The lack of institutional-grade opportunities and clear regulations limits global alternative investment firms despite their keenness to invest in Dubai’s property market.
There is a need for more quality stock that can bring more mature types of investments to Dubai in the form of pension funds, REITs, and institutional investments, one such investor says, speaking at the Dubai Real Estate Forum organized by Mashreq and MEED.
The investor says that they have a view to form partnerships instead of pursuing “one-off” transactions, with a long-term presence in the region with multibillion dollars’ worth of exposure in the UAE alone.
“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.”
Dubai’s property market can shed its image of a “risky market”, given the consistency recorded in the city over the past three to five years, says the investor.
The investor expects segments such as multi-generational assets emerging as prime investment opportunities and logistics hubs targeting Warehousing 2.0 concepts, with existing investments in retail locations and office spaces.
They added:
“Changes are taking place in the market, and institutions are recognizing the opportunities that Dubai real estate offers. 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
The city is “reaching a stage where we’re running out of quality office stock,” said a Dubai-based real estate analyst at the forum.
He added:
“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.”
Whether being built now or in the future, stock needs to be of better quality, which could be guaranteed through regulation, as highlighted by the analyst. Furthermore, to make such stock attractive to investors, its cost needs to be managed.
Challenges linked to delivering institutional-grade properties include financing and loan terms, and capitalization (cap) rates, a developer attending the event cites.
“Most loan terms sit around a 10-year mark, which is as comfortable as banks in the region are ready to go. 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.”
Although for a developed market such as Dubai cap rates of 7% to 8% is good, the developer notes that it falls behind global markets.
“It’s a chicken and egg situation. 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
An additional lucrative opportunity for Dubai’s market the investor says would be drawing pension funds. Global investments in real estate act as a way for pension funds to distribute risk and diversify their asset portfolios.
According to the Asset Allocation Insights 2021 report by asset management firm Mercer, pension funds are the second largest category of institutional investors in the GCC after sovereign wealth funds.
GCC pension funds made investments into areas such as real estate, listed infrastructure, and equities, in response to market declines across 2021. For example, Abu Dhabi Pension Fund in 2021 signed a real estate partnership with Abu Dhabi National Oil Company (ADNOC), as part of which a 31% stake in Adnoc’s Abu Dhabi Energy Real Estate Company will be acquired by the fund for $900M.
The investor commented:
“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. The question is how many assets are primed to attract such funds, or even available for sale?”
Real estate investment trusts (REITs) in the region are scared off by a similar challenge. While there is plenty of stock available, the investor notes 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.”
Building Trust
While financial institutions are more open to asset-based lending with residential projects, a mall developer based in the region notes similar practices in the mall and commercial real estate segment are still emerging. He stated:
“You do not see the level of commercial transactions here that you might in more developed cities. 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.”
According to the mall developer, Dubai is currently focused on growing population numbers, which it can do through recently introduced lifestyle incentives, long-term visas, and legal reforms. But the need exists to build greater transparency and trust to bring in more institutional investors. A senior financier representing a Dubai-based bank said:
“Emerging markets such as Dubai know that to be taken seriously, they need to tighten up the regulatory environment. 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.”
If borrowers are well-regulated, banks would be keener to back institutional investors with interest-only loans, according to the financier. He stated:
“Most of the investment-grade REITs are already borrowing at around 40 percent loan to value ratios as a policy. 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 states 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.”
