We are often asked why the Dubai real estate market attracts so much interest from investors in emerging markets relative to investors from more mature western markets. Our data shows this continued to be the case in 2013, with almost all sales during the year being either to local investors or those from emerging markets in the region and beyond. So, why is this?

The Dubai real estate sector has attracted vast investments from overseas players since it was first opened up around 10 years ago and the ability of foreign parties to purchase freehold properties remains one of the major attractions. Data from the Dubai Land Department show a total of Dh151 billion of land and completed property was transacted over the first 11 months of 2013, an increase of more than 30 per cent compared to the same period in 2012.

While no breakdown of this by nationality is yet available, data for the first-half suggests that foreign purchasers accounted for around 60 per cent of sales. Indian investors were the largest foreign purchasers accounting for 27 per cent of sales, followed by the British (17 per cent), Pakistanis (15 per cent), Saudi Arabians, Russians and Iranians.

Britain is the odd-man out in this list, being the only mature economy, with the others being firmly in the camp of emerging economies. While investors from Britain have figured among the Top 5 international purchasers in Dubai consistently in recent years, this data relates to country of passport and not country of origin, with many of the “British” investors being ethnically south Asians.

Global investment data

While Dubai continues to attract vast volumes of investment capital from emerging markets, there have been far fewer purchases by the more “institutional investors” such as listed property trusts, Reits, insurance companies and insurance funds that dominate the real estate market in more mature western economies.

Data collected by Jones Lang LaSalle show total global investment in completed commercial real estate totalled more than $360 billion (Dh1.3 trillion) over the first nine months of 2013, with total transactions for the year expected to top out at between $500-520 billion, making 2013 the highest level of transactions since before the financial crisis in 2008.

The vast majority are in established and mature western markets. The concentration of activity is so great that the Top 7 global cities — London, New York, Paris, Tokyo, Singapore, Hong Kong and Los Angeles — account for more than 25 per cent of all real estate transactions. In comparison, there has been very little investment into completed commercial properties in the Middle East, with the region remaining a major exporter of real estate capital. In the first nine months of 2013, there was a total of just $116 million invested in such projects in the Middle East (or 0.3 per cent of the global total).

Dubai market

Why is Dubai real estate so much more attractive to private buyers from emerging markets than it is to institutional buyers from more mature markets? The answer lies partly in the nature of the market and partly in the psyche of investors.

The Dubai market remains relatively young and immature in global terms, with land accounting for around 70 per cent of all investment in 2013. This is a sector that is more appealing to local developers and private investors from emerging markets that typically have a higher risk aptitude.

By contrast, institutional investors from more mature markets typically prefer completed and income-producing assets with a secure and stable long term cashflow.

There is a distinct lack of such assets offered within Dubai, where developers typically either sell to multiple investors (strata title) or retain assets themselves. There is a high degree of overlap between developers and long-term real estate owners in Dubai, with major developers such as Emaar, Nakheel and Majid Al Futtaim selling their residential projects to individual investors while retaining the commercial assets.

As the Dubai market matures and becomes better regulated, it will attract more interest from institutional investors from more mature markets. This will take some time and in the meantime the market will remain dominated by investors from emerging markets willing to pay a higher price due to their attitude towards risk.

A consequence of this trend is that the market is likely to remain relatively volatile and subject to wider swings in values than more stable mature markets.

 

The writer is the CEO at Jones Lang LaSalle, Middle East and North Africa