The International Real Estate Finance Summit ’08

IREF ’08, London December 16-17, 2008
Access to the GCC, islamic direct equity & finance
Building Bridges for Future GCC and UK Real Estate Relations

The current turmoil in the global financial markets may have dented investor confidence and precipitated investor caution in the short-term, but for the discerning, specialised and bespoke investor there are some surprisingly good deals in the global real estate market.

The current market conditions especially the fall in the volumes of real estate transactions, says Tony Horrell, CEO, European Capital Markets, is « driven by global credit conditions which made debt both less available and more expensive… It may well take another year before debt markets stabilize and in the meantime we are likely to see increased distress selling. High growth markets perceived as oversold are likely to attract the most attention from buyers. With the high velocity of pricing change come opportunities for buyers. The range of opportunity will increase for those able to commit equity in the next 12 months. »

This spells good news for Middle East investors flush with huge reservoirs of petrodollar liquidity. They are targeting real estate investments through equity ownership, joint ventures and mezzanine positions. However, some analysts warn that many GCC investors are ‘ego buyers’ looking for marquis assets that have « impressive curb appeal and locations that quite simply can’t be replicated ».

The UK, a traditional real estate investment location for the GCC countries, remains an attractive hub especially for Islamic real estate financing and investments. The UK and GCC have a historical and long relationship in economic cooperation and investment. The UK is also the single largest provider of expertise in banking, legal, consultancy and accounting services to the GCC countries including in the specialised area of Islamic financing.

A recent report from Moody’s Investors Service confirmed that in the wake of the US subprime housing crisis, London offices have deteriorated faster than any other European property market. Banks in the City and West End have been hard hit by the turmoil in the financial markets with resultant job losses being incurred. Resultantly, office take-up levels are unlikely to reach forecasts.

« Despite the financial turmoil, occupier demand remains relatively robust… however occupier demand could be negatively affected if the financial turmoil continues, » said Rod Bowers, co-author of the report.

Real estate market sentiments are echoed by other GCC institutions such as Kuwaiti investment bank, Global Investment House (GIH), in their homes markets as well. In August 2008, GIH launched a US$500m Islamic real estate fund, Global GCC Real Estate Fund II, aimed at providing opportunities for GCC, regional and international investors to tap into the flourishing GCC real estate sector.

Real estate has always been a key component of the GCC and Middle East economies. While an endless stream of luxury leisure-cum-commercial developments and residential-cum-golf and leisure projects have proliferated over the last few years, the new trends suggest a move also to the housing sector to satisfy demand of a rising and young regional population; for the lower-end affordable housing sector; and for specialised industry-cum-infrastructure real estate.

GFH, for instance is leading with its energy hub concept – it started the Qatar Energy City Project and exited at a good return; it has launched similar multi-billion dollar ventures – the India Energy City, Energy City Libya and the Caspian Energy Hub in Kazakhstan. More recently, it has expanded the concept to steel – launching the Hadeed Mena Project which would see steel plants in several MENA countries aimed at providing an anticipated growth in demand for steel and steel products die to increased project spend.

Indeed, a recent GFH report projects oil revenues of the six Gulf Cooperation Council (GCC) countries to top US$600bn annually for 2008 and 2009 alone. Aggregate GCC expenditure is expected to reach US$300bn in 2008 and private sector projects currently underway and on the drawing board is valued at over US$2 trillion. Private liquidity in the GCC alone, according to several estimates, is put at US$1.2 trillion.

However, the GCC market is not all about high liquidity and spend. The GCC states are not immune to the effects of the global financial markets turmoil. GCC markets are also feeling the effects of high food prices as import dependency and prices continue to rise. Residents of GCC cities complain about skyrocketing rents, food prices and transport costs.

Speculators the world over are the same. The GCC is no exception. As such governments are intervening with new laws to curb speculation and excesses in a real estate market which analysts say is ripe for a correction. In June 2008, the Shura Council of Saudi Arabia approved a new mortgage law which should be adopted before the end of 2008. The mortgage law deals with commercial and residential property and should open the way for greater real estate financing flows in the country.

In September, Dubai passed a Mortgage Law and Law No 13 of 2008, which regulates initial property registration and requires all off-plan sales contracts to be registered with the Dubai land Department and the Real Estate Regulatory Authority – aimed at curbing speculation in the market.

