A glimpse on institutional investment in Dubai

A glimpse on institutional investment in DubaiImage Credit: Supplied

As Dubai's real estate market emerged stronger after the 2008 downturn, the past couple of years have witnessed renewed demand from domestic and overseas players looking for realty investment prospects. However, in spite of renewed investor confidence and rapid increase in development and business activity, institutional purchases in the emirate are still significantly smaller compared to more developed real estate markets such as the UK and US.

The majority of the large fund investments in Dubai realty continue to come from local families, banks and GCC institutions.

Dubai's real estate market has entered a stabilization phase following the government's efforts to control the pace of capital value growth, which has slowed sharply in recent quarters.

''The federal mortgage caps, the doubling of the property registration fee and restrictions by some developers on the resale of offplan property have all helped subdue growth,'' says Murray Strang, Head of Investments and Agency — UAE at property consultancy firm Cluttons. ''These measures have already reduced the number of end users, while creating an opportunity for equity rich investors to step into the market.''

Gaining strength

This year, institutional deals happening in the realty sector are picking up. Among the latest transactions, Strang says, is the largest institutional investment since the recession: a Dh6.9-billion investment by Hong Kong-based Chow Tai Fook Endowment Industry Investment Development in February for the purchase of the mixed-use Dubai Pearl scheme on Al Suffouh Road.

''Bahrain-based Ravi Pillai Group also has plans of investing Dh5.5 billion in two real estate projects in Business Bay and Downtown Dubai,'' says Strang. ''Another recent acquisition is the Bahrain-based GFH Capital's purchase of a school building in Dubai for Dh125 million.''

Strang further reveals the emirate has been witnessing a steady growth in the number of Chinese realty investors. Among them is China State Construction Engineering Corp, which has invested in SKAI Holdings' Dh3.67-billion Viceroy resort and luxury apartment complex on the Palm Jumeirah.

The UAE-based Emirates REIT also continues to build its investment portfolio, with a Dh118.2-million investment in the Le Grand community mall at Trident Residence in Dubai Marina, raising its total investment in the UAE to Dh1.3 billion.

''Aside from the growing tide of headline institutional deals, the recent upgrading of Dubai to emerging market status in the Morgan Stanley Capital International Index has been a key driver behind the Dubai Financial Market's status as the world's best-performing stock market so far this year,'' says Strang. ''Not only does the upgrade give Dubai's stock markets greater exposure to global investors, but it also raises the emirate's profile. As the limited supply is further depleted, it will no doubt place further upward pressure on capital values.''

The challenges

There is a serious shortage of high-quality, income generating assets that meet the requirements of institutional investors. Moreover, purchasing property in non freehold locations is not very encouraging from a foreign investor's point of view as the purchased property will be registered under the name of a local partner.

This explains why many investors, particularly institutional investors, are driven to freehold zones.

''Most institutional investors buy freehold property, as they are considered less risky than non-freehold property,'' says Jan Tabrizi, Manager — JLT Office at Better Homes.

Freehold property is generally sold off-plan to retail investors and end users, leaving very small quantities in the market. This is one of the reasons there is shortage of freehold property.

''Institutional investors are organisations such as pension funds, insurance companies, endowments, hedge funds and investment banks, which have large amounts of capital to invest,'' explains Tabrizi. ''Their purchasing power is substantial, meaning their priorities have a direct impact on the market.''

In the UAE, local and GCC-based investors dominate as large-fund investors. Experts say steps should be taken to build more real assets that appeal to these types of investors and incentives should be introduced to attract foreign institutional investors to the country.

''Transparency, professionalism and standards are fundamental to sustained and steady growth, helping Dubai earn its place as a top competitor on the global stage,'' says Tabrizi. ''We see this being carried out through government initiatives such as regulations, corporate governance, transparency and clarity being set up and led by the Real Estate Regulatory Agency.''

The purpose

The investors' ability to take risk, their level of involvement and the structure of these firms largely determine their investment.

''Institutions look for safe, risk-free assets that have decent long-term yields,'' says Tabrizi. ''They also need to be large to justify moving substantial amounts of capital from other parts of the world to Dubai. For example, four or five villas would not really be worth transferring the capital, but full residential buildings, office buildings or bulk commercial assets will be of interest to them.

''Then there are options for investors who prefer a hands-off approach, those who want to have no direct involvement in their investment. Investing in Real Estate Investment Trusts is one of these options.''

Moreover, institutional investors also look for prime properties in key investment centres with good prospects for long-term tenant demand and good yields. These properties represent an opportunity to acquire long-term income as well as gain from value appreciation.

Market outlook

Dubai's realty market mainly attracts a large number of short-term investors that buy and sell property within a certain timescale to gain from capital value growth. This is not common in other major cities around the world, says Strang.

''There is little focus on long-term preservation and evolution of real estate investments such as serious consideration of tenancy lease terms, tenant profile and covenant strengths, the damage caused by cost savings in property maintenance and construction cost cutting at the outset of many projects,'' he says.

As the Dubai property market seeks stability and long-term, consistent growth, property developers and owners need to appreciate the benefits of taking a long-term outlook and planning for the future, as any institutional investor would expect, says Strang.

''We are seeing an increasing demand for institutional investors taking advantage of blue-chip property occupiers who are looking to commit long term to operating in the region, without acquiring real estate assets themselves,'' he says. ''These opportunities take the form of build-to-suit developments and sale and leaseback acquisitions, where each property investment is underpinned and secured by a long-term rental commitment from a proven and financially sound occupier.

''Rental guarantees, annual rental indexation and strict withdrawal penalties provide levels of security acceptable to institutional investors and negate the risks usually associated with an emerging real estate market.''

Location still remains an extremely important factor in any institution's decision to invest in real estate.

''There is no doubt that pockets of Dubai now offer extremely secure income for years to come, with prime residential locations continuing to benefit from a growing population with increasing salaries and GDP,'' says Strang.

''The onus now has to be on current developers and landlords to create and maintain the product to attract institutional investment into existing real estate.''

Read on why Dubai remains an exciting investment destination

Source: Hina Navin, Special to Property Weekly


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