Details

Real estate funds key to diversify investment vehicles, incentivise individuals

Real estate funds with assets of AED5 billion expected

to be established on UAE stock markets

US economy holds 200 listed funds equivalent to 60%

of global market value

Current mobility on Saudi market to boost value of real estate fund investments to 30 billion riyals

The real estate sector across the GCC states has been able to maintain a high level of mobility over the past few years despite the pressures and challenges it has experienced. Real estate developers have played the key role as a catalyst for movement by continuing to develop and launch real estate projects of varying sizes, investment values and targets. In the same time, many investment opportunities have been offered with different economic feasibility, but they were high and exceptional in value compared to the returns offered by other investment vehicles available in the other economic sectors in the region.

Al Mazaya Holding’s weekly real estate report said that the listing of real estate investment funds and the growing public awareness of their significance have been noticeable in recent years, reflecting the qualitative leap witnessed in the region’s real estate markets, debt markets and investment as a whole, which ultimately reflects positively on the construction and capital markets alike, and this is what the region’s markets need right now.

The report pointed out that real estate funds have important characteristics that often outweigh direct investment because of the low level of risk expected and the high monetisation rates they boast. In other words, the exit mechanism is easy and involves no losses. In many countries, real estate funds generate 90% of net returns, ensuring high feasibility and increasing number and value of shares. Furthermore, investment in real estate funds does not require investment, real estate or full-time experience.

Within this context, the Saudi real estate market has become a suitable environment for the spread and development of diverse investment tools, especially real estate investment funds, where the chances of success in the neighboring markets are high and feasible, with the real estate investments prevailing and ensuring competitiveness and attractiveness. Therefore, the Saudi model seems to provide a good opportunity to diversify the market, raise investment values and returns, and reduce the associated level of risk.

It is expected that the Saudi market will witness over the period ahead of the entry of international investment institutions while individuals will participate with good shares in these investments, as they conform to the nature of Saudi investors and also suit the mechanism at work on the real estate market while meeting investment requirements. In the meantime, the majority of existing real estate investment funds in the Kingdom is limited in terms of geographic diversity and also suffers a fairly high-risk level.

With regards to Egypt, the introduction of new investment instruments into the Egyptian market is a major leap forward in terms of investment instruments. Real estate investment funds are expected to revitalise the construction sector, as well as to reduce cost and lessen the burden of obtaining adequate financing for real estate projects, which are almost entirely dependent on banks until the moment.

Real estate funds offer new financing tools to boost the construction industry in order to meet the rising demand on the Egyptian market, where the total population exceeds 92 million with an annual increase of 2.6%. Such tools are expected to draw new investors on account of the diverse investment opportunities available.

Al Mazaya said that the competitive edge enjoyed by this kind of funds has increased as a result of the real estate developers facing problems in borrowing from banks because of the high interest rates following the floating of the Egyptian pound at the end of 2016, which often sends interest rates to as high as 17%, which are not economically viable rates for long-term real estate financing.

On the other hand, the UAE economy is based on the principle of diversification on the level of economic activities, investment instruments and incentives that have and still are contributing to the development of the country’s economic growth under all circumstances at a time when the financial system accounts for 44% of the total assets of sovereign funds at the Arab level, which are estimated at $3 trillion.

Dubai is more qualified to establish new real estate investment funds. This manifest itself in the current trend towards the establishment of real estate funds in the local financial markets with assets of AED 5 billion. Such funds will primarily focus on real estate assets that are developed, ready to use and capable of generating income.

The Al Mazaya report finds many advantages in the real estate sector in particular, the pace of economic activity and the movement of capital markets in general. All economic sectors are subject to the stimulation and development of their competitive capabilities in order to resist the existing pressures and achieve further growth in the coming period. The economies of the region and the prevailing investment culture are supporting the development of investment instruments and waiting for more. This comes as the US economy embraces more than 200 listed funds, holding more than 60% of the global market capitalisation of investment funds, which was estimated at $2.7 trillion at the end of the year 2016.

Al Mazaya’s report affirms that the current and expected mobility of the Saudi economy may lead to doubling the value of investment in real estate funds over the next few years, to surge 30 billion riyals, which will stimulate the economies of the region to develop these tools.

Al Mazaya stressed the idea that there is no investment without risk nor are there investments without returns. Within this context, investing in real estate funds has the potential to generate good returns over the medium and long terms. Due to the nature of investments in this vehicle, these funds may suffer losses if investments sustain heavy damage, assets suffered natural disasters or in case of sharp declines in the market value of these properties, especially if the value is overestimated. In addition, such funds lack efficient management and therefore it is incumbent upon those in charge of them to develop their capabilities, maximise return value and boost market efficiency at the local level in order to draw investors from abroad to inject new liquidity in the investment markets of the region.