Dubai: Residential property is no longer the only asset class that wealthy Middle East investors want to park their funds in. These days, they are just as likely to look out for commercial realty or hospitality-specific properties. It all has to do with yields, or to be more precise, the lower growth rates residential investments in Dubai are fetching now.
“A year ago a regional investor would have immediately committed to a residential property yielding around 7 per cent (annualised) because they felt there was an upside for it to go higher,” said Gaurav Shivpuri, Head of Capital Markets — Mena at the consultancy JLL. “Now, the same investors would baulk at a similar exposure because the expected yield growth is just not happening.
“Yield growth (and for high networth investors that is the key takeaway from any asset exposure) on residential in Dubai has been coming down. And as of now, there are very few transactions taking place to give an indication of where yields are headed in the short-term.” (JLL on Tuesday brought out its ‘Mena Real Estate Investor Sentiment Survey’, now in its ninth edition.)
For local developers with recent project launches or planning some, investor apathy can disrupt their plans. All through the upturn in the last two years, they have relied on the wealthy cash buyer rather than end-user to clear their inventory. This trend is most apparent within the premium end of the property market.
With most of the recent launches again skewed towards the high-end, transaction levels have dipped as prospective investors look to other options.
While that may be dispiriting for developers of residential projects, those with offices or hotels are sitting pretty. There have been a few major transactions involving hotel projects, involving one at JBR with which JLL was associated.
‘There remains appetite for office assets in the UAE, however the lack of available investment-grade product (single-owned ‘Grade A’ office space) has historically resulted in low transaction volumes in the sector’, according to the survey. ‘While some respondents wish to invest in the retail sector in the UAE, the market remains largely dominated by specialised developers leaving little room for investors’.
“Beyond Dubai, Middle East investors are looking at residential and industrial opportunities in Saudi Arabia, with yields in the 8-plus range,” said Shivpuri. “But there are facing still competition in the deals from domestic Saudi investors who do not mind even slightly lower yield generating assets. Plus, most of the transactions are financed by cash and that means there is less need to engage in speculative buying and selling.”
Egypt is another destination where regional investors see possibilities, more so after the recent elections. But pricing continues to factor in political risks.
Outside of the region, Central London remains a favourite hotspot, though yields now range between 3.5-4 per cent. “More regional investors could renew their acquaintance with the US property markets,” said Shivpuri. “There’s a sentiment towards taking on slightly more riskier real estate assets as well.”
In fact, the JLL survey shows 32 per cent of respondents expressing interest in “core plus/value-add projects, an increase from the 27 per cent in 2013, as yields tighten and it becomes more lucrative to invest on a risk-adjusted basis’. But, at the same time, 42 per cent of those polled continue to focus on low-risk, income-generating assets with stable cashflows.
More than at any time in the recent past, investors are willing to sell their assets, with 14 per cent of respondents identifying themselves as potential sellers compared to 6 per cent in 2013. ‘This signals a possible change in opinion among some investors on future value appreciation potential’, states the survey.
