x Abu Dhabi, UAEWednesday 17 January 2018

Investors 'will shun most new buildings'

Institutional funds seek high-quality tenants, long leases.

Despite a large influx of property on to the market this year, just a fraction of these new buildings are of "investment grade", some analysts say. "It is safe to say that few of these buildings fit the bill for international investors," said Matthew Green, the head of research at the property consultancy CB Richard Ellis. Institutional investors, such as pension funds, look for buildings with high-quality tenants who have signed long-term leases. They also prefer single-owner buildings because it gives them better control over their investment.

"Of the few investment-grade properties in the country, most of them are not for sale," Mr Green said. "This would include very successful shopping malls in Dubai or the top triple A-class office buildings. The last thing the current owners want to do is sell them at this point." Together with a "stalemate" in the wider market, where landlords refuse to sell at "distress prices", the situation is preventing a recovery of the property market.

Several funds are looking to invest in Dubai but it is difficult convincing some owners to let to them, Mohammed Kamal, the head of property for the Middle East at the law firm Hogan Lovells, said last month. This means the buildings that are for sale are the least attractive and the most high-quality assets are not on the market. But more sales could start to trickle through this year after the property market reached a "floor" for prime and retail assets, according to a report last month from Bank of America Merrill Lynch.

The bank said the wider residential market would still fall a further 15 per cent and Dubai would have 44,000 empty homes this year. HC Securities, a brokerage in Dubai, reported that rents had stabilised and transaction volumes increased after Dubai World announced its plan to restructure US$23.5 billion (Dh86.31bn) of debt. Many companies announced last year the creation of distressed asset funds, but few have entered the market and made substantial purchases.

Hines, a US developer and property investor, announced it was considering setting up a Dh1bn fund for distressed property but the strategy has since been delayed. Smaller groups have been unable to find financial backers because there is so much uncertainty surrounding the property market. There is renewed discussion about providing "last-mile" financing to buyers who cannot afford their final payment or to developers who cannot afford to complete their buildings, but there has been little public disclosure of any of these arrangements.

One of the next big questions is what developers will be able to do with properties that they seize from defaulting buyers. Hundreds of these cancellations are under way in Dubai after the Dubai Land Department began processing them this year. The law says seized properties should be sold in a public auction but with low demand for new apartments in Dubai, analysts have said it is not clear whether there will be enough buyers.

Mr Green said investors were wary of the residential market. "Especially for anyone building up a portfolio, residential units with one-year contracts don't seem appealing right now." @Email:bhope@thenational.ae