Casino Dubai’s Rebound Pitch Ignored by Global Investors
Dubai is back with the big plans. What it doesn’t have are the biggest property investors.
Surging home prices in parts of Dubai and rebounding shopping and tourism markets are prompting developers to announce projects on a scale not seen since the emirate’s property market collapsed in 2008. So far, sovereign wealth, pension and insurance funds are staying away even as they splurge on real estate elsewhere.
“It’s a thin market and it has a reputation of being something of a casino,” said Richard Price, chief executive for Asia at CBRE Global Investors, which manages $93 billion of property assets. “I struggle to think of any real client appetite for exposure.”
Dubai’s developers, government officials and leader Sheikh Mohammed bin Rashid Al Maktoum have unveiled projects with a value of at least $40 billion in the past six months while providing few details on how they would be financed. With local and foreign banks unable or unwilling to lend for development, the absence of institutional investors calls into question just how many of the plans will come to fruition.
New projects like the world’s biggest Ferris wheel and a district with 100 hotels haven’t captured the attention of institutional investors as fallout from the crash, persistently high office vacancies and a population made up mainly of foreign transient workers cause them to look elsewhere.
Brookfield Asset Management Inc. (BAM/A), based in Toronto, was one of the few large funds to target the sheikdom when it announced a $1 billion fund with the government’s Investment Corporation of Dubai in 2011 to focus on distressed assets. The size of the fund has since been reduced by half, Arabian Business reported May 9, citing Douglas Kirkman, chief executive officer of ICD-Brookfield Management Ltd.
“We are still fundraising and working on regulatory approvals for the fund,” Andrew Willis, a spokesman for Brookfield said by e-mail without being more specific.
Real estate topped the list of investments by sovereign wealth funds from Norway to Qatar last year, rising to 26 percent of the total from 14 percent in 2011, Institutional Investor’s Sovereign Wealth Center said in a May 16 report.
“Dubai is unlikely to attract very much interest from sovereign funds,” Victoria Barbary, director of the Sovereign Wealth Center, said by e-mail. “The boom and bust in Dubai’s property market over the past 10 years, as well as the large state-owned interests in properties and occupancy rates that still haven’t reached the levels of 2007 and 2008, would make the market too immature for non-Dubai-owned sovereign wealth funds.”
The lack of institutional investment compounds the financing difficulties for developers as foreign banks, stung by the last property crash, shun projects and local lenders are held back by regulation and their past losses. Banks that piled into Dubai during the boom, including HSBC Holdings Plc (HSBA), Royal Bank of Scotland Group Plc and Standard Bank Group Ltd., have struggled to recover their investments as state companies such as Dubai World Corp. and Dubai Holding LLC renegotiated terms of loans.
“Dubai would have to rely more on equity than debt relative to the last building boom,” said Gus Chehayeb, director of Middle East and North Africa research at investment bank Exotix Ltd. “This time around, international lenders do not have the same appetite for these types of projects. The balance sheets of Dubai banks are very exposed to government-related entities and local developments.”
In February, Sheikh Mohammed announced the Bluewaters project that includes the 210-meter (688-foot) Dubai Eye Ferris wheel and a Middle Eastern market as well as a hotel, restaurants and a family entertainment center. In November, he unveiled a plan for Mohammed Bin Rashid City, the largest real estate development to be revived after the emirate’s property crash. The new district will include homes, hotels, artificial beaches and gardens larger than Hyde Park. That month, he also approved Dubai Adventures Studios, a $2.7 billion project to build five theme parks.
Bluewaters developer Meraas Holding didn’t respond to calls asking for comment on the project’s financing. State-owned Dubai Holding LLC and Emaar (EMAAR) Properties PJSC, the main developers on the MBR City project, also didn’t answer calls for comment on how it would be funded.
Companies with the best-located projects still have fundraising options as rising property values and debt repayments lead to lower costs on bond markets. Dubai’s five-year credit default swaps, which measure the cost of insuring the emirate’s debt, have tumbled almost 50 percent in the past 12 months.
Emaar this month said it began the expansion of its Dubai Mall, the world’s largest by area, and formed a partnership with Meraas to build the 11 million-square-meter Dubai Hills Estate, a mixed-use project featuring an 18-hole golf course. Tecom Investments LLC, a unit of Dubai Holding, said it will invest 4 billion dirhams ($1.1 billion) in the first phase of Dubai Design District for the fashion, design and luxury industries.
The average sale price of mid-range villas in Dubai soared 47 percent in the year to May and mid-range apartment prices advanced 32 percent, according to data compiled by Cluttons LLC.
