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The recent trend of initial public offerings (IPOs) of equity in the UAE's real estate market may encourage more companies to follow suit, industry experts say. Lighter regulations and legal reforms as the government seeks to diversify its economy, coupled with tighter bank lending conditions, are said to contribute to this phenomenon.
An exemption from Dubai IPO rules granted by regulators to real estate major Emaar Properties, permitting an offer worth up to $2.45 billion (Dh9 billion), can pave the way for other such exceptions, while UAE corporates are waiting for the rules to be changed with the new commercial law and investment legislation going through final drafting.
“Availability of liquidity in the market, a wind of opportunity to capitalise on and the boom in the local market are prompting companies to go for an IPO because they can cash out, get a very good evaluation and liquidity at the same time," says Hamed Kazim. Senior Adviser at PricewaterhouseCoopers.
He says the new Commercial Companies Law, which has not been finalized and published in the Official Gazette, may encourage more companies to go for an IPO. Kazim adds that without the new legislation going for an IPO is a bit restrictive at the moment.
"The new Commercial Companies Law will help companies, especially family-held businesses, consider floating," says Kazim. "Since it has not yet come out, there is a lot of speculation, but any changes in that direction will help the UAE IPO market."
Currently, if a local private business wants to become a public joint stock company and be listed on a local stock exchange, it has to sell a minimum of 55 per cent of its shares to the public. Under the new Draft UAE Commercial Companies Law, the owners can now retain 70 per cent of their capital in the company, listing only 30 per cent for the public.
"As the market matures, which is a natural phenomenon, people realise there are other ways to raise liquidity and companies are taking advantage of it, cashing out and getting good evaluations," says Kazim. "If the laws make it more conducive and easier to do so, we will see more companies listing on the UAE stock markets."
Kazim further explains people have high expectations of the UAE real estate market. It is the sector they can relate to, it is tangible, they can see it physically and it has recently received a new boost in confidence because of Dubai's successful bid to host the World Expo 2020.
“I think increasingly more companies will go for IPOs, though there will be a limit for real estate companies as the large ones such as Emaar and Damac are already trading on the stock market," he says. “But since the number of big players is limited, and as the market matures, there will be more opportunities for mid-level companies to get into the market.”
"This year at least two more real estate companies will go for public listing."
Private and family-run companies looking to further the growth of their businesses often use an IPO as a way to generate the capital needed to expand, remain competitive and drive long-term sustainability of the business.
There are many benefits for a company to go public. Primarily, raising capital can help fund research and development projects, capital expenditure and more. IPOs can also generate increased public awareness of a company, especially among potential investors and customers.
The IPO activity in the Middle East and North Africa (Mena) is expected to pick up during the remainder of the year despite a double-digit slump during the first quarter, according to Ernst and Young (EY). The firm’s Q12014 Mena IPO update showed that five IPOs from the region raised $1.283 billion, a decrease of 21 per cent compared to first quarter last year.
Increased IPO activity
The Mena IPO market saw no change in terms of volume in the first quarter of this year compared to the same period last year.
But Phil Gandier, Mena Head of Transaction Advisory Services at EY, is upbeat about the prospects of the regional IPO market this year.
"We expect that the second half of the year will see strong IPO activity," he says. The ongoing transformation of family groups into institutional entities, led by a younger generation that is more competitive and not susceptible to family succession disruptions, will drive IPO activity.
"With sound economic fundamentals and strong regional liquidity fuelling new listings, the Mena pipeline is looking extremely healthy."
Gandier adds, "The Mena IPO market is off to a slower start in the first quarter compared to the same period last year, however, compared to the past few years, it has been one of the best-performing quarters. The recently announced Emirates REIT and Marka IPOs will spur further IPO activity and point the way to high levels of activity through the first half."
The UAE is expected to build on the strong performance of its IPO market this year, he says, with the capital raised in the country and the wider Mena region seeing its highest level since 2008.
Three IPOs from the UAE - Al Noor Hospital Damac Real Estate Development and Action Hotel – secured more than $740 million from foreign listings on the London Stock Exchange.
Meanwhile, the UAE's recent inclusion in the MSCI Emerging Markets Index will lead to an increase in the number of investors who want to focus on the region, improvement in liquidity and enhanced transparency.
The UAE's MSCI upgrade from frontier market to emerging market status is expected to attract more foreign funds, says Craig Plumb, Head of Research – Mena at JLL.
"There are nine UAE companies on the MSCI list and one-third of them are real estate companies. Since real estate is well represented on that list, it is going to lead to more funds Bowing into those companies,'' says Plumb. "That is another reason they are looking to make more shares available-to do more IPO listings. We expect more overseas investments in real estate companies in Dubai as a result of that listing and more foreign direct investment into the UAE's stock markets.
"There is an appetite for real estate developments at the moment. I think a wide number of companies are looking to do IPOs because real estate is, to some extent, back in favour with the market. So, clearly, the developers believe there is a market appetite to do it, whether here or offshore."
Restricted fund sources
Plumb says JLL is currently handling a number of cases involving companies who are readying for a stock market listing.
"We are preparing the papers for some companies that are planning IPOs," he says. "The real estate market is recovering and many developers are now looking to raise equity for their real estate projects. Since the traditional sources of funding for real estate projects in Dubai, including off-plan sales and bank lending, are restricted at the moment, the developers have to seek alternative sources of funding such as bond issues, IPOs and sukuks."
There is a limited number of real estate companies in Dubai and Abu Dhabi that could go for a listing, says Plumb, although he expects the bigger companies to go for an iPO.
“This can only happen for the well-established master developers. It is not really an option for the smaller companies with only one or two projects," he says. "We think it is a good thing because it will make the companies more transparent, they will have to be accountable to their external shareholders, to release more information on their projects and so it is for the overall market.
"We should get a better regulated market, more transparency, more openness and more information.”
The latest addition to the list of UAE real estate companies going for an IPO is Tasweek Real Estate Marketing and Development, the Abu Dhabi-based private joint stock company, which last month announced plans to launch a $272-million IPO by the end of the year.
"Our ultimate objective is to create wealth for all the stakeholders, be it the initial founders and shareholders or the new ones who will come on board," says Masood Al Awat; CEO of 'Tasweek. "In the long term, the end user customers will be the major shareholders in the company, who will create the company and let it work, so we need to take care of the customers, the previous shareholders, and the new ones after the IPO.
“The number one benefit of going for IPO will be adding credibility to the company and to the market. Once you do a listing, you have to abide by the laws and regulations, so people will know what your shares are really worth. It is giving yourself a value and then you can grow openly, because transparency is now on the top of the agenda as well."
Al Awar says an IPO is also an opportunity to boost the credibility of a company.
"When the new shareholders see the credibility of the company, more shareholders can come on board. That was one of the reasons we went into the stock exchange,” he says. "Going for a listing is like raising the bar 100 times for the company. Suddenly, you are being followed by 100 people, calling you up on a daily basis, so it is not relaxing.
"It is not about collecting funds, which will not come unless you are credible. Unless you are capable of listing, it will not happen."
Source: Jamila Qadir, Special to Property Weekly