Pe - Real Estate -
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Private Equity Real Estate Takes Centre Stage
Tamer Bazzari, CA, CFA Deputy Chief Executive Officer Rasmala Investments
Real Estate Investment Options
Development
Income generating assets
Property trading
Primary investor profile
Government entities, Private Equity Funds, Private Companies
REITS, Private Equity Funds, High Net-Worth Individual Investors, Business Groups
Individual investors, small funds
Examples
iRise Tower
World Trade Centre, Emirates Towers
Distressed sale, value play
Investment timeframe
Short-term (2-3 years)
Medium to long-term (> 5 years)
Short-term (1-2 years)
Risk/return profile
Moderate risk with potential for high return
Low risk with stable returns
Relatively high risk / high return
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: − Listed companies : available capital − Quasi Government entities: sale of land by master-developer − Large family groups /corporate entities : parent/private funding − Small developers : owner’s equity, private equity
Too Much Money Chasing Too Few Assets?
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. Over US$ 300 billion of projects announced
Significant price appreciation
Why does private equity account for just US$ 2.8 billion* of investment?
* Cumulative since 2002
Attractive yields of 10-15%
Is Private Equity Keeping Pace?
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. − Private Equity funds (“Blind pool”) works for pre-IPO equity deals and acquisition of undervalued properties. − Real estate investment trusts could be the best vehicle for income generating property. − 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.
Issues for Private Equity
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). − 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: − ownership restrictions on foreign nationals − regulatory uncertainties with regards to setting up and operations of investment trusts − concern over the quality of operating properties and quality of tenants.
Opportunities and Risks for Investors
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: − professional investment management processes − transaction structuring skills to achieve optimum returns − rigorous due diligence process to mitigate risk − development of clear and profitable exit strategies − 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.
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
Trade Sale
EXIT
Sale of Assets
Put Option
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 investors
UK and US hedge funds GCC investors Rasmala Investments
Project completion
December 2009
Target investors’ IRR
25% (net)
Rasmala’s role
Deal structuring Placement of equity Debt arrangement Project management
Drivers for Real Estate Private Equity Funds
Privatization efforts to increase private sector participation Relaxation of real estate ownership Introduction of free zones/ financial centers Amendments to company ownership laws allowing for greater foreign ownership and control
More transparent governance and developing legal environment Improved political stability de-risks investments in the region More developed capital markets and improving exit routes Lifestyle improvements have eased the ability to attract foreign talent Tax 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 growth Chance to partner with locally based investors to access assets that would otherwise be restricted
Government Deregulation
Friendlier PE Environment
Road Ahead
Funding & Capital Flows
The region will remain a large source of PE capital for non-Middle East funds
Middle East M&A activity will continue to grow and will energize deal flow Regional PE will continue to focus on real estate along with focus on tourism, consumer services, financial services, petrochemicals and infrastructure in general Proprietary deal flow will separate the average funds from superior ones
Deal Flow
Deal Making
Deal Structuring
There will be more potential in the development of start-up ventures and development plays. Buyouts and acquisition targets will be harder to come by We may see some consolidation of sub scale and fragmented industries
Islamic PE will become more prevalent through a combination of growing investor appetite and innovative Sharia compliant structures
Tamer Bazzari, CA, CFA Deputy Chief Executive Officer Rasmala Investments
Real Estate Investment Options
Development
Income generating assets
Property trading
Primary investor profile
Government entities, Private Equity Funds, Private Companies
REITS, Private Equity Funds, High Net-Worth Individual Investors, Business Groups
Individual investors, small funds
Examples
iRise Tower
World Trade Centre, Emirates Towers
Distressed sale, value play
Investment timeframe
Short-term (2-3 years)
Medium to long-term (> 5 years)
Short-term (1-2 years)
Risk/return profile
Moderate risk with potential for high return
Low risk with stable returns
Relatively high risk / high return
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: − Listed companies : available capital − Quasi Government entities: sale of land by master-developer − Large family groups /corporate entities : parent/private funding − Small developers : owner’s equity, private equity
Too Much Money Chasing Too Few Assets?
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. Over US$ 300 billion of projects announced
Significant price appreciation
Why does private equity account for just US$ 2.8 billion* of investment?
* Cumulative since 2002
Attractive yields of 10-15%
Is Private Equity Keeping Pace?
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. − Private Equity funds (“Blind pool”) works for pre-IPO equity deals and acquisition of undervalued properties. − Real estate investment trusts could be the best vehicle for income generating property. − 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.
Issues for Private Equity
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). − 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: − ownership restrictions on foreign nationals − regulatory uncertainties with regards to setting up and operations of investment trusts − concern over the quality of operating properties and quality of tenants.
Opportunities and Risks for Investors
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: − professional investment management processes − transaction structuring skills to achieve optimum returns − rigorous due diligence process to mitigate risk − development of clear and profitable exit strategies − 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.
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
Trade Sale
EXIT
Sale of Assets
Put Option
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 investors
UK and US hedge funds GCC investors Rasmala Investments
Project completion
December 2009
Target investors’ IRR
25% (net)
Rasmala’s role
Deal structuring Placement of equity Debt arrangement Project management
Drivers for Real Estate Private Equity Funds
Privatization efforts to increase private sector participation Relaxation of real estate ownership Introduction of free zones/ financial centers Amendments to company ownership laws allowing for greater foreign ownership and control
More transparent governance and developing legal environment Improved political stability de-risks investments in the region More developed capital markets and improving exit routes Lifestyle improvements have eased the ability to attract foreign talent Tax 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 growth Chance to partner with locally based investors to access assets that would otherwise be restricted
Government Deregulation
Friendlier PE Environment
Road Ahead
Funding & Capital Flows
The region will remain a large source of PE capital for non-Middle East funds
Middle East M&A activity will continue to grow and will energize deal flow Regional PE will continue to focus on real estate along with focus on tourism, consumer services, financial services, petrochemicals and infrastructure in general Proprietary deal flow will separate the average funds from superior ones
Deal Flow
Deal Making
Deal Structuring
There will be more potential in the development of start-up ventures and development plays. Buyouts and acquisition targets will be harder to come by We may see some consolidation of sub scale and fragmented industries
Islamic PE will become more prevalent through a combination of growing investor appetite and innovative Sharia compliant structures
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