Survey Analysis MENA Investor Sentiment Survey

Transcription

1 Survey Analysis 2014 MENA Investor Sentiment Survey

2 Join the discussion on KEY FINDINGS AN INITIAL WORD Welcome to JLL s 9 th Real Estate Investor Sentiment Survey. INVESTOR INTENTIONS Middle Eastern investors remain net buyers of real estate. However in 2014 we see a greater willingness to sell. LOCATION UAE and Saudi Arabia remain the most favored markets in the Middle East, with Egypt returning onto investors radar screens. UK remains the preferred global destination, with increasing interest in North America. CURRENTLY PREFERRED ASSET CLASS UAE residential remains investors number 1 pick, while UK s office remains the preferred global asset class. EXPECTATIONS OF FUTURE ASSET CLASS PERFORMANCE Limited further upside in UAE residential market results in a shift to other asset classes. North America s asset classes lead future investor preferences. YIELDS Yields remain tight in the UAE while they soften in Saudi Arabia. Unrealistic yield expectations overseas. INVESTMENT STRATEGY Investors move up the risk curve with more interest in value add opportunities. FUNDS AVAILABLE FOR REAL ESTATE Greater leverage increases pool of available funds. SUSTAINABILITY Increased focus on more sustainable buildings providing better financial returns.

3 An Initial Word Welcome to our Ninth MENA Real Estate Investor Sentiment Survey It is my pleasure to present the findings of JLL s 9 th MENA Real Estate Investor Sentiment Survey. This year s survey went out to just over 600 regional investors, which included a combination of private families, institutions, developers, asset managers and sovereign wealth funds. This year we have added an international section to the survey, which allowed investors to share their overseas strategies. Key messages from this year s survey include the investor appetite to move up the risk curve as well as emerging interest for North America real estate amongst Middle Eastern Investors. Regionally, while Dubai retains its preferred status, Egypt is now back on investor s radar. I would like to thank those who participated in the survey and would encourage others to participate in future editions. It is our objective that the results of this survey, which is available on our MENA website ( will allow investors from around the region to benefit from the views and opinions of their peers and create a more transparent market for investment decision-making. I look forward to hearing any feedback or comments that you may have. Best Regards Gaurav Shivpuri Head of Capital Markets, MENA

4 Investor Intentions: Greater willingness to sell The majority of Middle Eastern investors remain net buyers of real estate. Local transaction flows continue to be challenged by the lack of quality investment product available for sale and the gap in pricing expectations between sellers and buyers. This year s survey also saw more respondents willing to sell their assets; 14% of respondents identified themselves as potential sellers compared to 6% in This signals a possible change in opinion among some investors on future value appreciation potential. The lack of suitable investment grade stock in their home markets has prompted many Middle Eastern investors to consider investment opportunities overseas. Our survey reveals that 9 out of 10 respondents are considering international markets for investment % 14% 35% 56% 6% 38% Buy Sell Both Buy Sell Both

