Property funds target UAE industrial assets before they turn pricey

Dubai: A home or an office? Or should it be a warehouse?

More real estate funds active in the UAE are focusing on the third option to counter a soft property market, while at the same time picking up warehouse and other commercial assets when they are still relatively cheap. The ENBD Reit (real estate investment trust) definitely will be one of them.

By summer, it expects to have two or even three industrial assets in Dubai to the fund’s portfolio, for which it will spend between $50 million to $65 million. In a tight market where investors are cautious about every available cent or fil, that’s quite a substantial sum.

When that happens, ENBD Reit would have picked up its first industrial real estate, which also consist of logistical facilities and light manufacturing units. So, why this sudden interest in this asset class when it has a $456 million portfolio made up of offices, residential and small retail outlets?

“Right now, 64 per cent of what we have are office properties and 18 per cent residential,” said Anthony Taylor, Head of Real Estate at Emirates NBD Asset Management. “What we want to do is start investing in the alternative space, which is whee industrial comes in.

“In the past year and more, there had been some speculative activity surrounding industrial assets with small tenants on short leases. And they have felt a bit of pressure with all the additional stock coming to market.

“But what we are looking at are single-tenant assets on long-term leases. Lots more of these properties are coming around the new Dubai Airport and Expo 2020 site.”

Indeed, the immediate areas surrounding these sites are rated as prime prospects — but Taylor says it’s not just to do with the buzz of activity heading into the Expo 2020 time frame.

“The Expo is a point of time just around the corner,” he said. “While the infrastructure that has gone up around the area certainly had a positive impact on property values, it’s not the reason to invest in industrial assets now.

“It’s more about the traction that you will eventually have with the (Al Maktoum International) Airport, which is the key for businesses wanting to be in that location. The closest we have got to is Dubailand … but that’s going to change.”

In fact, the wider Jebel Ali area has seen multiple free zones being set up, targeted at industrial, warehousing and other services. Within the Dubai South master-development itself, there are dedicated clusters for such activities. What this does is also offer businesses to think beyond the Jebel Ali Free Zone as their future bases in Dubai.

Other developers and funds too are scouting around in the area for commercial real estate possibilities. The CEO of Dubai Investments, Khalid Bin Kalban, said that the company will shortly announce plans to set up a new and massive investment park in the UAE, along the lines of what it did in Dubai Investment Park spread over 2,300 hectares. But the market chatter is that Dubai Investments will pick a spot in Dubai itself, somewhere in Jebel Ali, for its next investment park, and which would provide future boost to commercial/industrial property.

Taylor sees other reasons for why now could be a good time to pick up these — “What we are seeing now is a much greater ability to transact in a softer market. As a buyer it’s easier to execute, as there are only a few sellers with a wait-and-see approach. Definitely, there are more opportunities than we’ve seen before.”

Some of it also has to do with a change in mindsets of master-developers/free zone operators. Industrial assets tend to be acquired on long-term leasehold, of 50 years and more.

“That makes it slightly less attractive for institutional investors like us, though there are ways to work around it,” said Taylor. “This comes back to master-community developers entertaining our business strategies.

“The ground leases need to be of a fixed term and contractual in nature. Currently, there are a lot of moving parts in these ground leases, which leave things open to interpretation and that’s not goo. For institutional investors, these need to be locked in.

“For example, the leases should only have fixed increases through the term of the contract. And master-developers cannot decide on open market reviews at various points in time during the agreement. There should also be fixed contractual rights on renewals and to be determined by both parties.”

What Taylor means is that the free zone operators unilaterally decide to hike lease terms because of demand in the wider market.

Are they willing to listen? “It’s getting to be more common now,” said Taylor.

In warehousing, Grade A is where demand is

In Dubai, demand for Grade A warehouses remained high through the first quarter, according to Cavendish Maxwell’s latest update. But this space “remains underserved due to an increased supply in the easier-to-build Grade B and C spaces,” the report adds. “Overall, flight-to-quality helped to push sales prices and rental rates of high-quality and well-specified assets up in Q1-19, especially due to the lack of Grade A supply. “

In Abu Dhabi, the government has made the move to allow foreign-owned businesses full freehold rights in investment zones. This would apply to some of the industrial areas as well, and help draw in more investments going forward. Developers such as Aldar have in the recent past spoken about getting into building industrial assets.