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Asset mispricing deters investors from MENA real estate market: JLL

Issac John / 6 June 2011

DUBAI — Almost 75 per cent of respondents in a survey said they were planning to increase their level of investment in the Middle East and North Africa, or MENA, real estate market in the next 12 months compared to just seven per cent who were planning to reduce their level of exposure.

Jones Lang LaSalle, or JLL, a leading real estate investment and advisory firm, said in its MENA Real Estate Investor Sentiment Survey that respondents aimed to invest up to $6 billion in the real estate market over the next one year. “However, this may be inflated because many funds may be trying to tap the same capital sources,” the report said. The study also indicates that although investment appetite exists, the region is missing out on significant regional and global capital flows because of the shortage of investment grade product and the lingering price gap between buyers and sellers.

Based on individual transactions, the most common deal size sought was between $20 million and $50 million. The majority of investors (74 per cent) indicated that they had the financing in place to fund their acquisition plans for the next 12 months. The remaining 26 per cent were planning to use a combination of debt financing and syndicated equity to raise the required capital.

The survey reveals that interest in the Mena real estate market remains limited to investors located in the region. Interest from overseas investors is limited by a combination of factors. These include mispricing, lack of suitable investment grade products, regional economic and political uncertainty, and limited visibility of investment offerings with distribution constrained to a small number of local buyers.

The majority of respondents are regionally based and favour “backyard investing,” thus it is not surprising that investment strategies focus on areas where investors have greater market knowledge and broader influence

“In the prevailing atmosphere of risk aversion, factors like political stability and security of income are at the forefront of investment decisions,” the survey report said. Driven primarily by supply concerns in almost all sectors, investors anticipate further capital declines in many MENA markets. Office assets remain the most attractive investment class for this investor base, but this preference is not necessarily in line with short term market conditions, it showed.

This latest survey highlights two clear trends. First, the amount of overseas capital allocated to investing in MENA real estate is negligible.

Second, although local investors are seeking to increase exposure within the region — particularly in those countries considered stable like the UAE and Qatar — activity is limited by type of product available and asset pricing that does not fully incorporate local market risks.

In a region awash with liquidity, the lack of tenable investment opportunities leads investors to deploy capital overseas, JLL said. “While recent events have created some uncertainty across Mena, there are areas within the region, particularly the GCC, where there remains a reasonable level of demand among local investors. The problem is one of finding and securing the right product at a price that makes sense,” said Andrew Charlesworth, Head of Capital Markets for the MENA region at JLL.

The report also indicates that investors continue to be frustrated by the lack of bank finance and the cost of financing when it is available. Increased risk aversion is leading investors and developers to adjust their corporate strategies and focus on building stable income generating portfolios.


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