Dubai Residential REIT, flynas IPOs show GCC markets primed for action

Despite the uncertainty surrounding the US tariff tsunami - and the interconnected second order impact that it has had on asset prices - the IPO juggernaut in the GCC continues. Unabated…

flynas out of Saudi became the latest candidate in offering its shares to the public, amidst reports that the Kingdom is expected to have as many as 56 new listings in 2025.

In Dubai, Dubai Holding announced a pure-play residential REIT, allowing investors to capitalize on income and growth opportunities in real estate in a frictionless and low-cost manner.

Earlier reports indicate that the amount of investment in the GCC equity markets had doubled, suggesting that liquidity spigots continue to move towards the Middle East as the world continues to reevaluate the ‘Rest of the World’ trade in capital markets.

Despite the incredulity expressed by the median investor regarding the fallibility of US markets, there is a growing consensus that opportunities abound in the rest of the world, with the GCC markets now vying for a significant chunk of foreign flows.

As relative valuations in the rest of the world come into focus, there will be many candidates who will be the beneficiaries of such foreign inflows. It is important for the value investor to distinguish between what David Hume called ‘relations of ideas’ and ‘matters of fact’.

It is a fact that in the investing world, professional money managers on aggregate have underperformed the so-called ‘amateur investor’, nowhere more so than in the developed markets.

In point of fact, it is the only industry that one can point to where professionals have produced inferior outcomes. The response has been typical: to ignore these results.

Yet there are important underlying reasons why this has repeatedly happened and diversification - or ‘deworsification’ as the late great Charlie Munger described - is not the reason. Rather, it has been an ability to understand the underlying business, by looking at its business model, looking at its competitors (or lack thereof in the case of companies like Salik and Parkin), and identifying its intrinsic value.

When this happens, the obsession with daily price movements become of little consequence for the business investor. Price falls (in the case of companies like Lulu) become opportunities to add to holdings.

What is clear that the GCC markets have garnered increasing amounts of attention, and will draw greater inflows as index weightages increase in these markets, triggering further inflows by institutional inflows from funds whose sole mandate is to ‘index hug’.

This involves chasing down every single idea, and yet success is achieved not by chasing down every single idea, but rather avoiding big mistakes. (As Warren Buffett has repeatedly claimed.)

The dialogue around the IPO train in the UAE has been the relative performance of some of the companies. But we know from Western markets that the performance of the business has very little to do with what its stock does over extended periods of time.

The correction factor that has to be put into place is to identify the business and then position oneself to capitalize on price falls, for ultimately the business model. (The ideal one being one that has a high marginal return of capital or ‘drowns in money’).

As GCC markets continue to grab the attention of money managers, increasing liquidity in secondary markets, the value proposition of the investor has not changed. It remains one of identifying outstanding businesses - whether in primary or secondary markets - and then hold on to it forever, letting the compounding process take over.  

The IPO boom increases the ability to identify such businesses, whether through its capital structure or through its product. And the GCC markets continue to provide the most fertile ground in the current investing cycle.