Institutional investors have ranked Dubai as the most competitive city in the Middle East and North Africa (Mena) in respect to real estate transparency, availability of quality real estate assets and market openness among other indicators," according to a recent survey.
The latest Jones Lang LaSalle Real Estate Investor Sentiment Survey (Reiss) of institutional investors in Mena and beyond, said Dubai consistently scored highest on factors such as value for money location while purchasing real estate, availability of good quality real estate assets, most open real estate market and real estate transparency. It was also widely agreed that Dubai had done the most to address problems that the real estate market faced.
Jones Lang LaSalle (JLL) said survey participants were limited to active investors and did not include advisors or analysts. Some high net worth individuals (HNWI) were included in the survey with an emphasis on more 'institutional' investors such as Sovereign Wealth Funds (SWFs), investment banks, private equity investors, large HNW family businesses and local and overseas based funds.
Investors scored Abu Dhabi second to Dubai on most indicators, with the UAE capital scoring favourably on liquidity, capital availability for the real estate market and government support for the sector. This indicates investors' belief that Abu Dhabi's underlying financial strength and government commitment to supporting the real estate sector could not be underestimated, it said.
The JLL survey saw Mena investors' expectations of the average yield increasing by around 90 basis points over the past six months.
Mena yields increasing
"This reflects ongoing concerns over softening market conditions and potential oversupply in many markets. Yield expectations have increased everywhere with the exception of Qatar, where they remained the same at around 10.7 per cent," said the JLL report.
Yield expectations have also increased across all sectors of the market over the past six months with the exception of hotels, where they dropped marginally. There was a gap between investors' yield expectations and market realities in Saudi Arabia with investors recognising the kingdom's strategic importance but finding it difficult to identify opportunities that meet their expectations of returns.
"While our investor respondents expect yields of 12 per cent and above, we have seen some yield compression over the past year, and the limited supply of investment grade assets have traded on initial yields of below 10 per cent," said the report.
According to JLL, there has been a shift in focus from development to income assets, with the exception of the residential sector where investors and developers were seeking to capitalise on Saudi Arabia's requirement for affordable housing. With lower yields, sale and leaseback funding has emerged as an alternative source of finance for local companies.
Institutional investors are more bearish on Mena markets than they were six months back, with most markets showing a fall in capital value growth sentiment as compared to the previous survey.
Investors expect to see growth in real estate values in Abu Dhabi in the UAE, Egypt and Qatar for the next year, but fewer investors expect to see significant value increase in markets such as Saudi Arabia, Abu Dhabi, Egypt and Qatar, where marginal growth is anticipated. Saudi Arabia continues to be regarded as the market most likely to see price increases over the next 12 months, in line with investors' expectations that it will be the first to "bottom out".
Survey respondents believe Saudi Arabia, Egypt, Qatar, Morocco and Abu Dhabi will experience the quickest recovery timelines. More than 40 per cent of investors suggested that real estate markets in Saudi Arabia have already started to recover, buoyed by the large local demand base.
Recovery remains distant
For those markets where investors are concerned about the strength of local end-user demand, the prospects for recovery are considered to be more distant. The most extreme case is Dubai, where approximately 75 per cent of investors believe any real estate market recovery is at least one year away.
This perhaps reflects concerns over the prospect of population recovery following the global economic crisis and perceived large population outflow that occurred in 2008–2009. More than 40 per cent of respondents said no recovery in Dubai was likely within two years, suggesting that investor sentiment towards Dubai is yet to improve significantly since the previous survey in October 2009.
The Reiss indicated that for most Mena markets, there were more potential buyers than sellers of real estate assets with buyers outnumbering sellers by an average eight per cent. The challenge faced by investors in these markets was finding suitable products that vendors were willing to sell at what buyers consider to be realistic prices.
The other major markets where potential buyers significantly outnumbered potential sellers include Egypt and Abu Dhabi. Egypt comes across strongly in this survey, holding the second highest buy position after Riyadh. The large percentage of investors looking to purchase in Egypt reflects an increasing willingness to enter this buoyant real estate sector to benefit from its potential long-term upside.
There continues to be strong investor interest in Abu Dhabi where potential purchasers exceeded potential sellers by 16 per cent. Abu Dhabi has witnessed a decline in those seeking to 'build' new assets rather than purchasing existing ones, with this category dropping from 25 per cent in the last survey, to 16 per cent. This probably reflects the large number of projects already under construction in Abu Dhabi, and concerns about how quickly this additional supply will be absorbed by the market.
The Dubai market is experiencing a closer balance between potential buyers and sellers, though buyers continue to exceed sellers by eight per cent. Despite the major correction in values, there appear to be few distressed sellers in the Dubai market, with many owners unwilling to dispose of assets at the bottom of the cycle. Interestingly, around 50 per cent of investors still prefer to 'hold' assets in Dubai, the largest percentage in all Mena markets.
The report indicated that a number of so called 'vulture funds' have been circling the market, looking to purchase income-producing real estate at distressed pricing levels. The lack of transactions completed to date reflects the absence of such assets being offered to the market at pricing levels considered attractive by these investor groups, the JLL report said.