Dubai’s gross domestic product expanded the most in five years in 2012, led by a 17 percent increase in the restaurant and hotel industries, according to Dubai Statistics Center data released today. The economy grew 4.4 percent last year, compared with 3.6 percent in 2011.
Developers including Emaar, Dubai’s biggest by market value, and closely held Damac Properties Co. are reviving the practice of raising money by selling homes and serviced apartments before they are built. Wealthy individuals and international hotel and entertainment groups willing to form partnerships with Dubai companies are also a source of funding.
The last property boom was paid for largely by advance sales as well as debt from banks and the bond market. Large investment funds were mostly absent while developers and wealthy families poured into Dubai from Saudi Arabia and other Gulf countries to capitalize on the boom, according to Craig Plumb, head of Middle East research at Jones Lang LaSalle Inc.
Institutional investors considered buying Dubai assets after the slump, but were put off by owners unwilling to cut selling prices and a lack of transactions on the open market, Plumb said. The Chicago-based company’s LaSalle Investment Management unit, with $47.7 billion in assets, doesn’t invest in the Middle East, he said.
“It’s mostly money going out of the region, to London or Hong Kong, but not properties in the Middle East,” he said. “They are not attractive in terms of the pricing or the yield that you get to compensate for the risk.”
Qatar, the natural-gas-rich nation that’s Dubai’s neighbor to the west, has focused on domestic projects and foreign investments in cities like London rather than developments on its doorstep. Qatari Diar Real Estate Investment Co., part of the country’s sovereign-wealth fund, helped build London’s Shard skyscraper and formed a partnership with Canary Wharf Group Plc to redevelop the Shell Centre near the London Eye Ferris wheel into a complex of offices and apartments.
Abu Dhabi Investment Authority, among the world’s biggest sovereign-wealth funds, has a maximum allocation of 10 percent for real estate investments, according to its website. The fund, backed by the emirate’s oil revenue, only invests outside the U.A.E.
Mubadala Development Co. PJS, another Abu Dhabi sovereign wealth fund with a large real estate portfolio, has assets mainly in its domestic market as well as investments in Los Angeles, the Maldives and Malaysia, according to its website. It doesn’t list any investments in Dubai.
Norway’s Government Pension Fund Global will be among the biggest buyers of real estate this year as it seeks to meet its target allocation of property, according to the London-based Sovereign Wealth Center. The $747 billion sovereign wealth fund, the world’s biggest, has purchased commercial property in London, Paris, Frankfurt and Berlin as part of a plan to increase real estate to 5 percent of its investments from 0.9 percent as of March. New property investment will initially focus on well-developed European markets, according to the fund’s website.
About 26 percent of sovereign-wealth investment, or $13.7 billion, went to real estate last year, beating commodities with about 23 percent, the Sovereign Wealth Center found. Much of it went to “safe haven” commercial assets in London and Paris, according to the center’s report.
Though large funds tend to favor income-generating properties such as office towers and malls with tenants in place, they also finance development. CBRE Global Investors is frequently forming partnerships with developers in China, where the fund provides capital for construction, Price said.
“While there has been some institutional interest in some of Dubai’s debt, it hasn’t been the case for real estate,” said Rachel Ziemba, an analyst at Roubini Global Economics in London. “There are still concerns over the underlying demand and what the returns on these investments would be.”
Dubai’s existing commercial properties don’t hold any more attraction for institutional funds than the developments. A dearth of high-quality, revenue-producing assets is the main reason funds aren’t giving Dubai much thought, said Matthew Green, head of U.A.E. research at broker CBRE Group Inc. The practice of strata title, where many owners share an office tower, makes acquisitions long and laborious.
“A lot of the available stock is unsuitable” for institutional investors, Green said. “There isn’t an abundance of revenue-generating assets and when they exist, they are held by wealthy families that are not willing to sell.”
The vacancy rate for offices across Dubai is 45 percent, while the central business district has a rate of 15 percent.
The scale of Dubai’s new development plans means that the limits on financing can add years to the completion of projects. Work on the biggest ones will probably to stretch out over at least a decade, Jones Lang’s Plumb said.
The U.A.E.’s population of 5.5 million, 80 percent composed of foreigners who are mostly there based on temporary work permits, creates a long-term challenge. Dubai, with 2.1 million, and Abu Dhabi currently allow property buyers to secure a visa based on property ownership, a policy that has changed several times since it was first introduced.
Institutional investors tend to focus on developed markets where property prices have stabilized, Roubini’s Ziemba said. When they do invest in emerging markets, countries with large indigenous populations tend to win as investors see a better long-term outlook, she said.
“I struggle with the scale of high-end condominium development on the basis of such a small indigenous populations and much larger transient population,” CBRE Global Investors’ Price said. “The housing bubble was built on sand rather than fundamentals.”
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