5 Location Middle East Markets: Saudi Arabia and Egypt gaining popularity Global Markets: Increasing interest in North America Unsurprisingly, the UAE remains the region s preferred market with 97% of respondents keen on investing in the country s real estate sector. The UAE s political and economic stability and market transparency continues to attract capital inflows. This has been further fuelled by the favorable performance of the real estate sector over the past 2 years, particularly in Dubai. Within the GCC, Saudi Arabia continues to be of interest to investors and we see improved sentiment compared to 2013; 61% of investors are now willing to invest in the Kingdom versus 38% last year. Saudi Arabia s economic and demographic fundaments make it an attractive destination for investments with an estimated GDP growth rate of 4% per annum ( ) and a current population of 29 million (Oxford Economics). The potential opening of the Saudi stock market to foreign investors signals a shift in attitude towards more transparent practices and is likely to increase interest in the real estate sector. This year s survey saw more interest in real estate investment opportunities in Egypt, with this sentiment being driven by the more stable political environment and the return to more robust levels of economic growth. Development initiatives such as the Suez Canal Development Program are expected to generate further domestic and international investment, boosting all sectors of the economy including the real estate market. This increased interest could further be attributed to the tightening of yields in the GCC, prompting investors to seek higher returns elsewhere. Middle Eastern investor interest in overseas real estate assets remains strong, supported by a string of high net worth family groups, large developers, and some of the largest Sovereign Wealth Funds in the world; all of whose target allocation to real estate has increased over the years. Europe continues to be the preferred global destination for real estate capital from the Middle East. Data from JLL reveals that Middle East investors spent USD 3.6 billion on European real estate in the first half of 2014; over three quarters of their total overseas spending. The United Kingdom was the largest beneficiary of these cross-border flows, as it remains the most liquid real estate market in the region. One major acquisition by Middle Eastern investors in Europe was the purchase of The London EDITION (Marriott International) by Abu Dhabi Investment Authority (ADIA). This year s survey saw North America gain traction as 47% of respondents are now keen to invest in the market (up from 24% in 2013). Data from JLL reveals that Middle Eastern investment flows to North America increased 51% Y-o-Y in the first half of 2014 to reach USD 1 billion. Interest in real estate investment opportunities in Emerging Markets remains modest. Difficulty in sourcing suitable assets, poor corporate governance and a lack of risk appetite are the main reasons for this. Investments in these markets remain driven by opportunities rather than strategic considerations. Middle East Markets Global Markets UAE KSA UK Western Europe North America

6 Currently Preferred Asset Class Middle East Markets: UAE residential remains investors number 1 pick Global Markets: London sees continued interest from Middle Eastern investors Our survey reveals that the UAE s residential sector is still the most preferred asset class among Middle Eastern investors. Within the UAE, Dubai has seen the most significant growth (over 50% in prices over the past 2 years), boosted by domestic and regional demand. However, this sector has experienced a welcome levelling-off during the summer months, which could prompt investors to switch out of the residential sector into other asset classes. Elsewhere in the UAE, the hospitality and retail sectors are among investor preferences as both continued to see strong growth figures. Over the second quarter, the hotel market saw the sale of the Movenpick JBR in Dubai Q2 while confidence in the retail landscape was reflected in the announcement of Mall of the World and the public listing of Emaar Malls Group and Emirates REIT. Internationally, Europe s office sector continues to attract Middle Eastern investors. The shortage of Grade A office space in the region makes overseas investments in office buildings attractive. One such recent investment in 2014 is the acquisition of Risanamento s Paris Portfolio, consisting largely of office assets, by the Olayan family for USD 1.5 billion. This year s survey reveals strong interest in the residential sector in Europe, reflecting the strong demand for second homes in core cities, particularly London. In North America, economic growth and evolving demographics continue to bring strong interest to the residential sector, boosting investor confidence. In Saudi Arabia, the residential and industrial sectors led investor preferences in As with other Gulf States Saudi Arabia is pushing ahead with its diversification strategy, focused on the continued expansion of the manufacturing sector as the economy moves beyond oil. Middle East Markets Residential Residential Hospitality Retail Industrial / Logistics UAE KSA UAE UAE KSA Global Markets Office Office Residential Residential Residential UK Western Europe UK North America Western Europe

