Dubai’s commercial real estate has been thriving for the last few years and the current year has begun with a blissful start. According to the Dubai Commercial Property Market Report for Q1, 2022, the first quarter of the current year has been one of the best quarters in the last several years for Commercial real estate. The sector experienced a 107% increase in sales value for Q1 2022 compared to Q1 2021. Office and retail sales remain at the forefront of the growth, with offices experiencing a 31% increase and retail a 104% increase for units sold over Q1 2021. The total sales value also continues to rise, as offices have seen a 71% increase and retail units a 49% increase over Q1 2021.
However, despite this monumental success achieved by Commercial real estate (CRE) in years, there is still a vast list of challenges faced by investors while investing.
Top Challenges Faced by Commercial Real estate Investors
Here are the top Challenges faced by commercial real estate investors in Dubai
1. Lack of Institutional-grade Opportunities
In the last few years, there has been a substantial rise in the number of global alternative investment firms interested in investing in Dubai’s commercial real estate; however, they are limited by the lack of institutional-grade opportunities and clarity on regulations. There is an urge to develop more quality stocks that can generate mature investments in the form of institutional investments, Real estate Investment Trusts (REITs), and pension funds.
2. Lack of Prime Investment Opportunities
To leverage the advantage of new & existing investments in the office spaces as well as retail locations, CRE investors expect key segments like logistics hubs to target Warehousing 2.0 concepts. Investors also expect multi-generational assets to emerge as a prime investment opportunity.
3. Securing Grade A Stock to Attract Affluent Buyers
Due to Dubai’s exponential growth in the last decade, there has been a huge proliferation in the demand from the number of corporations who want to set up their headquarters in the city rather than just a branch office. However, the commercial real estate is of very limited quality office stock which is making it very difficult for CRE investors to secure Grade A and Prime stock for the affluent domestic & international tenants.
4. Complex Financing and loan-terms
The CRE investors expect better quality stock available at a low cost. They also expect the cost to be regulated by the government to make it more attractive for the investors. However, the key challenge is that developers are facing a tough time in delivering institutional-grade properties due to complex financing & loan terms, and capitalisation rates. A vast majority of loan terms are around the 10-year mark.
5. Limited Support from the Financial Institutions
It has been observed that financial institutions are more inclined to asset-based lending with residential projects compared to commercial real estate. This is very evident from the vast difference between residential & commercial real estate transaction numbers. There is an urge for the banks & financial institutions to have more trust in commercial real estate. With the revolutionary policies adopted by the government such as – Masterplan 2040, Golden visa, legal reforms, etc. there will be a substantial surge in the population of Dubai in the coming years, which will create demand for shopping malls, offices, hotels, etc. Better transparency and regulations will make it more comfortable for the banks to lend money to institutional investors and offer interest-only loans.
6. Attracting Pension Funds
Real estate investments are the way to diversify asset portfolios and minimize the risk for pension funds. According to the Asset Allocation Insights 2021 report by Mercer, pension funds are the second largest category of institutional investors after sovereign wealth funds in the Gulf Cooperation Council (GCC) region. To counter the market slowdown amid Covid-19, GCC pension funds made investments in areas such as equities, listed infrastructure, and real estate. However, like global pension funds, regional pension funds also want to stay away from taking the development risk. They are more inclined toward assigning their allocation to products with higher yields. There is a very minimal number of assets that are ready to attract such funds, or even available for sale.
7. REITs not Available for Sale
Even in the case of Real estate Investment Trusts (REITs), the story remains the same as pension funds. There is plenty of stock available however it is not always available for sale. Dubai must develop a self-sustaining ecosystem which facilitates easy mergers & acquisitions with institutional investors. This will empower asset investors as well as commercial real estate developers in building commercial real estate which caters to the requirements of future investors such as government entities.