When the property economy was scrambling to ever more dizzying heights last year, a hint of the market's eventual tumult could be found in the make-up of investors. It seems most were individuals gambling their life savings, or companies dazzled by surging prices of off-plan properties. They would buy multiple apartments or entire floors with the intention of flipping them a few months later.
Few and far between were the institutional investors that make up as much as 80 per cent of transactions in developed economies. These investors are highly sensitive to risk - they are often managing billions of dollars of retired government workers' pension funds under significant restrictions, and it is safe to say they detected something a bit suspect in the maddening circuses that surrounded property launches.
Would-be buyers were known to camp outside the offices of Nakheel and Emaar hours or days before a new building went on sale just for the chance at buying a home that they would resell before the developer even started moving dirt around at the construction site. But after almost a year of price declines, consolidation and general uncertainty in the marketplace following the global credit crisis, developers are beginning to catch on to the fact that these long-term investors are needed in Dubai and Abu Dhabi for the economy to thrive.
A report from Jones Lang LaSalle this week said the ability of regional markets to attract real estate investment trusts (REITs), which are like mutual funds for property, as well as institutional investors "will be of critical importance to their progression into the stabilisation and recovery phases of their cycle". This shift also comes as the off-plan development model recedes. With buyers fleeing the market, developers can no longer build a tower with proceeds of pre-completion sales alone. Meanwhile, a steady stream of completed buildings has been coming online, especially in Dubai.
This has created a vacuum in a space once filled with capital. Long-term investors, which include wealthy family groups, conglomerates, sovereign wealth funds, insurance companies, REITs and pension funds, are the natural choice to fill this gap. The challenge is convincing them that the market is secure enough for them to begin acquiring buildings. These investors, like any prudent one, look at everything from the quality of macroeconomic data from the Government to the specific regulatory framework surrounding property in a given emirate.
At the forefront of these efforts is Sowwah Island in Abu Dhabi, which is the new planned business area between the main island and Reem Island. It will add approximately 180,000 square metres of top-grade commercial space alongside the new headquarters of the Abu Dhabi Securities Exchange and Cleveland Clinic. The project, which had made rapid progress, is under development by Mubadala Real Estate and Hospitality, a division of the sovereign-backed investment arm. John Buck International, which is 51 per cent owned by Mubadala, is crafting a framework for the development aimed squarely at these long-term investors.
This framework included lobbying the Government to designate the island as the official central business district and an investment zone, meaning GCC and Emirati investors can purchase freehold units and foreign investors can obtain 99-year leases. Among the most important factors, Mubadala is encouraging leases running five to 15 years, compared with the prevailing three to four years. Tenants will also be given partial sub-leasing rights to provide greater flexibility over time.
A longer lease would be attractive to an investor looking at buying a building because they would be more assured of their income in the years ahead. Lawyers say that many local companies and banks would like to move to new space and consolidate offices across the city into one headquarters, but have been reticent until the terms were to their liking. "The demand is there," says Scott Aitken, a partner in the property practice at the law firm Clyde&Co. "It's a question of getting the commercial terms of the leases right. When you get this right, you can bring in the anchor tenants then the investors will start to feel more comfortable in the market."
Mr Aitken says Mubadala appeared to be making the terms more tenant-friendly to attract these anchor tenants, which would in turn bring more interest from long-term investors. Despite the lack of a strata law to govern how multiple tenants pay for shared expenses of a building like lobby and lift maintenance, Mubadala has created regulations to handle these expenses. Each tenant will pay a base rent in addition to a services charge based on use.
These attempts to bring a competitive edge to a project comes at a watershed moment in the regional property market, says Olivier Laroche, a senior manager at the consultancy ATKearney Middle East. "The focus of the market is shifting in the Middle East," he says. "We are shifting towards an asset management market. As the valuations have gone down on property, we clearly see funds starting to look at what type they could invest in."
So far, most of these funds are from the region because they understand local laws and customs, Mr Laroche says. But with more proactive measures and sophisticated laws on the books, as well as a sense of economic stability, the larger European and North American funds could also start getting back into the market here. "This market is now positioned on the map of global real estate as a key place, and lots of assets are now on the market," he says.