June 23, 2017

The GCC real estate investment landscape is witnessing a rapid change in active participants with an increasing number of institutional investors pursing direct real estate investments. This surge in activity is being led by the likes of regional asset managers, REITs, sovereign wealth funds (SWFs), pension funds and insurance companies, all of whom are either investing proprietary capital or using third party investor funds.

A long road
While the seeds of this trend were sown in the early 2000s, what does the future look like for the region?

Real estate investment in the GCC was tapered until legislation around the ownership laws in the Gulf Cooperation Council countries (‘GCC’ – Saudi, Arabia, UAE, Qatar, Kuwait, Bahrain, and Oman) began to change in 2002. Prior to that, the ownership of real estate within the GCC was restricted to nationals and entities from the six member states, meaning that, primarily, the wealthy merchant families developed, owned and invested in real estate, with very limited direct investment by institutions.

Dubai was the first city state to allow foreign ownership, with other countries/cities, including Abu Dhabi, Bahrain, Qatar and Oman, following suit within the subsequent three years.

“The first foreign developers and investors in the GCC region were quickly followed by property professionals including consultants, agents, counsels and investment managers from mature real estate markets,” says Gaurav Shivpuri, Head of Capital Markets at JLL MENA. “These professionals helped to build the quality of real estate data, deal analysis and strategy, valuation methodology and legal documentation, which has all helped improve the standard and transparency of the real estate market.”

“The arrival of institutional investors began in 2006/07, with the launch of a few closed ended real estate funds – sponsored by regulated entities and banks – that raised funds through regional institutional and private investors to invest in single asset or strategy funds,’ explains Shivpuri.

While the Global Financial Crisis (“GFC”) in 2008 served as a brake on activity, as markets corrected significantly and fund raising became difficult, the Arab Spring in 2010/11 focused investors’ interest back into the GCC and the region saw a sprouting of closed ended real estate funds, sponsored by regional investment banks. While full data is unavailable, it is estimated that funds worth US$3 billion were launched during the period of 2011-2014, targeting yielding assets as well as single project development deals, primarily in the UAE and Saudi Arabia.

“By 2014/15, we had also started to see interest from pension funds and insurance companies as they gained confidence in the market and their ability to manage real estate ownership,” says Shivpuri.

In the last six months, Saudi Arabia has seen a spurt in the establishment of REITs, following the approval of the REIT law by the Capital Markets Authority in late 2016. Within a matter of months, close to US$500 million of REIT stock has been listed with another US$1 billion in progress. It is estimated that market size is potentially worth at least US$5 billion and will drive the institutionalization of real estate investment in Saudi in the coming decade.

Cross border interest
Despite the growth in regional institutional interest, investment from outside the Middle East has been limited and, over the past decade, interest from international players has come in bursts.

“Prior to the GFC, AIG and Pramerica invested in two income generating assets in Dubai, and there were a number of joint ventures structured between developers such a Goodman and Hines with local developers,” explains Shivpuri. “As the markets dislocated following the crisis, a number of these ventures were put on hold and later unwound. It’s only in the past 18 months that we have started to see some interest returning from international players, as tight yields in their home markets combined with more confidence in the local regulatory, legal and commercial environment, is beginning to make the region more interesting on a risk adjusted basis,’ he says.

A changing landscape
Shivpuri contends that the arrival of institutional investors is fundamentally changing the way real estate investments are evaluated, placing a greater emphasis on due diligence, including commercial, legal and technical aspects of a transaction.

And the effects have been seen across the wider industry as sellers looking to target institutions for capital appreciate the value-add of hiring professional real estate agents with experience in managing high ticket and complex deals. This has, in turn, created a more efficient market with well-structured tenant leases and global best practices in property management.

No slowdown in sight
“The preference of asset managers in the GCC, tends to directly correlate with their previous experiences in managing real estate; the more experienced are willing to acquire assets with medium terms leases where there is an opportunity to create value through an aggressive asset management regime,” explains Shivpuri.

‘In contrast, pension funds and insurance companies target long term sale and leaseback trades where the leases are on a triple net structure with minimal management responsibilities”

Shivpuri expects institutional investors to continue grow their share of the investment market in the GCC region and believes it will eventually rival volumes, as a percentage of the market, as seen in more mature markets.

“The growth of the institutional investor will be driven by the creation of more REITs and closed ended funds, coupled with further investment by regional pension funds and insurance companies. This is just the tip of the iceberg.”

Click to read about why more middle east investors will look to Asia Pacific


Gaurav Shivpuri

Head of Capital Markets at JLL MENA

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