7 Expectation of Future Asset Class Performance Middle East Markets: Limited further upside in UAE residential market results in a shift to other asset classes Global Markets: North America s real estate sector leads future preference Contrary to our findings in 2013, this year s responses reveal that the UAE residential sector is expected to perform less strongly over the next 12 months. Following a period of rapid growth in prices, risks of overheating prompted the government to take measures to restrict further escalation. The UAE Central Bank mortgage cap (75% for expatriates and 80% for UAE nationals), and the increased transfer fee (from 2% to 4%) has resulted in a welcome cooling in the Dubai market and has limited further upside in the residential sector in the short term. In this year s survey, investors expressed strong optimism in hospitality real estate across the UAE, as increasing tourist numbers have lifted investor confidence in the countrys hotel sector. Coupled with the government s commitment to support the sector s growth, we expect this trend to grow as investors revise their strategies to include more hospitality assets in their portfolio. There remains appetite for office assets in the UAE, however the lack of available investment-grade product (single-owned Grade A office space) has historically resulted in low transaction volumes in the sector. Similarly, while some respondents wish to invest in the retail sector in the UAE, the market remains largely dominated by specialised developers leaving little room for investors. Our survey also reveals that the residential sector in Saudi Arabia is expected to perform better over the next 12 months amidst strong demand. Fuelled by large infrastructure projects around the Kingdom and a favorable mortgage law, we expect improved access to home ownership in the Kingdom and more confidence in the Saudi residential sector. Our 2014 survey reveals that the North American office sector is expected to show the strongest improvement in performance over the next 12 months, driven by signs of notable economic growth in the United States. GDP growth in the second quarter of 2014 was revised upward largely as a result of businesses reinvesting through acquisitions, new products, and even people, with the number of job openings up 19% since year-end Investors also expect the residential market in North America to perform better over the next 12 months. Despite concerns of a growing supply pipeline, improved U.S employment figures are expected to boost the economy and the investment market further. On the other hand, the UK s residential sector is expected to perform the same as this year. In London, a strong economic backdrop continues to support price growth however buyers are now less likely to chase steep price increases than has been the case over the past couple of years. Hospitality remains a popular choice among Middle Eastern investors in both the UK & North America. London continues to be one of the most visited cities globally and the prospects for its hotel sector remain positive. In North America, hotel performance is exhibiting steady growth with many markets reaching their pre-recession revenue per available room (RevPAR) peaks. Driven by positive operating profits, investors have a generally positive outlook for the sector. The industrial sector in the UAE and Saudi Arabia is favored by Middle Eastern investors as both governments continue to diversify their national economies. Industrial is projected to be one of the best performing sectors over the short to medium-term but the government s control of industrial developments and zones makes it difficult for private investors to benefit from the potential upside. Middle East Markets (2014/2015) Hospitality Residential Office Industrial / Logistics Industrial / Logistics UAE KSA UAE KSA UAE Global Markets (2014/2015) Office Retail Residential Hospitality Hospitality North America North America North America UK North America

8 Yields Middle East Markets: Yields remain tight in the UAE while they soften in Saudi Arabia This year s survey reveals that investors are willing to buy real estate assets in the UAE on yields below 8% in both the office and residential sector. As the open bid/ask spread remains wide, there are limited opportunities for investors at these levels. However as the overall market softens and asking prices decline, yields are expected to grow closer to investor expectations. While investors recognize the strategic importance of Saudi Arabia, they are finding it difficult to identify opportunities that meet their return expectations. Respondents expect yields to average 9.5% in both the office and residential market, however the limited supply of investment grade assets have traded on initial yields lower than that. Global Markets: Unrealistic yield expectations mean Middle Eastern investors are losing out on opportunities Middle Eastern investors indicated a willingness to acquire office assets in the UK at yields between 5%-6%. In reality, the weight of demand has compressed prime office yields in London to 3.8% in the third quarter of 2014, leaving Middle Eastern investors priced out of the market. However data by JLL shows that yields in the Outer Core markets of the UK averaged 5.5% and therefore Middle Eastern investors still have opportunities to purchase office investments in cities outside Central London. Similarly, while investors stated they would accept residential yields between 6%-7% in the UK, these yield levels are scattered outside Central London; investors in search of higher yields need to consider secondary and tertiary markets. In Western Europe and North America investors are willing to acquire office assets at yields between 5%-7%. However robust investor demand has again pushed yields down in several cities making these expectations unrealistic. As such, secondary markets can be seen as an alternative for investors seeking higher yields. In addition to tapping into secondary locations, some Middle Eastern investors are looking for higher yields in niche real estate assets such as student accommodation. Student housing is of particular interest to investors due to its less cyclical performance, ability to deliver a stable income and solid rental growth and the exceptional demand conditions associated with it. Global Prime Office Yields (Q3 2014) 10.1% 9.3% 9.0% 8.3% 7.3% 6.4% Mumbai Riyadh Moscow Abu Dhabi Dubai Sydney 4.0% 4.0% 4.0% 3.9% 3.8% 3.5% 2.9% Paris New York Frankfurt Singapore London Tokyo Hong Kong

