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Not all investors / markets across Mena have been equally impacted by the withdrawal of liquidity and unprecedented opportunities now exist for potential investors to acquire good quality assets at competitive prices in many markets.
Sentiment is Key to Stability:
In our February Mena House View, we predicted that 2009 would be a year of correction for most real estate markets across the region, with further falls in prices and rentals being the norm.
The preliminary findings of the second Jones Lang LaSalle Investor Sentiment Survey confirm this, with respondents unanimous in their view that all the regional markets remain in the downturn stage of their cycle.
Driven by vanishing liquidity and the subsequent decline in investor demand, many of the regional markets have been characterised by a negative spiral which has been driving prices down over the past six months.
The key to reversing this "credit default spiral" will be a return in investor confidence. Just as markets feed off negative sentiment when they are declining, so they will feed off positive sentiment once the seeds of recovery are recognised. Characteristic of emerging markets, the recovery of real estate markets across the Mena region will be dependant on the rate at which potential investors become confident markets are close to the bottom and they are no longer faced with the prospect of further decline.
While different markets across the Mena region are at different stages in their cycle, most are expected to enter the transition stage over the next six to nine months as negative sentiment diminishes.
The timing of the recovery will also vary, but we expect 2010 to remain a year of relative stability before the markets experience a marked upturn as they move into the recovery stage during 2011.
Emergence of Recovery Signposts:
It is widely acknowledged that no recovery in the Mena region's real estate markets can be expected until confidence returns. We have identified a total of 17 primary factors that influence the level of sentiment or confidence in real estate markets across the region.
While some of these influences have now stabilised, none of them are yet showing any signs of a sustained recovery. None of the requirements listed yet have therefore yet reached the achieved status (green light). This reinforces our view that real estate markets are likely to decline further during 2009 before stabilising in 2010 and recovering in 2011.
- Oil Prices Appear to have Stabilised
The major factor driving economic activity in the GCC region is the level of energy prices. High energy prices have allowed the nations of the Gulf Cooperation Council (GCC) to almost triple their gross domestic product from $350bn in 2002 to more than $1 trillion in 2008, according to the International Monetary Fund.
The increase in oil prices widened the fiscal surplus of GCC economies to a record high, with an estimated $1.5 trillion in surplus being accumulated between 2002 and 2008.
While oil prices today are far below the levels reached last summer, recent production cuts by OPEC have succeeded in stabilising prices at above $40 per barrel.
Indeed, as shown by this month's table of leading indicators, the spot price for Brent Crude oil has increased by around 25% over the past month, crossing $50 last week for the first time since the first week of January.
- Ground Rules for a Return of Liquidity
An essential prerequisite for any real estate market recovery is for the global financial markets to be recapitalised.
Governments around the world have intervened to re-capitalise the banks and those in the Gulf region have made considerable and concerted efforts to underpin the financial sector over the past two months. Significant levels of liquidity have been injected directly or indirectly.
To date, this liquidity has not yet found its way back to the property sector, but this may be about to change. It is understood that over 50% of the $10bn of funding recently secured from the UAE Central Bank has been allocated to help finance the various real estate bodies operated by the Dubai Government.
There is also some $2bn of equity that was raised for real estate investment across the region over the first three quarters of 2008 that is currently waiting in the wings.
Much of this capital is now actively seeking deployment opportunities as investors seek to take advantage of distressed asset sales which are becoming available on an opportunistic basis.
Additional capital is beginning to pool as investors regain their balance and refocus on current regional opportunities. Some previously internationally oriented investment funds are being redirected to the regional markets.
Institutional investors are now looking more strategically at assets with long-term contractual income generally with 5-10-year leases with strong covenants.
Smaller deal sizes are more attractive, owing to restricted debt markets and more limited and valued equity.
This is leading to increased interest in alternative asset classes including industrial and work force accommodation as well as deals in the education, healthcare and infrastructure real estate related sectors.
Today, more than ever before, vendors and investors are more flexible and willing to explore creative deals that can be structured to meet their respective objectives centering around a shared pain - shared gain approach.
- Mixed Signals from Real Estate Markets
With prices falling significantly in recent months, more investors are beginning to see merit in re-entering the market. This is reflected by a doubling of monthly sales transactions in Dubai over the past month (from $250 to $520m). It must however be recognized that sales activity is volatile from month to month and that the number of transactions remains relatively low (at less than 400).
The credit crisis has resulted in a severe downturn in demand for commercial office space in most cities across the region.
Active demand has slowed to a trickle and many of the larger corporate requirements that were looking to lease (or pre-lease) space over the first three quarters of last year have turned into potential requirements with time-lines being pushed out to 2010.
While vacancies remain minimal in Abu Dhabi, Riyadh and Jeddah, they have increased significantly in Dubai where vacancies now exceed 15%, resulting in rents halving in some locations.
This is clearly a positive for those occupiers looking to expand their operations as landlords have come to recognize the value of their tenant's covenant and are now becoming more accommodating of tenant's needs for lower accommodation costs, better quality facilities and longer term leases.
