Institutional interest has been steadily rising in Dubai real estate. These players typically include banks, real estate investment trusts (Reits), insurance companies, etc. Although they have been primarily investing in Grade A office buildings, of late, they have widened their horizons to include industrial units, schools, community shopping malls, medical facilities and hotels.
Funds and institutional investors typically restrict their exposure in the residential asset class due to higher turnover and shorter lease terms, unless it is leased out as long-term employee accommodation.
"Institutions have always been active in the Dubai real estate segment, especially in large income-generating assets. However, of late, the trend is increasing with more and more players looking at taking positions. This can be largely due to increased regulations and transparency, and also the fact that the returns after taking debt are pretty attractive as compared to other established markets," says Niraj Masand, director, Banke International, a Dubai-based real estate agency.
However, institutional investors rarely take on build risk; they prefer to purchase the property once it is complete.
"Private equity players have progressively taken a more aggressive stance in the freehold real state space since 2012 onwards, and these have been for a number of reasons, not the least of them being superior regulation and a more moderate and mature price cycle. The recent passage of the mortgage law and the allowance of private debt having locus standi vis-a-vis the underlying asset has further spurred interest," describes Hussain Alladin, head of IR and research, Global Capital Partners.
Dubai real estate has been traditionally dominated by smaller individual investors in the strata segment, particularly for office stock. It has long been argued that Dubai lacked investment-grade stock available for sale.
"Master developers who undertake the development risk of building premium supply have deeper pockets to sustain the leasing cycle and want to maximise returns, given the steady yields and relatively lower risk on the back of historically high demand for Grade A stock. This demand continues to be evidenced by steady pre and post-leasing and purpose-built activity in prime districts such DIFC, D3, Tecom and One Central. Thus, developers continue to hold on to these high-performing assets. On the other hand, mid-level developers with Grade B stock have been hesitant to pursue the leasing risk, traditionally preferring an early exit by selling strata," says David Abood, partner at Core.
Institutional investors generally look for freehold buildings with a single or small number of tenants, long-term leases with all building operational costs covered by the tenants and high annual yields relative to established markets such as London, New York, Singapore, etc. They form a strong covenant due to long lease terms with blue chip corporate occupiers, giving asset managers steady yields over a longer investment horizon.
"While assets that satisfy the above criteria exist, current owners of these assets see no need to dispose due to the current lack of availability of alternative local real estate investment opportunities," continues Abood.
The investment sweet spot for institutional buyers is generally between $50 million to $100 million, say market stakeholders. In Dubai, they have been mostly seeking Grade A assets in freehold areas such as Downtown, Marina, Jumeirah Lakes Towers, etc., and in freezone designated areas.
"Depending on the nature of the investor, we have seen across-the-board interest: from distressed opportunities to annuity-based asset classes like industrial real estate [warehouses] to higher yielding properties such as schools and, more recently, community shopping malls as well. Investor funds have been as diverse as from Africa to South Asia, but primarily have been from the Middle East. Interest has primarily been led by the private sector funds thus far," reckons Alladin.
"The assets' capital values have to be in line with the market. Simply because it's rented at high values, it will not necessarily justify a high selling price," clarifies Masand.
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