9 Investment Strategy: Moving up the risk curve Our survey reveals that 42% of Middle Eastern investors continue to focus on low-risk, income generating assets with stable cash flows. However as yields tighten and it becomes more lucrative to invest on a risk-adjusted basis, we see investors moving up the risk spectrum. 32% expressed interest in core plus/ value add projects; an increase from the 27% in Opportunistic investments are at the other end of the risk/return spectrum. Given the low risk tolerance amongst Middle Eastern investors, this is the least favored investment strategy with only 26% of respondents willing to invest in opportunistic/development assets. Investors in this segment are typically developers who hold large land banks, develop properties in specialised sectors like education and healthcare, and invest in their home market where risk factors are mitigated % 32% 26% 47% 27% 26% Core Core Plus Opportunistic Core Core Plus Opportunistic Income Producing Value Add Development Income Producing Value Add Development

10 More funds Available for Real Estate: As bank financing recovers, more funds for larger lot sizes This year s survey reveals that 67% of investors continue to prefer smaller lot sizes valued at no more than USD 50 million. While this comes as no surprise, the survey shows a slight increase in the percentage of investors looking at larger lot sizes between USD million; 26% in 2014 compared to 23% in As liquidity and bank financing improves, we expect to see growing interest in larger lot sizes. There is ongoing willingness among investors to use leverage to finance their real estate transactions, with half of the respondents stating they would leverage up to 50% of their investments value. 40% of respondents are willing to invest their own equity up to USD 50 million with a further 33% looking to invest in deals between USD million. While assessing the total available spending power of Middle Eastern investors is difficult, together the amount of leverage and equity available suggests that investment volumes are likely to remain large. 40% 33% 27% Equity (2014) $0 $50 m $50 $150 m Over $150 m 67% 26% 7% Lot Size (2014) $0 $50 m $50 $150 m Over $150 m 50% 39% 11% Leverage (2014) Yes (<50%) Yes (>50%) No

11 Sustainability: Increased focus on more sustainable buildings providing better financial returns % 20% 67% 33% Yes No Yes No This year s survey reveals that 80% of respondents are willing to pay a premium for sustainable real estate assets. This represents an improvement compared to last year when only 67% of investors across the Middle East claimed they would pay a premium to purchase a green property. The majority of investors (84%) would invest because of value considerations and the belief that sustainable buildings will generate higher returns. Studies undertaken on certified green buildings have determined that a rental rate premium exists in many cases; Certified green buildings tend to use less energy and water and are therefore often cheaper to own and operate; Certified green buildings may be able to achieve higher occupancy rates; Beyond ethical considerations, research shows that there are a large number of compelling benefits from green buildings. According to the World Green Building Council, the value in sustainable assets is driven by the following: Some studies have provided evidence of a lower yield at the time of sale, translating to a higher transaction price. Why Invest in Green? Commercial Building Owners Source: The US Green Building Council, The Business Case for Green Building Commercial Building Tenants Increased Rental Rates Attracting Tenants Cost Effective Competitive Differentiation Risk Mitigation Lower Operating Costs Heathier, Cleaner Indoor Environmental Quality Immediate and Measureable Results PR and Community Benefits Contribution to Triple Bottom Line

12 Dubai Emaar Square Building 1, Office 403 Sheikh Zayed Road PO Box Dubai, UAE Tel: Fax: Abu Dhabi Office No. 3, 7 th Floor Abu Dhabi Trade Centre Building (East Tower) Next to Abu Dhabi Mall Tourist Club Area PO Box Abu Dhabi, UAE Tel: Fax: Riyadh 18 th Floor, South Tower Abraj Attawuniya King Fahd Road PO Box Riyadh 11414, Saudi Arabia Tel: Fax: Jeddah Level 4, Suite 406 Jameel Square Tahliya & Andalus Streets PO Box 2091 Jeddah , Saudi Arabia Tel: Fax: Cairo Star Capital 28 th Floor Office 86 2, Aly Rashed Street Heliopolis Cairo, Egypt Tel: Fax: Contributors Gaurav Shivpuri Head of Capital Markets MENA [email protected] Craig Plumb Head of Research MENA [email protected] Fadi Moussalli Regional Director, ICG MEA [email protected] Dana Salbak Senior Research Analyst MENA [email protected] jll-mena.com This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.