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July 9, 2018

Private debt is starting to emerge as a contender to traditional commercial bank lending in the Middle East’s real estate market – potentially changing the investment landscape.

As much as 10 percent of the region’s total real estate debt could come from private lenders by as early as 2023, according to estimates from JLL.

Private lenders – including pension funds, foundations, endowments and insurance companies – have historically played little part in acquisition or financing of real estate. The preference of using equity over debt, coupled with weak foreclosure laws has meant that the Middle East, unlike many Western markets, has been less penetrated by alternative lenders.

Culturally, the use of debt has played a “less significant role in real estate investment across the region historically”, says Gaurav Shivpuri, Head of Capital Markets for JLL in MENA.

Commercial banks have dominated the relatively small market thus far, through relationship lending.

Last year, traditional domestic and international banks provided US$81 billion of debt for real estate and construction in the United Arab Emirates, while in Saudi Arabia, US$55 billion was loaned to the sector, according to joint research by JLL and law firm Clifford Chance.

A growing focus on debt
With even traditional lending in both the UAE and Saudi Arabia on the rise – having almost doubled in the latter since 2013 – general appetite for using debt is rising in the region. The result could change the real estate investment industry.

Shivpuri says the region’s lending landscape could “look very different in a few years”, with improvements in transparency and regulation creating a more attractive environment for non-bank lenders. Regulation of real estate lenders in several markets is also under review.

The approach from institutional investors has been to buy assets, which requires asset management.

But now that is changing.

“We’re now starting to see some institutional investors consider debt rather than equity routes into real estate,” Shivpuri notes. ““As transparency levels in this region improve, so will the comfort levels.”

Debt also offers additional benefits over equity for investors. “Being lower down the capital stack, debt offers lower exposure to risk,” Shivpuri says. “It’s low risk and low return – for institutions, those are two crucial plus-points for new lenders.”

Safety first
As a first step, new private lenders are likely to enter the Middle East region via senior debt for income generating real estate assets, says Shivpuri.

Private debt’s ability to work across the capital stack – from senior loans to mezzanine and preferred equity – makes traditional bank financing appear more rigid. Longer term, that could bode well for smaller developers in need of greater flexibility and “for non-traditional lenders, it´s a sensible starting point”, he says.

Typical returns on a core, senior debt position range from four to five percent – and from seven to eight percent for junior finance.

While pension funds and insurance companies are more likely to be early movers, Shivpuri does not rule out the involvement of endowments, which typically take a long-term view on their investments.

“We could at some stage reach the point where private families begin to lend,” he says.

Before that, the UAE has its hosting of Dubai Expo 2020 to prepare for. But an expanding lending landscape is not long away and would be a positive for the city.

Click to read whether Egypt’s new capital is an untapped source of investment.

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Gaurav Shivpuri

Head of Capital Markets at JLL MENA

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