Dubai’s Only REIT Sees Hidden Gems in Underrated Offices

Dubai’s only real estate investment trust may spend about 675 million dirhams ($184 million) on Dubai office buildings, betting on a part of the market that missed out on the city’s property rebound.

Emirates REIT (CEIC) Ltd. will only consider buildings with a single owner after properties with multiple landlords contributed to the office market’s stagnation, Executive Deputy Chairman Sylvain Vieujot said in an interview in Dubai.

“We won’t look at a tower that has been sold to 200 people,” Vieujot said. “This is what gave the office market a bad reputation, but it also gives us an opportunity because we think it’s mispriced.”

Office values tumbled with the rest of Dubai’s property market after 2008 as speculation-driven construction exceeded demand from tenants. A recovery that lifted homes, shops and hotels over the last two years did little to improve the office market as larger businesses shunned buildings sold to multiple owners under a system known as strata title.

Office prices increased by 9 percent in the year through March while rents gained 11 percent, up from a 1 percent rise a year earlier, according to broker Colliers International. Values remain significantly lower than their pre-crash levels.

Emirates REIT was founded in 2010 and the company raised $175 million in an initial public offering on April 8. The stock, traded in dollars, has gained about 7 percent since the company’s debut, giving the company a market value of $434 million.

Targets Identified

The company is considering buying three buildings and it’s talking with developers and banks in Dubai and Abu Dhabi that took over properties after owners defaulted on loans, Vieujot said. The REIT owns office buildings in Media City, Dubai Internet City, Sheikh Zayed Road and Dubai International Financial Centre.

“There are a lot of opportunities in offices still and rents will grow,” Vieujot said. “If you buy a single-held property today, you might have good upside.”

Demand for offices from large companies and startups is expected to increase as Dubai’s preparation to host the Expo 2020 global trade fair creates about 277,000 jobs, broker Jones Lang LaSalle Inc. said in April.

Emirates REIT generally targets a net return on investment of around 10 percent, he said. Vieujot declined to specify which properties or areas the company is considering, saying he’s concerned about alerting competitors. The fund posted a total return of 25 percent in 2013, he said.

Eiffel Tower

The REIT was established by Eiffel Management and Dubai Islamic Bank PJSC. Vieujot is chief executive officer of Eiffel Holding Ltd., which was the main shareholder of Societe de la Tour Eiffel until a few months ago. Tour Eiffel operated the Eiffel Tower under a leasehold agreement until the city of Paris took back the monument in 1996.

Emirates REIT may buy empty buildings if offered at a discount and build up the occupancy itself, he said. The potential increase in property values would help provide long-term growth.

More than 600,000 square meters (6.5 million square feet) of office space, or 9 percent of current supply, is expected to hit the market by the end of this year, Jones Lang said. Another 1.5 million square meters of offices is scheduled for completion by the end of next year.

Emirates REIT owns more than 10 properties, mostly office buildings. Last month it bought a community mall in Dubai Marina for 118 million dirhams. It purchased a school from GEMS Education in Dubai and is looking at investments in warehouses, parking spaces, schools and health-care facilities, Vieujot said.

Banks are becoming more willing to sell properties on their balance sheets as values rebound from the emirate’s 2008 property crash, Vieujot said. Rising prices mean “they no longer feel that its a distressed fire sale,” he said.

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