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Real estate market in need of more innovative investment tools to cope with economic fluctuations

Al Mazaya Report: Investment funds are one of the most highly efficient solutions for maximising assets and maintaining long-term investments

Current financial and economic developments, early into 2016, are showing that focusing on the right investment tools and approaches will be key to protecting achievements, gains and ensuring growth and recovery of all key economic sectors.

In efforts to support an efficient and integrated economy that is able to cope with economic fluctuations and financial crises, Al Mazaya’s Weekly Report invites regional economies to look seriously at encouraging a more widespread promotion of investment funds. Real estate investment funds, in particular, being some of the most efficient solutions for reducing investment risks and offering guaranteed target returns.

While investment funds have existed for some time, they are a sound financial vehicle for managing economic stability; however, the demand for their tools are directly proportional to the common and projected investment risks in an economy – the higher the investment risks, the lower direct investment is, fuelling a greater the demand for investment funds.

In the opinion of Al Mazaya’s Report, the region’s financial and economic development has not been accompanied by an appropriate development of supporting investment tools. As such, the pace of economic activities requires a continuation of investment liquidity in the “arteries” of domestic economies.

Al Mazaya’s Report further suggests, that a “culture of investment funds” should be encouraged as one of the potential solutions – in order to hedge the risks of direct and indirect investment.

Al Mazaya Holding Company’s Weekly Real Estate Report acknowledges that while investment prospects are currently declining quantitatively, investment risks are often too high for individuals to take on alone. Investment funds, therefore, can provide what regional markets currently need.

At the start of 2016, the number of real estate investment funds in the region, as well as the values of the target economy and their basic goals, is largely insufficient and unfit for the requirements of the time. In addition, supportive regulations and laws need to both drive and meet the demand. Al Mazaya’s Report further states that the encouragement and promotion of “collective investment concepts” at the individual and private sector investment level will be highly important in driving the development and recovery of the region’s real estate sector.

Unfortunately, despite the importance and benefits real estate funds can have on driving stability and progress in an economy, these vehicles have not been disseminated as widely as they could be, in the region’s markets. This makes us believe that the failure to start listing the units of funds, through the main financial markets, could be a major reason for a noted decline of these funds.

The importance of investment funds emanates from these funds being based on comprehensive real estate investment. They can purchase unbuiltlands, develop them, build residential and commercial complexes, buy existing real estate properties and benefit from their leasing revenue, and – ultimately – they can be sold. It should be noted that many laws in force allow these funds to sell off-plan, which activates these funds and increases the number and value of these investments.

Saudi Arabian Real Estate Fund – Market Overview

Currently, Saudi Arabia is considered the best of the region’s markets in this respect. 11 real estate funds exist there at present, under the supervision of the Capital Market Authority (CMA). However, the current number still remains low and not in keeping with the volume of the Saudi real estate market’s size – estimated at SAR 1.3 trillion – and it is also not compatible with the volume of demand for the residential and commercial sector.

According to Al Mazaya’s Report, investors are looking for direct, transparent and rapid investments in all circumstances, regardless of the level of realised profits and losses. Therefore, investors’ preferences emphasise the feasibility and circulation of an investment fund “culture” as a highly efficient solution for maximising assets and preserving investments in the long-term.

On the other hand, existing funds in many regional countries are run in a primitive manner, while “dissociation operations” with long periods in order to complete deals being a downside factor. There are also difficulties in the determination of unit prices in view of the absence of a market in which prices are circulated among a large number of buyers and sellers.

This has recently caused the board of Directors of Saudi’s CMA to issue a decision stating that valuation reports will not be accepted for real estate investment funds unless assessors who enjoy membership in the Authority prepare them. Al Mazaya’s Report welcomes this decision as highly important for the revival and encouragement of collective investment programmes and investment funds, since it enhances transparency and disclosure and provides a secure environment that attracts investment.

UAE-China Joint Strategic Investment Fund

In related news, Al Mazaya’s Report considers that the Joint Strategic Investment Fund, launched by the UAE and China with a value of US$10 billion – for commercial investments, conventional and renewable energy fields, infrastructure and advanced manufacturing initiatives – will strengthen and deepen strategic and economic relations, boost the growth of the world economy and promote the economic diversification approach, in the Gulf region.

Such initiatives serve as an introduction to higher investment values and more comprehensive goals in the coming period. They may pave the way for the expansion of investment in various funds – especially real estate funds – and try to impose corrective tools for the real estate market whenever it suffers distortions and deviations and concentrate investment on the medium-term by reinforcing the activities of real estate developers – a much needed proposition for the real estate market in the UAE.

UAE Real Estate – Market Overview

The liquidity of the real estate sector in the UAE remains good. The available investment opportunities are diverse, attractive and competitiveness with regional and global markets is still at its best. As such, real estate investment funds would help maintain the local investment liquidity and attract more from overseas.

Al Mazaya’s Report says that the downturn indicators in real estate investment volumes, during the current year, are as a result of the prevailing financial and economic developments, which increasingly points to the feasibility of collective real estate investment, in various types of investment funds.

The continuation of government spending on development and infrastructure projects will provide additional support for the expansion of joint investment strategies, taking into account that the decline in oil revenues and the strength of the dollar will lead to a decline in the flow of capital towards the real estate market in a number of countries and cities in the region – particularly the Emirate of Dubai.

Consequently, real estate markets of the size of the region’s markets require the promotion of a collective investment culture to improve the quality of output and maintain the value of investment assets. It is noteworthy that the value of land and real estate transactions in Dubai reached AED 267 billion, in 2015, an increase of 8 per cent, over the previous year (2014).

Qatar Real Estate Sector Overview

In 2015, the Qatari real estate sector recorded a rise in the value of real estate transactions, with an increase of 5.6 per cent and a total value that exceeded QAR56 billion. Al Mazaya’s Report states that the Qatari real estate sector has taken an upward trend in recent years, which raises optimism and maintains growth. The sector, therefore, is ripe for developing new investment tools.

Conclusion

Al Mazaya Holding’s Weekly Real Estate Report can confirm that real estate investment funds have demonstrated good performance over the past years in terms of both realisability and risk. The performance of many funds exceeds the average performance of the market, while maintaining the preferences of many investors who prefer to invest in funds instead of owning real estate directly.  In addition, funds have a higher liquidity than that of actual real estate making investment in these funds more attractive.

The Report also points out that the elements required for the establishment of real estate investment funds are available in the region’s markets because of the availability of real estate development companies, an abundance and diversity of real estate market products, and the development of hotels, residential and commercial properties and shopping centres. In addition, the regional mortgage market has matured over the last few years, which leads us to believe that the trend towards investment in real estate funds will expand in the coming period.