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Tracking Investor Sentiment in the Middle East

19 Apr 2009

Jones Lang LaSalle in association with Cityscape Intelligence is delighted to present the findings of the second MENA Investment Sentiment Survey.

Summary Points

• The results of the survey are significant in that they represent the sentiment of regional market players in the context of a looming global financial crisis. Investor sentiment is clearly a strong barometer for the health of any market and can either be a catalyst for investment activity or can block activity. What is clear is that during the last 6 months, the region has experienced a strong market reversal and is perhaps one of the latest cyclical entrants to the global financial turmoil.
  
• It is encouraging that MENA investors remain most confident in the performance of MENA during the next 24 months versus the rest of the world. Within MENA, Abu Dhabi has been identified as the strongest future performing market followed closely by the Kingdom of Saudi Arabia and Qatar. This is not surprising as investors seek shelter in strong performing economies. Interestingly Dubai is still seen one of the top four strongest performing MENA markets, although rated with roughly 50% of the enthusiasm of the previous survey in September 2008.
  
• In addition to high expectation for real estate performance, Abu Dhabi has been identified in the broadest terms as the stand out over-all market performer, with respondents consistently rating it number one, with respect to the quality of its planned infrastructure, real estate vision, political stability, corporate governance and environmental sustainability agenda. Dubai received the second highest scores after Abu Dhabi, followed by Qatar.
  
• In terms of real estate market recovery, approximately two-thirds of respondents believed that the region would recover within the next 18 months, with earlier recovery expected for Abu Dhabi, Qatar and the Kingdom of Saudi Arabia. Notably, Dubai was seen as the market that would take the longest, between 18 to 24 months for recovery, consistent with its more advanced stage of the real estate cycle.
  
• The question of future increases or decreases in asset values followed a similar pattern. With the exception of Jeddah and Riyadh, where respondents believed real estate asset values would increase slightly in 2009, the remainder of the MENA markets were expected to see asset value decreases with the largest drops expected in Dubai. This is largely consistent with investors’ expectation with respect to the availability of debt finance which was generally agreed would not return within the next 12 to 18 months.
  
• In making investment decisions today, investors are most concerned about the adequacy of the regional regulatory environments and the associated market risks. This is in stark contrast to the results from the 2008 survey, where investors’ primary concern was maximizing capital gains. The region’s ability to address these concerns will be one of the required pillars on the road to recovery and the restoration of investor confidence.

Ian Ohan, Head of Investment Transactions, Jones Lang LaSalle, discusses the findings of the second Investor Sentiment Survey with Catherine Walker, Editor, Cityscape Intelligence

What are the main points that have been raised by this latest survey?

The most interesting thing we have seen is the decline in confidence in the Dubai market. Dubai was the furthest along the growth curve and has been the hardest hit in the short term.  The other point that is very interesting and is the number one most critical item in terms of investment, was  the issue of the regulatory environment and market risk. Previously it was capital growth so obviously there has been a huge change in the approach to the market. A further point of note is the emergence of Abu Dhabi as the rising star.

Interestingly, there was less concern about availability of finance. Six months ago there was no concern about availability of finance and although this time it was ranked slightly higher as a critical concern for investment, it was not a top priority. I think because there is no finance available generally in the market, it didn’t come up as one of the top four criteria in investment considerations.

Investors certainly want to see a more stringent regulatory environment. The reason this was significant was because based on what has happened in the last few months, it seems that investors have pointed to the fact that an insufficient regulatory environment has led to some of the issues they are facing today.

Do you think a slowdown in the market will allow some of these changes to be implemented and for markets to settle?

It gives the whole region an opportunity to do that and I think this is a much needed pause in the market cycle. We have been in very heated, unsustainable growth mode in 2008 and the markets need a chance to move towards a strong regulatory environment, to continue and improve infrastructure, improve the banking systems and to strengthen regulatory and corporate governance. This is a much needed hiatus and all the regions will benefit from that.

Do you think valuations of property will become more stringent to avoid rampant speculation in the future?

I think that is absolutely right and it goes back to the issue of transparency which we logged with the regulatory environment. We are involved with some of the government task forces in terms of looking at regional issues. The two major issues that these task forces and global economists are trying to resolve are how did we get here before we try and find out what the solutions are so this situation is not repeated. The two primary areas of concern are that the regulatory environment was not robust enough to deal with the international investment and the second issue was the lack of transparency and the lack of availability of information upon which investors can make decisions. RERA have a huge mandate in front of them in trying to address all of these issues simultaneously but the government is very committed to making Dubai’s regulatory environment among the best in the world.

