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MENA

Limited Further Upside in UAE Residential Market Results in a Shift To Other Asset Classes

JLL Releases Ninth Annual MENA Real Estate Investor Sentiment Survey


​​​​​JLL, the world's leading real estate investment and advisory firm, has released its 2014 Middle East and North Africa (MENA) Real Estate Investor Sentiment Survey, which includes the views of leading real estate investors from  the region on both the Middle East  global markets.

Gaurav Shivpuri, Head of Capital Markets at JLL MENA, said: "Although the UAE residential market remains the preferred asset class, investors recognise there is now a limited further upside in this sector and are therefore shifting their attention to other asset classes such as hospitality and offices in the UAE and residential and industrial opportunities in Saudi Arabia.  Other key messages from this year's survey include investors moving up the risk curve as well as emerging interest in North American real estate amongst Middle Eastern investors"

Other Key Findings, MENA Real Estate Investor Sentiment Survey:

Investor Intentions: Middle Eastern investors remain net buyers of real estate despite a greater willingness to sell. 51% of Middle Eastern investors remain net buyers of real estate. 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 2013. This signals a possible change in opinion among some investors on future value appreciation potential.

Middle East Markets: UAE and Saudi Arabia remain the most favored markets in the Middle East, with Egypt returning onto investor's radar screens. UAE's political and economic stability and market transparency continues to attract capital inflows, and 97% of respondents are keen on investing in the country's real estate sector. Within the GCC, Saudi Arabia continues to be of interest to investors with improved sentiment compared to 2013; 61% of investors are now willing to invest in the Kingdom versus 38% last year. This year's survey also saw greater interest in real estate investment opportunities in Egypt, with this sentiment being driven by the stable political environment and the return to more robust levels of economic growth.

Global Markets: U.K. remains the preferred global destination, with increasing interest in North America. Middle Eastern investor interest in overseas assets remains strong; 9 out of 10 respondents are considering international markets for investment. Data by 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 UK was the largest beneficiary of these cross-borders flows as it remains the most liquid real estate market. This year's survey saw North America gain traction as 47% of respondents are now keen to invest in this market (up from 24% in 2013). Middle Eastern investment flows to North America increased 51% Y-o-Y in the first half of 2014 to reach USD1 billion.

Currently Preferred Asset Class: UAE residential remains investors' top pick, while UK's office remains the preferred global asset class. While the UAE's residential sector is still the most preferred asset class among Middle Eastern investors, the welcome levelling-off experienced during the summer months could prompt investors to switch out of the residential sector into other asset classes. Internationally, Europe's office sector continues to attract Middle Eastern investors. The shortage of available and completed Grade A office space in the region makes overseas investments in office buildings attractive.

Expectations of Future Asset Class Performance: Limited further upside in UAE residential market results in a shift to other asset classes. North America's real estate sector leads future preferences. This year's responses reveal that the UAE residential sector is expected to perform less strongly over the next 12 months. .Instead, investors expressed strong optimism in the performance of  hospitality real estate across the UAE, as increasing tourist numbers and the government's commitment to support the sector's growth have lifted investor confidence. Globally, JLL's 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.

Yields: Yields remain tight in the UAE while they soften in Saudi Arabia. Unrealistic yield expectations overseas. 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 is 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. Globally, the unrealistic yield expectations of Middle Eastern investors have priced them out of the market in some occasions. Investors in search of higher yields need to consider secondary and tertiary markets or alternatively, invest in niche real estate assets such as student accommodation.

​Investment Strategy: Investors move up the risk curve with more interest in value add opportunities. The 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, JLL sees investors moving up the risk spectrum. 32% expressed interest in core plus/value add projects; an increase from the 27% in 2013.

Funds Available For Real Estate: Greater leverage increases pool of available funds. 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 USD50-150 million; 26% in 2014 compared to 23% in 2013. 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. The amount of leverage and equity available suggests that investment volumes are likely to remain large.

Sustainability: Increased focus on more sustainable buildings providing better financial returns. This year's survey reveals that 80% of respondents are willing to pay a premium for sustainable real estate assets compared to 67% in 2013. The majority of investors (84%) would invest because of value considerations and the belief that sustainable buildings will generate higher returns.​

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