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Analysis of GCC Real Estate Markets for Global Investors

This paper explores why global real estate investments are lacking in the GCC region and assesses the attractiveness of GCC markets for global investors. It discusses risks and opportunities, constraints, emerging market trends, and real estate fund allocations.

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Analysis of GCC Real Estate Markets for Global Investors

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  1. ‘AN EXAMINATION OF THE ATTRACTIVENESS OF GCC REAL ESTATE MARKETS TO POTENTIAL GLOBAL REAL ESTATE INVESTORS’ PAPER PREPARED FOR THE ERES CONFERENCE STOCKHOLM JUNE, 2009 Mohamed Salem RESEARCH ADVISORS Mr. David Morley Prof. Andrew Baum SUPERVISED BY Dr. Andrew Ross Dr. Karima Saci Dr. Richard Kirkham Dr. Raymond Abdulai RESEARCH SPONSOR

  2. WHY THE PAPER WAS WRITTEN??  • Increase in attention of global real estate investing in emerging markets. • A first step to contribute to the current body of knowledge by exploring an under-reported region (i.e. The Gulf Cooperation Council (GCC)).

  3. AIM OF THE PAPER Answer two questions: ‘Why there is lack of global real estate investments into the GCC region, and are the GCC real estate markets considered as an attractive and favourite region to global real estate investors?’

  4. CONTENT

  5. GLOBAL REAL ESTATE INVESTMENTS: RISKS AND OPPORTUNITIES • Gordon (2003) identifies the key drivers for international investments as: • Higher return on investments • Diversification (low correlation with domestic markets) • Increase in Cross-border service, and • Rising Transparency in some parts of the globe.

  6. GLOBAL REAL ESTATE INVESTMENTS: RISKS AND OPPORTUNITIES Table 1 shows the key constraints to direct property investment in an international context. Table 1: Key constraints to international direct property investment Source: (Morell, 2003)

  7. OPPORTUNITIES IN AN EMERGING MARKET As globalisation of investments increases, global real estate investors might have to consider other emerging markets than those of East Asia, Latin America and Eastern Europe, and to start developing a better understanding of markets such as those of the Gulf Cooperation Council (GCC) in the Middle Eastern region.

  8. “The map identifies ten cities in the gulf region that are of particular interest to global real estate players. As well as Dubai, they include a number of cities that are attracting growing real estate activity, such as Abu Dhabi, Doha, Riyadh and Jeddah” Jones Lang LaSalle (2008a) The GCC real estate markets The Gulf Cooperation Council (GCC) economies include Saudi Arabia, Kuwait, UAE, Oman, Qatar & Bahrain. Source: Jones Lang LaSalle (2008a)

  9. CONTENT

  10. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (SECONDARY DATA) • Table 2 shows that as of April, 2009, 21 real estate funds, with no more than 0.2% of total global Gross Asset Value are being allocated to the whole Middle Eastern region including the GCC. Table 2: Property Funds Research current vehicle database Source: Property Funds Research (April, 2009)

  11. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (SECONDARY DATA) • Table 3 shows that some of these funds (e.g. fund# 3) partially targets UK and European investors. Other funds however, did not specify the target investors. Table 3: Sample GCC funds basic information

  12. EMERGING MARKETS LACK OF INVESTMENTS STUDY Table 4 presents part of a recent study conducted by (Baum, 2008); using population and GDP per capita as the main drivers for investments, outliers have been identified for those countries which viewed investment that did not fit with predicted investment. The result shows that Saudi Arabia has an error of 31 funds. Table 4: Countries with fewer funds targeting than predicted Source: (Baum, 2008)

  13. GLOBAL REAL ESTATE INVESTMENTS IN THE GCC MARKETS (SECONDARY DATA) In addition, latest data from Jones Lang LaSalle, providing ‘inter-regional’ investments worldwide reveal only US$ 0.8 bn. have been invested in direct commercial properties in the whole Middle Eastern real estate markets including Turkey inH1 2008 (JLL, 2008b).

  14. GLOBAL REAL ESTATE INVESTMENTS IN THE GCC MARKETS (SECONDARY DATA) Figure 1: Inter-regional investors H1 2008 Flow Map Source: (JLL, 2008b)

  15. GLOBAL REAL ESTATE INVESTMENTS IN THE GCC MARKETS (SECONDARY DATA) Figure 1: Inter-regional investors H1 2008 Flow Map Source: (JLL, 2008b)

  16. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (INITIAL ANALYSIS) • Secondary data confirms that GCC real estate markets cannot be considered as a favourite destination of global source of funds. It was therefore, necessary to comprehend the reasons for this phenomenon.

  17. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (INITIAL ANALYSIS) • The interviews conducted with fund managers who are currently managing funds in emerging markets with similarattributes to the GCC markets centred on this.

  18. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (PRIMARY DATA) • As part of the initial investigation, four practitioners were in-depth interviewed, all of them are working in large-scale real estate investment management firms: • Fund of Funds Manager • General Manager • Head of European Fund Operations • Portfolio Manager

  19. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (PRIMARY DATA) • Respondents were mainly discussing: • The key constraints & cross-border barriers they experience in emerging markets as well as the GCC markets (if applicable). • The opportunities and potential of GCC real estate markets as a future investment market.

