Shortage of products holding back investment in MENA, survey suggests

The Middle East and North Africa region is missing out on significant regional and global capital flows because of the shortage of investment grade product and the lingering price gap between buyers and sellers, a new report claims.

The latest Middle East and North Africa (MENA) Real Estate Investor Sentiment Survey from consultants Jones Lang LaSalle says that the amount of overseas capital allocated to investing in MENA real estate is negligible.

It also says that although local investors are seeking to increase exposure within the region, particularly in those countries considered stable like the United Arab Emirates and Qatar, activity is limited by type of product available and asset pricing that does not fully incorporate local market risks.
 
In a region awash with liquidity, the lack of tenable investment opportunities leads investors to deploy capital overseas, it points out. The MENA real estate markets have the potential to capture a much higher proportion of capital flows from both international and regional buyers.
 
But it says that unlocking this potential will require a few adjustments including an increase in the product available, willingness of owners to transact with greater transparency, and realistic pricing that is benchmarked against global markets.

‘Whilst recent events have created some uncertainty across MENA, there are areas within the region, particularly the GCC, where there remains a reasonable level of demand among local investors. The problem is one of finding and securing the right product at a price that makes sense,’ said Andrew Charlesworth, head of Capital Markets for the MENA region at Jones Lang LaSalle.

The report also indicates that investors continue to be frustrated by the lack of bank finance and the cost of financing when it is available. Increased risk aversion is leading investors and developers to adjust their corporate strategies and focus on building stable income generating portfolios. Lack of product, mispricing, and limited finance availability thwarts transaction, portfolio restructuring and rebalance of portfolio risk.

Even for investment grade commercial properties such as buildings in central locations of high demand with long term leases and strong tenant covenant, available in the region, institutional investors are simply not willing to purchase at yields available in mature markets like London.
 
Together with limited transaction activity, the custom of privately conducting local investment deals discourages international investment and inadvertently stifles recovery of the regional real estate markets.

They survey also found that buyers outnumber sellers in all markets with a distinct polarization occurring between those countries perceived as stable, like the UAE and KSA, and those still characterized by political uncertainty.

In the prevailing atmosphere of risk aversion, factors like political stability and security of income are at the forefront of investment decisions but the majority of respondents indicated plans to increase investment in the MENA real estate market over the next 12 months.

However, analysts believe that actual transaction activity will remain constrained by the lack of suitably priced product. In terms of yield spread, the lack of differentiation between cities and asset classes suggests investors are focused on achieving a specific return threshold and thus are focused on the strength of the tenant covenant rather than the asset risk.
 
Driven primarily by supply concerns in almost all sectors, investors anticipate further capital declines in many MENA markets.

Office assets remain the most attractive investment class for this investor base, but this preference is not necessarily in line with short term market conditions.