With the property market booming in Dubai, many retail investors are re-entering the market buying prime properties at choice locations.

Institutional buying, however, has lagged. In comparison with other locations, institutional investment in Dubai’s realty is minuscule and dominated by local investors and banks. According to a 2012 survey by E&Y, only 4.3 per cent of real estate private equity managers indicated that they are focussed on a Middle East exposure in real estate.

Institutional investors typically invest in income generating assets from a mid to long-term perspective. They target properties in prime centres with cashflows matching to that of a fixed income investment, which is usually achieved by long-term rental leases.

Research indicates that real estate remains the largest block of alternative assets for pension funds, accounting for 55 per cent of alternative assets. Real estate topped the list of investments by sovereign wealth funds from Norway to Qatar last year, rising to 26 percent of the gross from 14 per cent in 2011.

London is the biggest market for cross-border real estate investments by Asian and GCC sovereign wealth funds. The recent recovery in the US’ housing market has been driven by institutional investors pouring funds into residential properties and holding them until a full recovery. This has not only stabilized the market there but also provided good returns to investors who secured these assets at relatively low prices.

After the Expo 2020 win, Dubai has once again been in focus as business opportunities look set to increase. This has attracted attention of funds and large investors from Asia who typically sit on huge cash surpluses scouting for investment propositions.

They are, typically, looking at commercial buildings, retail space and hotels as key assets since they directly stand to benefit from the Expo. Many local institutions such as Emirates REIT have also expanded their investment portfolio by accumulating assets such as the recent purchase of a floor at Index Tower.

Lack of transparency

However, no major deals have been done by international investors over the recent past. We had a Singapore fund that showed interest in Dubai property but they ended up investing significantly less than the original budget. It is the lack of transparency and procedural bottlenecks that prevent international funds from committing large sums of money into the market.

There is no real clarity on demand trends in either the residential or office markets. The risk profile is still perceived to be higher than other international locations. Another issue is that key properties are owned by local families who have a long-term holding interest and little or no desire to sell their assets.

We believe there is tremendous opportunity for institutional investors in the commercial sector as the market is beginning to stabilise. Strata ownership in most of the commercial building provides an opportunity for institutional investors to purchase and repackage the properties to suit the needs of multinational corporations in a better way and consequently secure long-term leases and enhance portfolio returns.

The regulatory framework also needs to be modified to accommodate operational ease for international institutional investors. At the moment, any entity looking to invest in property needs to have an commercial license and an office set-up to do so. However this practice is perceived to be operationally cumbersome by many investors.

Institutional investors

The recent crises has also led to investors desiring more control over their funds — these should also be accommodated by providing for a visa and power-of-attorney relaxations to institutional investors. More investment vehicles will also raise the exposures from those investors who do not wish to invest in real estate directly but would rather go through a real estate investment trust (REIT) or other non-direct means with easier exit options.

Arbitrary valuation methodologies have also driven away institutional investors in the past. An organised framework must be created to ensure valuations are transparent and objective.

Regular and consistent reporting is also critical as fund managers are accountable for their allocation decisions and need to rely on accurate information.

The writer is the country manager - UAE at Chesterton International.