  20. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (PRIMARY DATA- INTERVIEWS FINDINGS) Findings on emerging and GCC markets Cross-border Barriers “The keyword here is markettransparency, ..... Transparency could be legal issues, ....., corruption also legal security, which funny enough worse in Italy but that is not the question, political stability, market data accessibility, and any historical data. Head of European Fund Operations in Investment Management Company, Luxemburg

  21. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (PRIMARY DATA- INTERVIEWS FINDINGS) Findings on emerging and GCC markets Cross-border Barriers “...a big issue we’re facing in GCC markets is essentially the lack of sophistication” General Manager in Investment Management Company, Luxemburg “....OK, partners, transparency, currency, knowledgeable legal systems and property data”    Fund of funds manager in real estate Investment advisory firm, UK

  22. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (KEY FINDINGS) Key findings on emerging & GCC markets investment barriers:

  23. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (PRIMARY DATA- INTERVIEWS FINDINGS) Key findings on the GCC region as a potential investment market “... in Saudi Arabia I think 50% of the population are below 25, and 5 children per capita, there is big big need. Here comes the need for real estate, first residential,.... then they will need office space, ...they will also spend it for shopping, so you need retail” General Manager in Investment Management Company, Luxemburg

  24. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (PRIMARY DATA- INTERVIEWS FINDINGS) Key findings on the GCC region as a potential investment market “...Saudi Arabia would be my favourite, I mean it is a big market, market with a lot of potential, it will be a market where all institutional investors sooner or later will look at. General Manager in Investment Management Company, Luxemburg “....and what I am expecting excellent demographic, good GDP growth, high quality of construction.....I’m very interested in Saudi Arabia” Fund of Fund Manager in Investment Advisory Firm, UK

  25. GLOBAL REAL ESTATE FUNDS IN THE GCC MARKETS (PRIMARY DATA- INTERVIEWS FINDINGS) Key findings on the GCC region as a potential investment market • Excellent demographics • High population growth • Good GDP growth • Huge need for residential, retail & office real estate

  26. CONTENT

  27. CONCLUSIONS • Respondents point out that the region has excellent demographics ‘particularly in Saudi Arabia’, high population growth, good GDP growth and huge need for residential, retail & office real estate that are enough reasons for institutional investors to invest and diversify their portfolio into the region.

  28. CONCLUSIONS • However, they believe that lack of transparency, problems finding appropriate local partners and lack of research and knowledge are key hurdles to further attract global sources of funds into the region, and suggest that further research may assist to develop a better understanding of the GCC local property markets.

  29. CONTENT

  30. FUTURE RESEARCH AGENDA • The remaining data to be collected can be divided into two closely integrated phases:

  31. FUTURE RESEARCH AGENDA 1. To critically examine several case studies of GCC real estate funds already established in the GCC. As seen within the secondary data, 21 real estate funds (cases) operate in the GCC. • The reason to do so is that these cases will uncover key issues such as criteria of finding appropriate local partners, market structure, etc.

  32. FUTURE RESEARCH AGENDA 2. Working with a global real estate investment management firm to hypotheticallystructure a GCC focused real estate fund (a conceptual framework), which should address the key requirements of global investors when deciding to invest in the GCC markets. One large-scale real estate investment firm is already on board and willing to cooperate – the company is based in Luxemburg.

  33. FUTURE RESEARCH AGENDA • The integration of both data collection phases will preciously facilitate the development of the proposed conceptual framework. • The framework should identify key challenges for international property acquisition, deal structuring, financing and taxation issues in complex cross-border transactions, and review transaction and post-acquisition risks.

  34. FUTURE RESEARCH AGENDA Key issues might also include (but not limited to): • Macro and micro economic factors for cross border real estate investing, current trends in key GCC real estate markets • Establishment of cross-border joint venture partnerships • Routing foreign investment from a suitable jurisdiction • Structuring a deal with multi-country taxation regimes • Sourcing local or international debt • Dealing with exchange controls and currency risk • Guidelines and regulatory issues governing in-bound real estate investments in the GCC market

  35. FUTURE RESEARCH AGENDA The framework should provide a better understanding of the GCC real estate industry regarding, for example: • Rules and regulations; • Access to local banks, developers, agents, and all other involved at the fund and property transactions levels; • Preferred fund structure, asset allocation, compliance, domicile, etc. • Local partners who are willing to enter into joint ventures with global investors.

  36. THANK YOU

  37. REFERENCES • Baum, A. (2008). Unlisted Property Funds and the Emerging Property Markets . Working Paper in Real Estate & Planning 01/08. • Gordon, J. (2003). The big picture: Global economics and property markets. Presented at IPD European Property Strategies Conference, Wiesbaden , 9. • JLL. (2008a), ‘World Winning Cities Series Emerging City Winners’. Jones Lang LaSalle. • JLL. (2008b). Global Real Estate Capital: Standoff in global direct commercial real estate. Jones Lang LaSalle. • Morell, G. (2003). Segmentation of European property markets: Implications for pan-European. paper presented at the IPD European Property Strategies Conference, Wiesbaden , 15-22.

  38. QUESTIONS PLEASE

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