Investors remain cautious
According to Colliers International's 'Global Investor Sentiment Survey', almost two-thirds of investors were looking to expand their real estate portfolios, leaving just under a third either holding steady or rebalancing their existing portfolios.
Conducted from February 15 to March 1, the survey covered 244 major institutional and private investors representing a broad cross-section of property investors across the globe with a combined investment portfolio exceeding $300 billion (Dh1.1 trillion).
The Colliers report said that while investors were looking to expand their real estate portfolios, most expressed high degrees of caution and significantly more rigorous due diligence. Investors in Asia and the Pacific (Australia and New Zealand) expect the market to return to normalcy by the fourth quarter of this year, while those in Canada, Latin America, Eastern Europe and Western Europe expect this by the first quarter of 2011, and those in the US, in the second quarter of 2011.
John Davis, Regional CEO and Director of Colliers International's Global Investment Services (GIST), said it would take a while for international funds to enter the Dubai market. "International funds require transparency at all stages of the investment process and suitable quality stock with single title. Strata developments are of no interest to global institutional investors. Dubai has lost favour globally with investors due, in part, to events over the past six months and the consequent difficulty in obtaining international finance to support acquisitions."
Industrial rents to bottom out
Despite a fairly negative global economic backdrop, survey respondents felt that real estate prices today represented good value globally, with many willing to look past what could be a difficult period for rents and vacancies.
Respondents expect industrial rents to bottom out as early as mid-2010, retail by the end of the third quarter and office rents by year-end. This explains why survey respondents expect the investment market to return to normal by 2010 or early 2011.
In the meantime, however, 60 per cent of investors indicated a real reluctance to invest beyond their own borders, reflecting a more cautious stance adopted by many. Another 20 per cent do not even have an offshore portfolio, leaving 80 per cent out of cross-border investing, at least for the time being.
The investment mantra from all corners of the globe appears to be 'stick to what you know,' and unless the potential upside is significant, "stay close to home and be content with more modest returns."
This approach was born out of a desire for investing in more mature and stable economies and forgoing the investment potential in less mature markets, until a positive shift occurs in the global market. Most investment will likely be contained to domestic transactions in the G7 economies and English speaking countries.
Most investors are planning to expand their real estate portfolios in the coming year as the majority believe their respective domestic real estate markets are at, or near the bottom. This was reflected by two-thirds of respondents believing their domestic markets were between 4:00 and 7:00 on the global property clock, with 12:00 being the top of the market and 6:00, the bottom.
The survey also said around 80 per cent have little or no appetite for cross-border investments, with investors in the US, UK, Australia, Canada, Germany and the UK being predominantly interested in their respective domestic markets. However, they singled out emerging countries such as Poland, Ukraine, Vietnam, Brazil and India for possible future investment.
Abu Dhabi softens
Apartment rents in Abu Dhabi have fallen by at least five per cent during the first quarter of this year and are expected to soften further as more new properties come onto the Abu Dhabi market, a recent Asteco report revealed.
Affordability has put a ceiling on villa rents, with declines in rents particularly at the upper end of the market, and demand for office space remains subdued with prospective tenants adopting a 'wait and see' strategy in expectation of further price reductions, says the latest Asteco report on the Abu Dhabi property market for the first quarter of 2010.
Commenting on the report, Elaine Jones, CEO, Asteco Property Management, said that 2010 will be a 'ground-breaking year' for the Abu Dhabi real estate market with the first phases of investment area stock being delivered. "This new 'freehold' supply, along with many sizeable build-to-lease projects on and off the main island will bring a significant quantity of new supply with a total close to 20,000 new homes by the end of the year," she added.
Meanwhile, apartment rents in Abu Dhabi have fallen on average by between five per cent and 15 per cent over the last three months and with significant quantities of new supply under construction this downward trend is set to continue, said the Asteco report.
"A trend of falling rents strongly contradicts the pent-up demand and under-supply argument. Asteco estimates that as many as 15,000 apartments will be delivered to the market by the end of 2010, with over 9,000 of these units being built specifically to lease," the report said.
"In addition, a substantial quantity of the new investment area stock due to complete in the next three to six months on Al Reem Island is likely to become available to lease," said Jones.
Asteco said the report has seen low leasing take-up rates amongst new developments which have been handed over in the last three months or are due for imminent completion.
"This is due, principally, to a mismatch between landlords' price expectations and prospective tenants' budgets," the report added. "Landlords have tended to test the market with initial high quoting rents to gauge demand and have found downward price adjustments to be necessary," said Jones.
Of 15,000 apartments being delivered this year, around 4,600 will be completed in the first phases of Al Reem Island (Marina Square and Shams Abu Dhabi) in the next three to six months, with a further 511 units due to complete at Al Bandar, Al Raha Beach within the next three months. At present, demand continues to be entirely focused on these close-to-completion developments.
In terms of off-island villa communities, with the majority of the villas at Golf Gardens having been handed over, Asteco's research shows that around 70 per cent of these villas are being made available for rent, with the remaining 30 per cent occupied by the owners. Moreover, approximately half of the villas which have been rented out to date are company contracts, the Asteco report said.