier representing a Dubai-based bank. “But frankly, having the environment in a healthier state will make it easier for all of us to do business. It sets out clear rules for everyone.”
The financier adds that banks would be keener to support institutional investors with interest-only loans if borrowers are well-regulated.
“Most of the investment grade REITs are already borrowing at around 40 per cent loan to value ratios as a policy,” says the financier. “It is a risk-free and efficient way to raise capital and improve yields, but more clarity is required on the regulations front.”
The financier notes that the lack of ways to recycle capital if things go wrong is also a major gap in the market: “It’s not about encouraging failure, but about saying that we need that kind of supportive ecosystem, including for banks.”
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