Middle East Outbound Real Estate Investment

The real estate investment landscape in the region continues to evolve and a number of trends that will impact investment decision making in the year ahead are emerging. As we look back, 2018 was clearly a year of rental correction and value softening and while this is slowing down, here is a look at five key levers at play across the GCC’s real estate sector in 2019.

Compression of bid-ask spread – The spreads have reduced over the past two quarters and one that will continue into 2019. This is a result of a combination of the sellers adjusting to market realities and buyers noting that the rental market may have bottomed and, in many cases, the capital values are almost as low as its replacement values and that they are unlikely to acquire quality assets in high 8s or beyond.

Return of private capital – While there had been a reduction in high net worth family investments in real estate since the oil price fell in 2015, there has been a recent uplift in interest from this investor group; a trend resulting from cap rate compression in mature markets as well as current valuations within real estate in the region.

Institutional investors continue to dominate – Institutional investors such as Real Estate Funds, REITs and other institutional capital will continue to dominate the bidding on assets. However, their pricing will be sharper in 2019 as they will adjust the return expectation of their investors and continue the smart use of debt. Watch out for the phrase “Asset Adjusted Returns” in 2019.

Cap rate movement considering interest rate rises – With a limited number of quality trades on offer, there isn’t an expectation of major real estate cap rate movements in 2019. The impact, of interest rate rises in 2019 isn’t expected to significantly impact investors’ target yields.

Asset Class Focus – Increasing investment interest in the year ahead across healthcare, higher education, logistics, residential and prime retail sectors. Healthcare real estate transactions are set to increase as operators gear up for growth in 2019. In Saudi Arabia education assets will have interest while in the UAE higher education should offer opportunities. Logistics will continue to be of interest to institutional capital across the region. There is also the expectation that returning Private Capital will focus on value adjusted transactions in the residential sector in the UAE and prime retail & entertainment in Saudi.

While the rental outlook remains challenging across the GCC in 2019, I expect to see more deal activity as buyers and seller bridge their pricing gap across, especially in alternative real estate asset classes.

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