Experts say Dubai’s alternative real estate assets are under the spotlight
While the residential segment remains a hot favourite among property buyers in the UAE, the calmer market conditions have drawn several property investors to look at other realty assets to diversify their portfolio and obtain higher gains. Hospitality and offices continue to appeal to buyers, as well as education and health care due to a rise in institutional investment in the region.
“Since the deal flow in the region is rather limited, investor interest in alternatives assets has been across the asset classes range, while education has dominated the transacted assets,” says Gaurav Shivpuri head of investment transactions at JLL Middle East and North Africa. “The key reason for the increase in these deals is investor interest in such properties, as well as the need for the owners of these assets to raise funding by selling the real estate.
Shivpuri says these alternative assets have qualities that attract institutional investors. “Moreover, institutional investors prefer low asset management intensive real estate with long-term leases, which is only available with alternative asset classes,” says Shivpuri. “These properties are more defensive in nature as compared to the core asset classes, hence, the timing of investment is driven by the operating state of the operating company that leases the real estate more than the situation of the market. If the tenant is financially stable, this investment could be made at any time.”
According to David Godchaux, CEO, Core Savills, logistics, Grade B offices in core locations, healthcare and educational facilities are worth looking at for investments.
“Office investment ticket sizes are also within reach for many investors, while large-scale investments such as education, hotel and warehousing are limited to established players or institutional investors,” he says.
Reputed international educational operators are increasingly expanding their regional presence in Dubai, according to Godchaux, driven by ease of market entry, regulations and positive geopolitical and socioeconomic indicators. “However, higher establishing costs continue to inhibit operators,” he says. “With a typical high-end international school for 500-1,500 students involving a benchmark cost between Dh200 million-Dh300 million, the ticket size is limiting this sector predominantly to institutional investors and developers.”
He says many school are now being financed through the sale of existing school buildings to investors on a sale-and-leaseback model or through investors building schools to be leased on a long-term basis. “Established players are increasingly pursuing these models as an alternative approach to improve returns through the release of cash from real estate and directing capital into core business activities to fund growth,” says Godchaux. “Stable high returns on investments typically ranging from 10-11 per cent once fully stabilised.”
The health-care segment, as a real estate investment avenue, is limited to established players because of its costly operations and equipment, while requiring a hand-in-glove arrangement between the developer and operator. However, Godchaux considers the introduction of compulsory health insurance in Dubai and the government’s initiatives towards promoting Dubai as a medical tourism hub should increase the bed requirements and in turn demand for this investment sector.
“This asset class is somewhat saturated in central locations in Dubai, while investment opportunities exist towards the burgeoning suburban districts,” says Godchaux. “High-quality, efficient private hospitals could achieve 10-12 per cent yields margins after initial stabilisation years.”
Grade A industrial and warehousing spaces also provide high yields due to the sheer lack of availability in Dubai. “This segment requires further analysis and scrutiny from the investor as this market is primarily purpose-built, and ready warehouse rental is still in the nascent stages,” says Godchaux.
Private purchasers, on the other hand, favour serviced apartments and single hotel rooms when looking beyond residential. “These units are fully fitted out and furnished and offers a regular return to buyers via a rental pool,” says Declan King, director and group head of real estate at ValuStrat. “Hence, the owners do not need to worry about directly managing their property and arranging tenants as someone else is doing this for them.
“These types of units have traditionally been available in upmarket locations such as Downtown Dubai and Dubai Marina. However, over the last two years, developers have launched more affordable offerings in newer areas such as Business Bay, Shaikh Mohammad Bin Zayed Road and districts close to Al Maktoum Airport and the World Expo 2020 site. While a serviced apartment can be quite an easy form of property ownership, buyers need to pay close attention to the rental pool arrangements and be aware of high fees and limitations on self-usage.”
Dubai’s hospitality sector has been flourishing over recent years and this has brought focus to the sale of individual hotel rooms. “With entry prices for whole buildings out of reach for most, except corporations and institutional investors, innovative concepts for the sale of individual hotel rooms have been introduced in the market,” says King. “Similar to the serviced apartment model, this structure also offers private buyers the opportunity for direct hands-free ownership in Dubai’s hospitality sector. Well-located properties being run by premium operators could prove an attractive investment.”
For the more modest real estate investors, he adds acquisition of commercial property such as office and retail units is a viable option. “Offices in areas such as Jumeirah Lakes Towers and Business Bay may offer good prospects for rental income with the city’s expanding economic base [JLT] a growing services sector,” says King. “While retail units in Dubai’s acclaimed malls are not made available for individual purchase, single shops can be bought in towers in Dubai Marina and JLT. Suburban offerings are also available in locations such as Jumeirah Village Circle and International City.”
Other forms of alternative real estate asset classes include self-storage, student accommodation and retirement villages. “These investments allow the purchase of individual units with income enjoyed by way of a rental pool,” explains King. “While not yet generally available in this region, these types of assets have seen increased prevalence in Western markets – especially privately provided student accommodation, which has evolved significantly in university towns in the UK.”
Private investors can also consider real estate investment funds (REITs) and real estate funds. “REITs offer individuals the opportunity to target professionally managed offerings with specified strategies,” says King. “Some funds are very broad in their approach and others much more focused. REITs are stock market listed and allow investors to buy and sell shares in any volume whenever they wish.”
Real estate funds, meanwhile, are promoted by banks, financial institutions and insurance companies. “These may have more restrictive entry and exit rules then REITs and the minimum financial allocation may also be higher,” says King.
King, however, points out that specialised asset segments such as car parking, self-storage, student accommodation and retirement villages, although already popular in other countries, are not yet widely available in the UAE. “But they will probably emerge in time,” says King. “Internationally, development in these segments is often encouraged by way of government incentives on acquisition, holding or disposal costs.”
2017 and beyond
Dubai has seen a growing interest for investment in education, health care, logistics and retail because of high returns and they can easily expand their portfolio. “For example, the education segment has seen some groups expanding exponentially and make their mark in the market,” says Sandrine Loureiro, head of commercial sales and leasing at Better Homes. “Similar patterns can be found in health care and hotels. Investors have taken advantage of lower prices in the recent market to buy offices, retail spaces or warehouses instead of paying rent. Similarly, investment funds and large investors have been able to negotiate good rates to acquire larger assets and strengthen their portfolios.
“Going forward, we expect demand to remain strong from current investors as well as new brands to come into the market.”
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