Tangible, reliable and usually sharia-compliant, real estate has long been a favoured asset class in the Middle East. But will the low oil price cause problems for this market? Dave Waller reports.
Few things in life are as reliable as bricks and mortar – certainly in the minds of Middle Eastern investors. Along with cash, real estate has traditionally been the most sought-after asset class in the region. In an area of rapid economic and population growth, that makes particular sense: people need places to live and work and infrastructure developments are at a premium. Indeed, 81% of investors are planning on increasing their real estate portfolios in the near future, according to the GCC Wealth Insight Report of March 2015 by Emirates Investment Bank.
“Investors in the region like assets they can touch,” says Joseph Morris, head of capital markets at property consultancy Knight Frank UAE. “So you tend to see a much larger weighting in portfolios towards real estate than you would elsewhere – it’s that desire for the tangible.”
There are a couple of other bonuses. Real estate has tended to offer good yields in the MENA region, and is likely to be sharia-compliant. Unlike conventional bonds, an investment in real estate doesn’t pay interest, the payment and receipt of which are prohibited by Islamic law (instead, real estate generates rent, which is permissible).
Even if a building is used for some non-sharia compliant activities, scholars may deem it counts as a compliant investment if these activities are in the minority – say, the sale of alcohol by one shop in a larger shopping centre.
So it should come as no surprise that real estate funds have traditionally been among the most popular fund types in the region. There has, however, been reason to suspect the roof is about to blow off the building. The price of oil hit a five-year low in January, sinking to as little as $45 a barrel. While the price has since rallied, the insecurity led many analysts to predict a knock-on property slowdown in the oil-producing regions. As much of the money going into real estate investments there is derived from oil wealth, it follows that a decline in oil prices will cause investors to rein in their investments.
PRICE SLIDE
In Dubai, for example, a lot of buyers traditionally pay for real estate using money that has come from oil-funded economies such as the UAE, Saudi Arabia, Iran and Russia. And property prices in Dubai had already weakened due to the imposition of mortgage caps and a hike in property transaction fees.
According to JLL, another property consultancy, villa prices in Dubai fell 1% during the final three months of 2014 and apartment sales remained flat. In April, Deloitte estimated average sale prices of residential property in Dubai would fall by up to 5% in the first half of this year.
On a wider level, the price of oil affects confidence in the market in general. When things are going up, people buy; and when going down, they sell. “The oil price drop had an impact on the Dubai stock market, and the residential market mirrors that,” says Morris, of Knight Frank. “There’s been a slide in the last six months in residential real estate.” This has particularly hit off-plan sales at recently launched or soon-to-be-launched developments.
Yet the picture isn’t all bleak. MR Raghu, senior vice president in research at Markaz, a Kuwait-based investment company, says that while “the decrease in oil prices may lead to reduced government spending on infrastructure”, there are other forces at play too.
“Real estate prices in the Gulf are driven by many factors such as consumer demand, government spending on housing and infrastructure, interest rates charged, and government policies towards real estate investments,” he says. “The strong demand – driven by the youth population, low interest rates and government’s measures to provide affordable housing – is favourable to the real estate sector, especially in Dubai.”
Raghu is confident that real estate prices will remain stable in the near future – only softening by 5%-7%. The partial recovery in the oil price seems to support his view.
DIVERSIFICATION
“Fluctuations in oil prices are not new to the region,” says Robin Williamson, real estate industry leader at Deloitte, Middle East. “So any impact is likely to be less than outsiders might think. And while a significant long-term slump is likely to have an adverse effect on the oil-dominant economies, recent improvements in the price of oil would suggest that we are a long way yet from any slide.”
Williamson says most countries across the region have taken positive steps to diversify their economies and are thus less reliant on the hydrocarbons industry than they were. “Oil accounts for only 4% of Dubai’s current GDP,” he says. “It has invested heavily in infrastructure to include roads, rail and an airport that now serves 70 million passengers a year – more than London Heathrow – and is becoming a destination to rival global cities like London and Singapore.”
LONDON TOWN
So what of that overseas market? Even with a sense of stability in the MENA region, isn’t it still safer for investors to seek overseas targets in popular locations like the UK or the US? This is often what grabs the headlines: note Abu Dhabi Financial Group, which shelled out £370 million ($560 million) in December 2014 for New Scotland Yard in Westminster, London. That was a cool £120m above the asking price. Meanwhile, the Qatar Investment Authority looks likely to become the new owner of Canary Wharf, east London’s financial district. Williamson points out that overseas markets act as a means of diversification and a hedge to other markets. “Only last year, Arabs invested £3.5 billion into the UK commercial property market alone,” he says.
“We do see a strong demand and affinity to markets like the UK and the US,” says Morris, of Knight Frank. “There’s a definite desire to go there: it’s familiar, and it’s easy to do business there. Our team here is set up to do a lot of that work, and we’re seeing more of it, not less. We do see demand for GCC investments too, but finding quality investment products for the institutional market here is very thin. You just have to look at what money goes abroad from the Gulf to see what wants to invest here but just can’t find a home. Whenever opportunities do arise, they’re hotly contested, both by real estate funds and private investors.”
So, is this having an adverse effect on MENA-focused real estate funds? It depends who you ask. Raghu says inflows to such funds have increased, with most registering positive returns in the past six-month, one-year and three-year time horizons. “The funds based in the UAE were the top performers in terms of returns,” he says. “Emirates Real Estate (EREF) Acc registered a return of 43% in 2014.”
Morris paints a more mixed picture. “Dedicated real estate funds struggle with deal flow a bit,” he says. “In places like London, real estate is all about the building, because the tenants will come. In the Gulf, it’s the reverse: property is all about the tenant. We see a lot of money in these funds looking to deploy into the Gulf, but there aren’t a huge amount of transactions, and those that do happen are handled principle to principle. So it’s a difficult market for funds to operate in, and some are yet to deploy.”
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