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Mena real estate makes for attractive oppurtunities

1st February 2015

With aggressive government initiatives at the forefront of economic growth, the region has prime investment opportunities that will continue well into 2015 and beyond.

There’s no doubt that the MENA region is one of the most vigorous, interesting and diverse regions in the world in terms of its real estate offering.

According to Nick Maclean, Managing Director of CBRE Middle East, Dubai and the Middle East are on the radar of international investors who are looking for greater diversity; the MENA region has emerged on their shortlist. “What we are seeing is that investors are looking at Dubai as their entry point into the Middle East. The last three years have seen a fundamental shift for investors and the Middle East has been given consideration, particularly from investors in the Far East; Singapore, Hong Kong and Malaysia.”

Faisal Durrani, International Research and Business Development Manager from property consultant Cluttons agrees, who specialise in the GCC agrees. “The MENA region is an interesting, diverse and dynamic region in terms of its real estate offering, particularly countries in the Gulf and obviously markets such as Dubai are well-known globally and offer investors a range of asset classes with yields not found in more established markets like London.”

Durrani added that what differentiates the MENA region from the rest of the world is that governments make a concerted effort to drive economic growth thereby creating jobs and demand for real estate.

However, JLL’s Senior Research Analyst Dana Salbak says that more money is flowing out from the region than flowing in, attributing it to the lack of quality investment grade stock available for purchase and the relatively high risk associated with the region in the minds of overseas investors.

“The lack of quality stock relates not only to the physical quality of assets, but also the limited number of developers that build commercial assets for sale with most of the high quality office and retail assets being held as long term investments by their developers or current local owners,” says Salbak.

WHERE TO INVEST?

Manama, Bahrain

Manama, Bahrain

According to the Head of Cluttons Oman, Philip Paul, Oman is very investor friendly with good infrastructure as well as a strong legal and banking sector to support its inward investment.

Paul notes that while Oman is a smaller market compared to the UAE, there is a lot of momentum in the oil and gas sector and significant government expenditure and freehold residential incentives.

For JLL, the UAE and Saudi Arabia continue to attract the majority of global capital flow.

“The UAE’s political and economic stability and market transparency make it a safe haven for a large chunk of capital inflows. Saudi Arabia’s economic and demographic fundamentals make it an attractive destination for investments,” says Salbak.

In addition, the potential opening of the Saudi stock market to foreign investors signals a shift in attitude towards more transparent practices and is likely to increase interest in the real estate sector.

CBRE’s Maclean agrees that the UAE (Abu Dhabi and Dubai) is one of the countries offering the most potential, but notes that investors should keep a firm eye on Bahrain.

“Bahrain gives access to Saudi Arabia very easily across the causeway. It’s home to a lot of expats, particularly in the oil and gas sector and defence sector. We are seeing more adventurous funds from the UK into this market at the moment,” added Maclean.

MAJOR DEVELOPMENTS

Cluttons’ Durrani tips Tilal City in Sharjah as one of the UAE’s noteworthy developments. Tilal City is a mixed-use neighbourhood, currently under development 10km away from Sharjah International Airport, for 65,000 residents. In addition, Durrani mentions Al Maktoum International Airport and the upcoming Cultural District on Saadiyat Island, Abu Dhabi, as other major developments in the region.

“For Sharjah there is a pent up demand for both residential and office stock, both of which remain in exceptionally short supply which has helped to push office and residential rents up by about 20 – 30% over the last 12-18 months,” says Durrani.

Outside the UAE Durrani notes Bahrain’s China-themed mall, along the lines of Dubai’s Dragon Mart, as one of the upcoming developments to watch out for. The wholesale and discount-oriented mall is targeting between one million and two million visitors a year.

Looking ahead, CBRE’s Maclean commented that the movements of large corporate occupiers will determine major developments in the MENA region. He explained that geographical locations where occupiers such as international banks and major global corporations operate from will drive investment and development.

PROMISING ASSET CLASSES

The UAE’s residential sector has undoubtedly led investor preferences, according to JLL’s Salbak. However the sector has experienced a levelling-off during the summer months, which could prompt investors to switch out of the residential sector into other asset classes, such as hospitality real estate given increasing tourist numbers.

“In Saudi Arabia, the residential sector is viewed positively, fuelled by large infrastructure projects around the Kingdom and a favourable mortgage law. Also, as the Kingdom pushes ahead with its diversification strategy and its continued focus on the expansion of the manufacturing sector, we see the industrial sector emerge as a preferred asset class,” says Salbak.

According to CBRE’s Maclean, the most popular asset class across the region is the office sector.

“The office sector has generally lagged behind but we are now seeing strong growth from international occupiers and therefore development has started again and we are confident that we will see strong office growth over the next four to five years. It is a very interesting time to enter the office market,” says Maclean.

According to Cluttons’ Durrani, investors should keep an eye on the industrial sector in the UAE, particularly around the new airport.

“Given the fact that Dubai World Central [Al Maktoum International Airport] will have a dedicated stop on Etihad Rail just south of Jebel Ali Port it will create a logistical and transport hub. This is also being replicated in Oman on the northern coast of Soha Port. It’s similar in Bahrain where most of the industrial estates are doing exceptionally well offering a gateway to the central Gulf,” says Durrani.

INVESTOR CONCERNS

For JLL’s Salbak, externally the unstable political situation in neighbouring countries might still deter some investors from looking at investment opportunities in the MENA region in general. On an internal level, the lack of transparency in some markets may put off some investors.

CBRE’s Maclean believes that the key weakness in the regional real estate market is lack of liquidity which is not a result of lower inbound capital, but a consequence of the availability of assets.

EMERGING HOTSPOTS

For 2015, JLL’s Salbak foresees the UAE and Saudi Arabia to continue to account for the majority of global capital inflows. Egypt is also re-emerging on investors’ radars, driven by the more stable political environment and the return to more robust levels of economic growth.

According to CBRE’s Maclean, the UAE will continue its lead but Turkey and Egypt will emerge as attractive investment opportunities.

“Egypt which has been off the radar for the past few years is much more interesting to Gulf investors as we see political stability returning. There’s also a lot of state money going in and a lot of trading family money which will be reinvested over the next few years,” he says.

According to Cluttons’ Durrani, the entire MENA region will emerge as a hotspot in 2015 due to strong economies and aggressive government initiatives from all MENA countries to drive economic diversification.