Another positive factor has been the significant reduction in the proposed future supply pipeline as projects around the region have been placed on hold or delayed.
The Dubai market saw a 50% decline in the projected level of new supply due to enter the residential and commercial markets between 2009 and 2012 during the second half of last year.
This trend has continued over the first quarter of 2009 with developers either ceasing or slowing construction schedules to allow markets time to adjust to the new (lower) levels of demand. With construction costs continuing to fall, developers have the opportunity to renegotiate contracts with contractors who are increasingly keen to secure work.
- New Investment Paradigm
A new business model is likely to emerge for the funding of real estate development and investment in the Mena region. It is now generally recognised that the previous model, which was heavily dependent upon pre sales and the availability of developer financing, is no longer sustainable. A move towards models of financing seen in more mature real estate markets will be an inevitable consequence of the current cyclical downturn.
The recent announcement that "off plan" sales will only be conditionally permitted in select projects in Saudi Arabia represents a move away from the previous model. While it remains to be seen how this announcement will be enacted, a more regulated environment will be a positive move, while a total prohibition could have negative consequences.
This paradigm shift will involve a move from the previous develop and sell business model to one based around securing tenancies and holding assets to gain sustainable long term income flows.
The emphasis will move from high short term profits to long term predictable income streams.
- Concerted Government Action
While global tourism numbers have continued to decline, Mena is faring relatively well, being one of the few regions to experience a continued increase in arrivals over the first quarter of 2009.
Concerted government policies to promote their local tourist industries have been a key factor in this area. In Dubai, this has involved a major new promotional campaign, reduced fares on Emirates Airlines and government pressure to reduce hotel rates to improve the international competitiveness of the market.
Governments are also recognising the need to improve the level of corporate governance and real estate market transparency.
As we see a move towards a more mature development financing model, banks will wish to scrutinize projects more closely. This will require a much higher level of due diligence and a corresponding requirement for more accurate and reliable market data to be made available to potential investors.
One of the major changes to have emerged over recent months is a sense that governments across the region are now emerging from a period of inactivity with more concerted action plans to address the various challenges facing real estate markets.
This is starting to impact on sentiment as investors increasingly see the ruling authorities being more proactive in the development and implementation of realistic plans to address issues in a concerted manner.
Opportunity Outlook:
The current market conditions create significant opportunities for equity only investors and those who still have access to debt finance. Below we provide our outlook for investors looking to enter the Mena markets in 2009.
Abu Dhabi: While both demand and prices have fallen over recent months, we see significant long term potential for the Abu Dhabi market. The market is dominated by government-related groups that are beginning to proactively intervene to rationalize and delay projects, thereby avoiding potential future over supply.
The financial strength of the government will also provide a solid platform for continued infrastructure spending over the next few years. As with other markets, decreased construction costs and falling land values will result in higher returns, particularly on those projects at early stages of development.
Dubai: Given the correction in pricing that is now taking place, Dubai offers a range of options for opportunistic investors. While yields are likely to increase (with capital values decreasing ahead of rental values) in the medium term, the long-term outlook for the Emirate remains positive, particularly as supply forecasts decline with more and more projects being either cancelled or put "on hold". As with other markets, Dubai is expected to see a flight to quality which will make the selection of high quality well located assets with a stable long term income stream of paramount importance in sustaining value for investors.
Saudi Arabia: By far the largest of the Gulf markets, the opportunity for developers to capitalize on the significant shortage in middle and low cost housing abounds. While the mortgage industry in the Kingdom is currently somewhat limited, the growth of the end-user financing market will assist developers and investors in this sub-segment of the market.
Although decreased oil prices will negatively affect the economy and the ability to fund major infrastructure projects, Saudi Arabia posses a depth of underlying demand that is missing from many other Gulf markets. Watch for the development of the new Economic Cities which provide opportunities for investor participation, either directly or indirectly.
Qatar: The richest country in the Gulf in terms of GDP per capita, is somewhat better insulated through its large and more stable income from long term LNG contacts. The looming oversupply in the residential and office markets will however challenge the market in the short-term.
Bahrain: One of the least wealthy of the Gulf States is also likely to see higher potential returns due to falling prices, lower construction costs and the availability of more distressed sellers in the face of increased oversupply in the luxury commercial and residential markets. Bahrain also benefits from having one of the most established regulatory environments in the region.
Kuwait: With prices having fallen 40-50% for land and up to 30% for built product, increasing opportunities are emerging to acquire attractively priced assets from distressed sellers. Kuwait is well positioned to benefit from the stabilization and subsequent opening up of the Iraq market.
North Africa: In comparison to the GCC economies, finance for real estate development and investment in North Africa remains relatively available for both equity only investors and those requiring financing. Transactions are continuing to occur, given the undersupplied nature of many of these markets. JLL is currently marketing a portfolio of hotel properties in Morocco for which there has been considerable interest from both local and European investors.
See also
Average property value drop in Dubai at 30%
Dubai home financing to return 'with affordability'
Dubai's real estate industry 'at low point'
Post-slump Dubai rental yields to 'stabilise at 8%', but no agreement on end date for downturn
Posted by Siba Sami Ammari
