Private Equity Real Estate Takes Centre Stage

Tamer Bazzari, CA, CFADeputy Chief Executive OfficerRasmala Investments

Property trading

Primary investor profile

Investment timeframe

Risk/return profile

Individual investors, small funds

Short-term (1-2 years)

Relatively high risk / high return

Development

Government entities, Private Equity Funds, Private Companies

Short-term (2-3 years)

Moderate risk with potential for high return

Income generating assets

REITS, Private Equity Funds, High Net-Worth Individual Investors, Business Groups

Medium to long-term (> 5 years)

Low risk with stable returns

Examples Distressed sale, value play iRise Tower World Trade Centre, Emirates Towers

Real Estate Investment Options

Financing Options for Real Estate Developments

Initially, most developers financed development through presales; Negligible debt or equity financing (except for listed companies).

Debt financing has jumped in the form of Islamic bonds, syndicated loans or even plain vanilla construction financing.

Equity financing could be through various means:

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Listed companies : available capital

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Quasi Government entities: sale of land by master-developer

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Large family groups /corporate entities : parent/private funding

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Small developers : owner’s equity, private equity

Traditionally pre-sales and land sales have contributed significantly to funding with negligible equity.

Historically there is too much money chasing few assets – but the landscape is changing:−

demand-supply imbalance provided significant appreciation in property prices−

liquidity in the region fuelled further large scale developments.

New laws such as escrow accounts means pre-sales funding cannot be relied upon, resulting in increased demand for equity.

Why does private equity account for just US$ 2.8 billion* of investment?

Over US$ 300 billion of projects announced

Too Much Money Chasing Too Few Assets?

Significant price appreciation

* Cumulative since 2002

Attractive yields of 10-15%

Private equity does not seem to contribute much to the real estate boom.

Investment targets include pre-IPO equity, developmental projects, income generating property and undervalued assets.

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Private Equity funds (“Blind pool”) works for pre-IPO equity deals and acquisition of undervalued properties.

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Real estate investment trusts could be the best vehicle for income generating property.

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Individual structures for individual development projects.

Public information is available only on blind pools funds; private equity is playing a major role in one-off development projects through individual structures.

Is Private Equity Keeping Pace?

Private equity investing is attractive to for investors with no access to the market (foreign investors) or who require a lower cost of entry (residents with restricted resources).

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Local investors/family groups typically with larger resource base take positions directly in investment opportunities.

However, investments by foreign investors in real estate is faced with several legal and regulatory issues:

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ownership restrictions on foreign nationals

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regulatory uncertainties with regards to setting up and operations of investment trusts

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concern over the quality of operating properties and quality of tenants.

Issues for Private Equity

Real estate in the MENA region presents many investment opportunities due to the massive scale of investment and attractive returns.

Skilled fund managers can provide advantages to investors through:

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professional investment management processes

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transaction structuring skills to achieve optimum returns

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rigorous due diligence process to mitigate risk

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development of clear and profitable exit strategies

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ability to acquire substantial equity stakes and to play an active role in the corporate governance of investee companies.

However, using a blind pool funds structure may not always provide the best results; different investment opportunities need to be structured differently.

Opportunities and Risks for Investors

Exit Options

Usually, the holding period for each of the real estate private equity fund's investments is expected to be from 5 to 6 years, after which the investment may be sold. A number of exit alternatives are available for the Fund's investments:

Initial Public Offer

Put Option

Trade Sale

EXIT

Sale of Assets

Recent Rasmala Transaction: Real Estate

Structured and placed 2007

Deal type Private Equity – real estate

Project size US$ 220 million

Project Development of i-Rise office tower

Country Dubai, UAE

Built-up area 1.9 million ft2

Equity investorsUK and US hedge fundsGCC investorsRasmala Investments

Project completion December 2009

Target investors’ IRR 25% (net)

Rasmala’s role

Deal structuringPlacement of equityDebt arrangementProject management

Drivers for Real Estate Private Equity Funds

Government Deregulation

Privatization efforts to increase private sector participationRelaxation of real estate ownershipIntroduction of free zones/ financial centersAmendments to company ownership laws allowing for greater foreign ownership and control

Friendlier PE Environment

More transparent governance and developing legal environmentImproved political stability de-risks investments in the regionMore developed capital markets and improving exit routesLifestyle improvements have eased the ability to attract foreign talentTax free environment

Family Business Succession Planning

With more family businesses rarely surpassing their 3rd generation without ownership change, some of the region’s oldest family businesses are reaching a tipping point in their succession planning

Proven Regional Fund Managers Raising

Capital Internationally

An opportunity for international investors to access regional growthChance to partner with locally based investors to access assets that would otherwise be restricted

Road Ahead

Funding & Capital Flows

The region will remain a large source of PE capital for non-Middle East funds

Deal Flow

Middle East M&A activity will continue to grow and will energize deal flowRegional PE will continue to focus on real estate along with focus on tourism, consumer services, financial services, petrochemicals and infrastructure in generalProprietary deal flow will separate the average funds from superior ones

Deal Making

There will be more potential in the development of start-up ventures and development plays. Buyouts and acquisition targets will be harder to come byWe may see some consolidation of sub scale and fragmented industries

Deal Structuring Islamic PE will become more prevalent through a combination of growing investor appetite and innovative Sharia compliant structures