Globally, real estate is getting a bad rap. After all, it was the US housing bubble that triggered the economic crisis we see today. From Miami to London, Johannesburg to Moscow, home and office prices have plummeted, and may fall further. The Middle East and North African (Mena) markets have also been affected, with a clear slowdown in the pace of development.
But amid the turmoil and uncertainty lie hidden opportunities of an altogether untraditional nature.
In the fast-growing Mena economies, real estate investors have generally focused on the mid- to high-end residential market, on offices, malls and hotels. Combined, the real estate and construction sectors of Saudi Arabia, the UAE, Kuwait, Oman and Bahrain expanded at a whopping nine per cent per year during the five years to December 31.
More recently, however, it's these sectors that have been hardest hit by sagging confidence and demand. In Dubai, for instance, short-term demand for residential and office developments has been hurt as local and foreign firms scale back their ambitions in the world's largest oil-exporting region.
Historically, the focus on this very visible kind of real estate development has generally meant that other, less exciting types have been overlooked, with the result that demand in the latter tend to outweigh supply. This includes the markets for warehouses, schools, hospitals and low- to middle-income housing. Demand in these areas is expected to rise as the region's population of 280 million grows at close to two per cent per year.
In healthcare, countries in the region need an extra 100,000 hospital beds through 2017 just to keep pace with existing penetration of 2.2 beds per 1,000 people. To reach the OECD average of 3.9 beds per 1,000, the need rises to 650,000 beds. In education, 950 private schools need to be built through 2015 to meet growing demand or as governments seek to increase attendance to 80 per cent from 70 per cent of school-going age children.
In Saudi Arabia, a shortfall in low- to middle-income housing could double to a million units by 2012 if existing rates of construction don't accelerate, according to a November report by global real-estate services firm Jones Lang LaSalle.
Another key characteristic of the Mena property market is the near-entire absence of institutional investors. Most real estate in the region is owned by corporate entities, families and individuals. Very little is owned by institutional investors, notably funds or Real Estate Investment Trusts (Reits). Compare this with the United States and Britain, where institutional investors own more than half of all commercial property, or 35 per cent in the rest of Europe.
This structure will probably change over time as governments put in place new regulations designed to encourage institutional ownership. Turkey, for instance, was the first nation in the region to adopt Reit regulations, quickly followed by Dubai International Financial Centre, Egypt and Bahrain.
Institutional ownership of real estate offers several advantages, especially in times like these when company cash flows can be restricted, and bank financing is either expensive or difficult to come by. A logistics provider or private-school operator that wants to meet today's challenges and emerge ahead of its competitors when the economy turns can ill-afford to sit on a piece of land that generates no revenue. The market is ripe for sale and leaseback. Under such an arrangement, a school operator or logistics provider sells the school or warehouse to the institutional investor. The investor immediately leases it back to the seller on a long-term basis and at an agreed rent. This offers the seller long-term rental certainty and the use of the asset, while it frees up funds to finance operations or expansion. The buyer gets an asset and a steady source of income.
The opportunity also lends itself to two growing trends in the region – Islamic finance and environmental sustainability. Islamic finance generally requires transactions be backed by physical assets. What better than land. Institutional investors can also help promote environmental sustainability in the assets they acquire. This plays well regionally where the UAE is leading the way with several measures, including Abu Dhabi's Masdar, a project to build the world's first carbon neutral, waste-free urban district.
- The author is Executive Director at Dubai-based private equity firm Abraaj Capital. The views expressed are his own
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