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Despite having a vibrant freehold property market, Dubai has seen very little activity on the capital markets for the retail investor to participate in the ongoing infrastructure and real estate opportunities. With the exception of Emirates REIT (available only for qualified investors at the IPO stage), the expected move to capitalise real estate in capital markets has thus far not transpired.
For this activity to kick-start, regulatory moves in developed jurisdictions may need to be scrutinised to ascertain their relevance for the domestic capital markets and enable the small investor to reap the benefits.
The US passed the Jumpstart Our Business Startups (JOBS) Act in 2012, under which Regulation A+ (which was effective in June 2015) reduced the legal and regulatory filings in order to go public. It allows for companies to raise up to $20 million without even having the need for audited financial statements, with retail investors being able to participate with investments as low as $500.
Since this law went into effect in June 2015, 94 companies raised a total of $1.7 billion, with more than 35 per cent of these being in real estate (developers as well as investment trusts that were otherwise considered too small to qualify under traditional SEC requirements).
A number of these companies have successfully traded in the secondary OTC markets, and even though these are early days, activity has been robust. A number of such listings have been filed for mergers with the aid of community and national banks.
Known as “Mini IPOs”, this activity has been far more successful than the much-touted crowdfunding model, as it has facilitated greater transparency and liquidity for retail investors. It has allowed for companies to slowly build out their infrastructure to cater to the regulatory requirements that kick in after they reach a certain size threshold, while simultaneously ensuring they can access capital needed to grow their businesses.
Even though the regulation has attracted interest from the entire economy, it has been of little surprise that real estate has been the primary beneficiary, as it has enabled investors to capitalise on small opportunities in markets that they otherwise would not have access to. It also provides an ability to exit in the secondary markets.
Developers and fund managers on the other hand have been able to offer increasingly bespoke solutions and grow their businesses by capitalising on these opportunities. Regulators have been able to impose a regime of gradually increasing transparency in the marketplace.
In Dubai, such a piece of regulation would be prescient, especially as much of the fund-raising activity by private sector developers has taken place under a friends and family network that has sometimes allowed for some unscrupulous activity as inadequate protection has been made available to these investors.
There are currently more than 400 private sector developers registered with RERA, currently undertaking development projects of more than $2 billion. It is a number expected to grow significantly in the years leading up to the World Expo 2020 event (the bulk of money raised through private offerings).
It also allows for greater protection for the small investor while allowing for a platform for secondary capital market activity that can be monitored by regulators as a more robust framework is put into place. Furthermore, it facilities organic merger and consolidation activity between developers.
This establishes a platform for the proliferation of investment trusts and where investment managers can have access to far greater information than currently available.
Although such a regulation would spark activity in areas other than real estate in Dubai (which only increases its appeal, given the vibrant SME framework that currently exists), it stands to reason that the sector would be an immediate beneficiary. This is so as it would foster a minimum regulatory platform that would extend comfort and opportunity to the retail investor, while allowing developers to access capital markets in a more efficient manner.
While initial evidence from the US suggests that this has not been beneficial for start-ups, it has stimulated tremendous interest both in the primary and secondary markets for companies that have demonstrated some success. And real estate has attracted the lion’s share of capital.
It is of little doubt that Dubai would benefit immensely from such a regulation, further cementing its position as the regional hub of real estate and infrastructure finance.
Source: Sameer Lakhani, Special to Gulf News
The writer is Managing Director of Global Capital Partners.