Middle East property market weighed down by pricing, supply issues

The poll of 30 institutions with investments in local real estate revealed that nearly 75% had funding in place and were actively seeking investment opportunities in the Mena region this year, compared to only 7% that were looking to decrease their level of exposure.

Respondents also indicated that they plan to invest up to $6bn in the real estate market over the next one year, but this figure might be inflated because many funds may be trying to tap the same capital sources, the report said. Based on individual transactions, the most common deal size sought was between $20m and $50m.

However, the report revealed that interest in the Mena real estate market remains limited to investors located within the region due to a number of mitigating factors. These include unrealistic pricing, lack of suitable investment grade products, regional economic and political uncertainty, and lack of transparency with investment offerings with distribution constrained to a small number of local buyers.

"Investors want to increase regional exposure (especially to office assets) and have the capital in place, but remain constrained by product availability," wrote Andrew Charlesworth, JLL's Head of Capital Markets - MENA. "There is a shortage of commercial assets in prime locations with high occupancy and strong tenant covenants and, more importantly, owners rarely want to dispose of such assets."

Regional funds look to remain in Middle East

So while regional funds remain focused on investing in their home market, international investors are turning to developed markets such as Europe and the US in hopes of finding a more attractive level of risk adjusted returns, which means the Mena region is missing out on foreign institutional investment.

"We maintain the Mena market has the potential to capture a higher proportion of global real estate capital flows, but the restricted product offering and opaque market processes continue to inhibit transactions and delay market recovery," JLL said.

The report also found a distinct polarisation occurring between those countries perceived as stable, such as UAE and Saudi Arabia, and those still characterised by political uncertainty. "In the prevailing atmosphere of risk aversion, factors like political stability and security of income are at the forefront of investment decisions," the report said.

Another key trend to emerge is "backyard investing", which means investors are focussing on markets they understand and within their perceived sphere of influence. "Even though other emerging markets are consistently perceived as having higher growth potential, relatively few investors are deploying capital in those distant markets," the report said.

Office is most attractive sector

Although there is general interest across all asset classes, investors remain focussed on the office sector in the region. "This is ironic because, in various markets across the Mena region, burgeoning office oversupply will increase risk in this sector over the short term," the report noted.

Mena-based investors also expressed interest in the low to middle income housing sector as this was neglected when the market was at its peak. In particular, regional developers and investors see opportunity in partnering with local governments to develop low cost housing, the report noted.

Driven primarily by supply concerns in almost all sectors, investors anticipate further drops in property prices in many Mena markets. The highest declines were expected in Abu Dhabi, while Dubai was expected to stabilise.