Investment climate looking up

Abu Dhabi looks set to be the strongest performing MENA real estate market over the next two years, according to the results of a survey of 200 of the region’s premier investors.

“With Abu Dhabi and Saudi Arabia suggested as hot spots for investors in the coming years, the MENA region looks set to grow in significance even further”

Abu Dhabi will be the stand out market for real estate investors, according to findings from the second annual Investor Sentiment Survey, an in-depth study of real estate professionals’ market views conducted by Jones Lang LaSalle in association with Cityscape. The report also reveals that, increasingly, investors are returning to invest in fundamentals with more weight being attached to regulatory issues and market risks than six months ago. According to the investors surveyed, markets will begin to recover in 12-18 months – a view consistent with Jones Lang LaSalle’s view that 2010 will be the optimal year to have invested in for the MENA region.

Jones Lang LaSalle’s Investor Sentiment Survey incorporates the views of over 200 developers, sovereign wealth funds and high net worth investors, and provides an ideal benchmark for the state of regional real estate markets.

Ian Ohan, Head of MENA Investment Transactions at Jones Lang LaSalle, commented: “Sentiment, be it positive or negative, drives markets. Since we last undertook our Investor Sentiment Survey in September 2008 in the aftermath of the Lehman Brothers collapse, sentiment has, without doubt, fuelled a dramatic change in the health of the MENA real estate sector. This is, therefore, a vital piece of research with contributions from the many of the region’s leading investors.”

As one of the world’s leading real estate advisory organisations, Jones Lang LaSalle sees many positives in the report. “That investors are returning to investment fundamentals such as focusing on yield is a welcome finding as is the suggestion that there is, at last, an end in sight to the current turmoil,” continues Ohan. “With Abu Dhabi and Saudi Arabia suggested as hot spots for investors in the coming years, the MENA region looks set to grow in significance even further.”

Andrew Charlesworth, Head of Corporate Finance Advisory Jones Lang LaSalle MENA, agrees. “The rebuilding of investor confidence is critical to institutional and fund based real estate investment,” he says. “We are beginning to see the return of investor interest in discretionary funds that provide sound investment strategies, professional and credible management and proprietary deal flow.”

Key findings
The Middle East was the last region to get hit by the global downturn. Capital values and rentals in the Middle East only started to decline in the final quarter of 2008, whereas other markets in the world had already been in decline for some time. Nonetheless, Middle East real estate markets have reacted relatively quickly over the past six months, with prices adjusting to the new market realities, and governments across the Middle East region have been swift to react compared to their counterparts in more mature economies. Concerted efforts are being made to stabilise the regional financial and real estate markets after the initial damage assessment.

Despite the downturn, however, Middle Eastern real estate markets continue to outperform globally. Around 36 percent of respondents consider that the Middle East will have the world’s best performing markets over the next 12-24 months, confirming the view that the Middle East will outperform real estate markets in other regions over the next two years. Opinions on regional markets confirm the view that there is a shifting focus of sovereign wealth funds and major regional investors into their local markets. Of the international markets, Asia Pacific, North America and Western Europe show the greatest potential, with London top of the list of those looking to invest internationally.

Within the MENA region itself, Abu Dhabi is seen as the market likely to perform the best over the next 12-24 months. A balanced growth story to date, vast oil wealth and a relative undersupply of housing and other asset classes makes the emirate the most attractive investment environment of all the major markets in the region. Saudi Arabia was considered by a quarter of respondents as likely to be the most robust market in the next few years. Jeddah and Riyadh offer the most potential, according to the survey, with the new economic cities starting to hit the market towards the end of the year. Vast under-supply of housing, notably in the middle-income sector, will continue to drive demand in the largest of the Gulf economies.

Qatar’s potential was also noted by respondents, with almost twice as many as last year suggesting it would outperform other markets. Strong GDP forecasts and vast per capita wealth make Qatar the most protected from a protracted global downturn. Significant future supply may, however, temper real estate performance in the new term.

Recovery set for 2010
All MENA markets are currently in the downturn stage of their cycle, with Saudi Arabia least affected, according to respondents. Dubai will be the market hardest hit, and is thus the furthest market from recovery. The emirate has been hit by a combination of the international downturn as well as a significant level of new supply coming on to the market; however, with significant adjustments in capital and rental values already in place, Dubai may prove to be one of the most lucrative real estate investment opportunities in the region over the next 12-24 months. Other markets not developing at this pace and able to learn from the Dubai model are better protected.

Nevertheless, there is a relatively narrow band of sentiment of the likely recovery time for markets within MENA. Half of those surveyed believe KSA will start its recovery within the next 12 months. Meanwhile, 36 percent of respondents believe that liquidity will return to the market in the next 12 months, with a similar number suggesting that this will happen in the next 12-18 months. This supports the view of a broad recovery in 2011.

Falling prices create greatest opportunity
2009 will see a further erosion of values in all markets – KSA will see the smallest drops, with Dubai the worst hit. This price adjustment is expected to aid Dubai considerably as investors are attracted back at fairer values and with greater yields. Early signs of such activity is already visible.

Yield expectations have increased everywhere, with investors expecting yields of greater than 11 percent – higher than the nine percent figure revealed in last year’s survey. This yield shift represents a decrease in expected capital values for income assets of around 20 percent by respondents and 40 percent from peak actual traded values, consistent with London and other major centres that entered the downturn at least 12 months prior to MENA.

“As the signposts of recovery begin to emerge globally and regionally, experienced investors that understand the significant lead time to properly review and complete transactions are keen to not miss out on these value investment opportunities and are already pursuing deals,” concludes Ohan.