Several factors influence the real estate sector in the GCC and MENA countries. These include:

• The huge growth in oil revenues and liquidity which in turn has spurred huge project, infrastructure and development spend
• The spectacular rise in Sovereign Wealth Funds (SWFs). The IMF estimates the current total volume of assets under management by the SWFs at US$2 trillion -US$3 trillion, projected to rise to US$6 trillion – US$10 trillion within the next five years. Abu Dhabi, Singapore, China, Norway, Kuwait and Saudi Arabia have the largest SWFs in the world. While asset allocation of SWFs are primarily in government bonds and commodities, there may be diversification into other asset classes including specialized real estate assets.
• The GCC region has one of the highest population growth rates in the world. Some 60 per cent of the Saudi population of 24 million is under the age of 25 years old. As such the demand for housing and consumer goods is expected to increase heavily over the next few years.
• There is plenty of low cost financing available including from specialized government funds which effectively subsidise the sector. The International Finance Corporation (IFC) has already set up an Islamic mortgage company joint ventures in Saudi Arabia and Egypt to facilitate greater flows of such affordable financing to ordinary people.
• The new mortgage and other laws will provide greater protection to investors and consumers alike. As such this will act as a catalyst for more banks entering the mortgage market.
• Attractive FDI incentive regimes with full repatriation of capital.
• The availability of innovative financing especially Islamic financing for the housing and real estate sector.

With all these market dynamics, IREF 2008 could not have come at a more opportune time. Real estate will always remain an attractive investment asset class for Middle East investors both in the region and out of the region.

As such IREF 2008 is the real estate event directed to anyone interested in the real estate market in the UK and GCC whether as a regulator, player, financier, structurer, investor, speculator, analyst or simply as an interested part.

GCC realty companies adopt ‘positive survival’ strategies through recapitalisation, retrenchment and restructuring

In the wake of the credit crunch and the global economic slowdown, real estate companies especially in the Middle East are increasingly adopting strategies of positive survival with the projection that by end 2009 through to 2010 the recession would have bottomed out and GDP growth would start getting back on track.

These strategies imply that companies in general are concentrating on consolidating core business and not venturing into new showcase projects. But, this does not mean that flagship developments already planned in less affected markets are being put on hold.

In the Gulf Cooperation Council (GCC) markets, especially Dubai and Bahrain, the real estate sector has embarked on a three-pronged policy of recapitalisation, retrenchment and restructuring – recapitalisation through IPOs and other capital raising exercises; retrenchment through cutting back on some jobs; and restructuring through prioritising or even suspending projects to suit the current economic cycle and market dynamics.

Realty companies in the GCC region, however, remain optimistic in an era of doom and gloom in other markets. Judging by the spate of new projects announced over the last few months, albeit much more measured, Saudi Arabia, Kuwait, Qatar, Oman and Abu Dhabi remain active and buoyant markets for both inward and outward investments in the real estate sector. Affordable housing similarly is emerging as a priority sector especially as more countries in the region introduce mortgage laws and other legislation to curb housing speculation and to provide greater security to developers, mortgage providers and customers.

Recent reports that the Qatar Investment Authority (QIA), the emirates sovereign wealth fund (SWF), is planning to build up portfolios of investments in prime real estate properties in international cities such as New York, London and Tokyo that have been affected by the adverse impact of the global financial crisis, have also boosted the markets.

The above issues, including prospects for Shariah-compliant real estate financing and several others, will in fact be discussed at the International Real Estate Finance (IREF) 2008 Summit organised by ICG-Events along the theme Building Bridges for Future GCC and UK Real Estate Relations, and which is due to be held on the 16th-17th December 2008 at the Park Plaza Hotel in London, UK.

The summit will discuss several pertinent topics and issues including global economic and real estate market dynamics; challenges and opportunities in the UK real estate market; key real estate trends in the GCC countries; structuring real estate products; Issues relating to structuring Shariah-compliant real estate transactions; FDI flows into and out of the GCC real estate sector; a GCC real estate market players panel discussion (a first for any such summit); and a Shariah Scholars panel discussion, which has always proved very popular at past IREF summits.

Saudi Arabia remains by far the most attractive real estate market for foreign investors. Leading international property consultants, such as Strutt & Parker and Jones Lang LaSalle (JLL) have recently formally launched offices in the region. Blair Hagkull, JLL Managing Director for Middle East and North Africa, is confident that the Saudi realty market will grow significantly over the next few years and is currrently the fastest-growing market in the world. Indeed, JLL reports that investors from Malaysia, China, Singapore, North America and other Asian countries are increasingly interested in investing in the real estate market in the Kingdom.

Indeed a survey of real estate market professionals conducted in October 2008 by JLL and Cityscape Dubai concluded that Saudi Arabia is set to become the best regional performer in the real estate sector in the next three years, with yields projected in excess of 8.5% per annum for prime commercial assets and higher for specialized assets such as hospitality.

Source : ICG London (Islamic Conference Group)