Do you think the issue of residency had a negative impact on the Dubai market?

Dubai was not clear enough on this at the beginning. Developers said to investors that if required, they would process residency visas but at the end of 2008 it was stipulated they didn’t have the regulatory power to do that. The Federal government said developers were not in a position to do that because it is an immigration and security issue. So at the end of 2008 when the issue was raised, it was a very negative signal to the market but the details have still not been clarified.

What further changes need to be made to strengthen the market?

Associated with the regulatory environment is the need for corporate governance - this applies particularly strongly to the banking sector as well as the property sector. There is also a whole range of issues associated with the method in which off plan sales were allowed to take place. There is nothing wrong with an off plan sales model that is properly regulated and protects all the stakeholders in the value chain. The effects of a less regulated off plan sales market will probably be one of the most difficult things to clear up in the short term.

Transparency is generally going to be required and will be welcome in the market; the availability of statistics on transactions, transaction values, lease values, having proper contracts, enforceable contracts, are all things that need to be looked at.

To what extent has investor confidence been affected by negative press?

I think it is a combination. In addition to what has happened here we are also seeing a lot of international negative sentiment and that would suggest that investor sentiment globally is at an all time low. Part of it comes from outside the region but I think most people within the region were shocked by what happened. However, I think it will have a greater impact on international buyers and it will take longer for that sentiment to recover. Regional investors here are less phased by these events, are more entrepreneurial by nature and still feel Dubai is a safe haven.

Do you think there needs to be further government Intervention?

The bond issue that took place which was underwritten by the federal government was a very strong sign of confidence and an indication of the integrity of the union of the UAE. It was a huge vote of confidence and was very well received by the market. What we really need to do is deal with a lot of the issues such as the regulatory environment and fund the critical concerns in the short term so we are not throwing good money after bad. Having said that, I think an additional stimulus would certainly be welcome but throwing money in the absence of addressing the fundamental problem is not necessarily the right thing to do.

Do you think continued government funding of infrastructure projects will help stimulate the market?

We know, for example, in Abu Dhabi the construction market is still quite active and it is thought the Abu Dhabi market alone will contribute to help bolster construction prices in the medium term. Governments are certainly putting a lot of money into infrastructure so in terms of economic stimulus I think they are doing all that they can and will obviously come out of this much stronger. One of the things we questioned in the survey was how people would rank the different regions by adequacy of infrastructure.  Abu Dhabi came across as number one in all those categories, Dubai was a short second.

Despite the collapse of the property sector, does the Dubai economy maintain strong fundamentals?

The issue with Dubai was that it was the most advanced in terms of development. It was a regional boom within a global boom, Dubai was the most advanced in the cycle and so there is no question it was the hardest hit. If something is too big it is obviously going to get a lot of negative media attention and this is shallow media attention which doesn’t really address the fundamentals of what is going on here.  Dubai is fundamentally a strong, economy, as are Abu Dhabi, Qatar and Saudi Arabia.  They all have specific  features of their own economies but Dubai’s saving grace will likely be a return to reasonable pricing. This was one of the reasons Dubai was very attractive in the first place. But I do think Dubai has all the fundamentals in place and the scale of the problems is relatively small in the grand scheme of things. This is particularly true in light of the macroeconomics just down the road in Abu Dhabi. It is powerful in its own right and it is always going to be a commercial hub as will Abu Dhabi.

What is investor sentiment towards other countries in the region?

With investors, it is symptomatic of the drop in confidence that people are gravitating towards what they believe are stronger economic fundamentals so Abu Dhabi came up very strongly, followed by Saudi Arabia and Qatar. I think that is because there is a general feeling that the economic drivers in those economies are stronger today than some of their neighbours and are therefore safer havens.

Do you think Middle East investors will stay in the Middle East or will look for opportunities in Western markets?

There is no question that significant portions of funds previously targeting international investment are being redirected to within the region. We see this in Kuwait, Qatar, KSA, and the UAE in particular. Middle Eastern investors however, are still looking abroad opportunistically and showing particular interest in London and the United States as destinations for outbound investment.

Source: Cityscape Intelligence