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Tracking Investor Sentiment in the Middle East


17 Apr 2010

Craig Plumb Andrew Charlesworth

Craig Plumb, Head of MENA Research, Andrew Charlesworth, Head of MENA Capital Markets, discuss the results of the latest Jones Lang LaSalle Real Estate Investor Sentiment Survey, Middle East & North Africa

Key Points

Sentiment shows greater stability.  Sentiment towards the majority of MENA markets has remained broadly similar over the past six months. This stability is considered a healthy sign, reflecting the on-going maturing of these markets.

Two clear drivers of investor sentiment are emerging:

Local demand is key with investors favouring those markets with large local populations and a strong domestic demand base.  Investors are relatively optimistic about the markets of Saudi Arabia and Egypt on the basis of their large local populations.

 Energy-rich markets have the necessary capital to support large scale infrastructure and will benefit from potentially higher oil and gas prices as the global economy recovers. The markets of Saudi Arabia, Abu Dhabi and Qatar have continued to be viewed favourably by investors on this basis.

Saudi Arabia emerges as the clear local winner.  Being the only MENA market to score highly on both of these drivers, investors expect Saudi Arabia to experience the strongest real estate performance over the next 12 months.

Greater Focus on North Africa. Egypt and Morocco are viewed as attractive real estate markets by investors due to their strong local populations, the relative lack of new supply over recent years and the  availability of income producing assets.

More buyers than sellers in most markets.  To date this has not resulted insignificant sales volumes as there remains a lack of institutional stock being offered at the level of pricing being sought by investors.

Yield expectations have increased by an average of 90 bps over the past 6 months.  This has contributed to the lack of sales activity as it has increased the price gap between investors and vendors.

What were the key points to emerge from the survey?

The first point to emphasise is that there is far more stability and the results of the survey were not dissimilar to the last survey conducted in October 2009. On the one hand you could say that this is a positive sign because investor sentiment is not getting any worse. However, on the other hand we are still not seeing any real increase in expectations of transactions volumes or pricing growth.

The second key theme relates to investors and what factors are influencing their investment decisions. A couple of points have emerged quite clearly. The first is that investors are now looking at centres of high population where there is an indigenous demand or a large population that will drive demand going forward. This type of demand is considered important because it means less reliance on the global economic environment in terms of creating jobs etc. The second key attribute appears to be an emphasis on countries that have a strong underlying economic base such as  the presence of hydrocarbons. If you take those two points and correlate those to the countries that are more interesting from an investment perspective, we see that Saudi Arabia remains the most interesting investment market in the MENA region.  It has both a large and growing population as well as an energy based economy.

There are signs that Egypt is also now starting to move up the ranks quite rapidly. Again a large local population base, a relatively neglected real estate sector, congested inner city and the fact that the country has broadly escaped the effects of credit crises has resulted in increased investor interest in this market.  Whilst 30% of respondents to the investor survey felt that Saudi Arabia would be the strongest performing market over the next 12 months, Egypt has gone up from 6% to 13%.

The markets which fall into the category of energy- rich economies and thus are perceived to have a positive investment outlook due to their financial strength are Saudi Arabia, Qatar and Abu Dhabi.

How does Abu Dhabi rank compared to last year?

Twenty six percent of investors said it would be the number one market compared to 25% last year, so there has been virtually no change. Saudi and Abu Dhabi were first equal last year, but Saudi has pulled ahead slightly. The interesting point about Abu Dhabi is that there is a tremendous amount of supply coming through and if you look at the statistics, the market is heading for significant potential oversupply. On the other hand, it has a huge infrastructure development programme which should go some way to absorbing that excess supply.  For example, it is estimated that the nuclear power programme could employ 14,000 people over the next few years, and it is these sorts of industries which are going to drive demand. Abu Dhabi also has financial strength. We asked respondents to rank the most competitive cities and Abu Dhabi scored highly on four key factors – financial strength, availability of liquidity or capital for investment and on providing support to the real estate sector.  Dubai however, was the clear winner in the remaining categories in terms of infrastructure, quality of life and progress over the last ten years.

To what extent do you think investor sentiment towards Dubai has been affected by the Dubai World debt restructuring?

The reality is that Dubai World was an issue that was sending negative signals to the rest of the world. It was a negative problem that has been dealt with successfully and although this will not kick- start the economy in its own right, it will help prevent things from getting any worse.

One point that did come out of the survey was that investors are less concerned about transparency than they were six months ago. Regulation, legislation and risk are the most important factors that people are really focusing on now in terms of how they are making their investment decisions. Risk was also ahead of rate of return so institutional investors are focusing their attention on limiting downside risk rather than chasing high returns on the upside.

Are many transactions taking place?

