In a real estate investment market, the more the merrier
We ask Simon Townsend how REITs, multinationals and new investment vehicles will shape the property market this year
The GCC has seen an increase in the number of real estate investment vehicles being listed over the previous 12-18 months, which has added to the increase in capital looking to be deployed in the region. PW speaks to Simon Townsend, senior director, head strategic advisory, at CBRE Middle East to discuss its impact on the local and regional investment markets.
CBRE has indicated previously a lack of institutional real estate product within the local and regional markets. Now with the delivery of the new commercial districts across the region, including the likes of Dubai International Financial Centre (DIFC), Dubai South and Maryah and Reem Islands in Abu Dhabi, has this now shown any signs of reaching a balance?
From an institutional investment standpoint it definitely remains a seller’s market. By institutional we mean not just the quality of the asset and its physical attributes, but importantly the nature, length and security of the building’s income. Historically, we have seen very few occupational leases of more than three years, occasionally longer leases with options to determine existed but very few occupational leases of 5, 10 or 15 years. The changes in legislative environments in these zones provide encouragement for companies to commit to longer continuous lease periods and this in turn fuels investor appetite, especially for those seeking an investment zone acquisition. If we look at many of the traditional areas, such as Shaikh Zayed Road, the terms of occupation remain shorter than those in say DIFC.
With an increasing number of international companies establishing regional headquarters and a lack of suitable accommodation, whether single-owned office towers or bespoke warehousing or distribution hubs, these companies have started to look to the developer markets for build-to-suit properties. Examples in the UAE include Ikea’s distribution hub, Standard Chartered Bank HQ and the under-construction HSBC regional office.
This imbalance means that investors seeking to acquire such assets are competing in a busy market and this is having a direct impact on the price at which they are being required to pay. This competition has seen a compression of yields, with recent transactions such as the Edge Building in Tecom seeing some of the lowest yields in the market in the past few years.
Is this just limited to the local and regional investors or are we seeing international investors competing for these opportunities?
Originally real estate investment trusts (REITs) and other listed investment vehicles originated from local banks and had a ready pool of assets that were available to be transferred on listing. The more recent listings have been from the wider investment market rather than limited to the traditional banks and we are seeing a number of the family offices and local investment companies looking at options for releasing capital from their held assets rather than going to the debt markets for a refinance or restructure. This is providing the family offices with additional capital, as well as reducing in some instances their risk of over exposure to a specific asset or asset class.
Regional capital is also increasing with several of the more regional groups looking to add a more balanced portfolio geographically — it is also widely noted that many of these institutional assets tend to be in Dubai, such as the new purpose-built headquarters for HSBC in Emaar Square, adjacent to the Standard Chartered Bank build-to-suit HQ.
The increase in the number of REITs is adding to the size of the investment pool, and it is understood that while the focus remains within their own jurisdictions, they are looking to add some regional coverage. Global capital continues to explore the region but to date we haven’t seen any significant activity from the traditional global funds. We know they have indirectly invested into some of the corporate listings, such as the recent Emaar initial public offering, but have limited direct investment.
How do you see the market continuing this year and what should we be looking out for?
Many of the investors, especially the regulated funds, continue to chase yield and as such have a focus on existing income-producing assets. For those that meet the investment criteria, e.g. secure income, suitable covenant strength, correct sector, suitable tenure, there will be an increase in investor competition and a continued downward pressure on yields. It is important to comment on that while there is this imbalance; as mentioned the investors have strict investment criteria and there is not the same shortage across the market of noninstitutional investment product and there are several examples of income-generating assets that have proved challenging to dispose of — this is often a combination of mispricing as well as not meeting the investor return/structure profiles. There is continued interest in forward purchase or build-to-suit investments in the region and we are seeing an evolution in the investment strategies to start taking more development risk, albeit in these conditions this is mitigated/managed. There does remain a limit of speculative development funds where obviously the risk profile is increased.
The continued growth in the number of vehicles in the region is expected to continue this year and there will be a more diverse range of entities creating such REITs or structures, including potentially more family offices and quasi-government entities. The increase in Sharia-compliant investment vehicles looking to deploy capital is adding further yield pressure on such opportunities and the competition around assets such as build-to-suit for schools continues, further suppressing these yields. Investors are forced to act quickly and in turn become more efficient in due diligence and investment decisions.
We expect more institutional opportunities in the latter part of the year, especially in light of some of the corporate activity around the logistics and manufacturing sectors and supporting companies around the World Expo 2020.
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