An interesting point to come out of the survey was that there are still active institutional buyers in the market across the region. In fact the survey indicated more buyers than sellers. However, there are still relatively few transactions taking place and there are probably a number of reasons for this. First of all in the UAE for instance, the Government has provided substantial financial support to the local economy and the banks have worked to re-schedule loans. The result is that widespread forced sales or re-capitalizations have been limited which has prevented the market being flooded with cut price assets. Many of the buyers who are looking to buy are really after ‘distressed’ prices but due to the limited foreclosures there have been limited investment options. In general there remains a mismatch in pricing expectations between buyers and sellers and a lack of motivation from either side to close the gap.   Consequently whilst there has been a lot of talk about distressed funds and ‘vulture’ funds we have not seen these materialised in the way expected.   

As a result of this, what do you think will galvanize the market?

The general sentiment seems to be that the global economy is beginning to improve and so it would be expected that those markets which are more aligned to the global macro environment are likely to benefit from this improvement. Dubai would be an obvious case with an economy focussed on finance, tourism and trade. As these sectors improve one would expect Dubai to benefit particularly as the country is now more competitive as a result of the price reductions. Other markets such as Saudi Arabia and Abu Dhabi should benefit from higher oil prices which we expect to occur again as the global economy gathers momentum. Increased oil prices should mean increased budgets and opportunities to press ahead with wide-scale infrastructure programmes.  

If we go back to the survey and review what the respondents think – general sentiment suggests the region will see recovery occurring over the next 12 months but for Dubai the expectation was that recovery will more likely be seen in around 24 months.

Do you think Middle East investors will look regionally to invest or do you think they will look for international opportunities?

We asked respondents which regions in the world would show the best returns over the next year, and Asia Pacific was by far the big winner. 46% of the respondents this time compared to 36% last time stated Asia Pacific would be the market they would expect to see the strongest performance globally in the near term. The Middle East went down slightly, it was 26% and is now 23%.

What were investor expectations in terms of yields?

We asked respondents about their yield expectations today versus where they were six months ago. What they have suggested is that their yield expectations have increased from 10.4% in October 2009 to 11.3% today. That is blended yields across different real estate markets and sectors. This illustrates the point that despite people being more stable in their thinking, there has been a slight drop in value expectations compared to six months ago. So on the one hand we see values having dropped slightly since our last survey in October 2009, but on the other the sentiment was that values in most MENA locations will improve over the next 12 months. 

Specifically, average yield expectations across the MENA region have increased by around 90bps over the past 6 months.  This reflects ongoing concerns over softening market conditions and potential oversupply in many markets. Yield expectations have increased everywhere with the exception of Qatar where they remained the same (10.7%).

Yield expectations have expanded in all sectors of the market over the past 6 months with the exception of hotels where they have dropped marginally.  Investors have demonstrated a greater differentiation between markets and sectors. Most notably, the logistics sector saw the largest increase in yield expectations growing from an average of 10.3% in October 2009 to 12% in this survey. This increasing yield expectation suggests that investor confidence in the logistics sector across the region may be waning.

 Similarly, the retail sector has also seen a 140bps increase in yield expectations – reflecting the reduced spending and increased supply experienced in many markets across the region.

Which asset classes are generating the most investment interest and are there any emerging asset classes?

In a number of markets the most popular traditional investment sectors of residential, offices and retail have been the ones most impacted and which suffer from over supply issues. Investors are clearly wary of these sectors so unless there are compelling investment reasons they will tend to be avoided.

Investor focus has shifted to previously untapped sectors such as low cost housing, again particularly in high population destinations such as Saudi Arabia and Egypt. Other real estate asset classes of interest include logistics, particularly where there is a lease in place to an international occupier. Other non-traditional investment sectors are also attracting interest and these include healthcare, education and staff accommodation – in general anything that can show stable revenue, good underlying demand and limited new supply. There is very much a ‘back to basics’ investment mentality.

As eluded to earlier cash is king and income and revenue stability are key investment decision making drivers. Investors are focussed on longer term secure income rather than development opportunities or land transactions.

Do you think there will be development opportunities in Saudi and Egypt?

Yes, Saudi and Egypt will continue to see development and another reason people are getting excited about Saudi is because of the new mortgage law. Historically you couldn’t get a mortgage to buy a house so if the new mortgage law is passed it should open up a whole new market dynamic as developers will be looking to take advantage of the inherent demand for houses aimed at the local domestic market.  

Similar demand for affordable housing exists in Egypt and there is plenty of development occurring on the outskirts of Cairo.

In conclusion, whilst transactions volumes within the institutional investor market remain subdued across the region investor appetite remains quite firm and broadly investors remain optimistic for prospects over the next 12-24 months. However, investors are much more cautious in both the types of investment they seek and where as well as are much more price sensitive. In the absence of motivated sellers we expect volumes to remain subdued and activity to remain focused on those markets with the higher local populations and / or that have a strong  economic base that can support the real estate market.     



Source: Cityscape Intelligence