Consistently over the past 27
quarters we made it a standard practice to send a private investor’s letter to
few of our investors holding sizable active portfolios.
The letter gave us a chance
to take them through the general market conditions -in simple terms- as well as
give them a personalized brief of the portfolios that have been presented by us
and the performance for the quarter of their portfolio alongside the average of other portfolios. At
the same time we provided a brief of where we see the market heading in the
medium and long term.
This quarter we decided to
make a brief of the letter publicly available to give the wider investor base
the benefit of access to such analysis; and help every day investors by giving
them an update on things that matter to them, rather than keeping such insights
exclusive to few privileged clients.
The generic brief is a sample
and does not represent the entire letter provided to portfolio holders
investing through Arms &McGregor International Realty®.
Main elements - Investors letter Q4/2018- Q1/2019 :
I.
Current market state
II.
Portfolio analysis - Ultimate
market positioning
III.
Market analysis- What’s coming
I.
Current market state
The real-estate market is
continuing its shift towards smaller more efficiently used space. This shift is
usually driven by a market squeeze for developers to achieve an offering of smaller
ticket properties.
As explained in previous
investor letters the abuse of this phenomena gets developers to build minuscule
properties in secondary none prime locations where space is plentiful as well
as competition. Although this results in further attractiveness of property
ticket prices it results in development of none attractive properties for
inhabitants.
There is some supporting
elements that may back this drive similar to a flood of buyers from certain
markets where the standard of living space is smaller than what it is in Dubai
Market. Unless users with a similar mindset drift towards the market similar
consequences will be evident.
The luxury and Ultra luxury
sectors stay under pressure while the mid-market segment sees good movement and
the low end segment struggles.
An impacting contributor to
asset valuations is revenues such assets generate.
Although asset values have
dropped by around 20 to 50% since their highs late 2014 and rentals by around
40%; Cap rates are so attractive that it makes very little sense to dispose an
asset unless to reposition a part of a portfolio. It also makes it attractive
to grow or start building portfolios through a balanced systematic step
approach that considers the perils going forward as well as the prospects.
Offerings with long term
payment plans have started taking center stage. More offerings expected with
longer term payment plans and new to market schemes similar to real
lease to own offerings will start evolving. In some instances calculating the
present value of such offerings prove that some developers are offering
properties at rates they should not be able to afford. The availability of low
cost cash and sitting on land banks gives some developers such ability. This
consists good quality opportunities for some end users who wish to make an
entry to the housing market; as long as the property is looked at with
consideration to all what makes a property valuable and usable thus right for
the family planning to utilize the property.
II.
Portfolio analysis - Ultimate market
positioning
We have added properties to
most of our residential diverse portfolios within the last quarter of the year,
with a very descent CAP rate which in turn boosted the average rate of return
of the whole portfolio. For repositioning purposes we have let go some of the
assets linked to few portfolios which resulted in some small confirmed losses.
This was mostly made up for by some new purchases that have great short and
medium term prospects. We maintained our view of holding enough cash to fund
entries when opportunities arise. Such entries proved worthy in the third
quarter of 2018, as it resulted in 3 of the biggest active portfolios being
boosted by a 6 to 9% growth in market value quarter on quarter. The average CAP
rate among all (accounted for significant portfolios) sat at 7.1% during the 4th
quarter while the highest ROE stood at 38.6% and the lowest was for a none
ideal all cash portfolio of 8.9%.
Our middle end portfolios had
a boost by two deals in the midmarket sector which represented a great
opportunity. Shared among several portfolios those transaction came from
developers at discounted rates and were mostly resold at a very healthy profit.
End users were the major purchasers. This consisted the majority of the
movement in those portfolios. As an over all we maintain a great 8.3% CAP rate
and an Average ROE of 23%. Rentals in this segment (specifically in the top end
of this segment) have a descent room to adjust although price corrections are
not expected to be significant. We will capture opportunities in this segment
with our appetite growing for villas and townhouses, not because they offer
better prospects but because we would like to balance the portfolio’s
composition which are currently dominated by apartments.
We continued replacing
commercial assets with more prominent prime commercial assets during the last
quarter. Our target is to end up with 80% of the total portfolios value
repositioned to Grade A and prime commercial within the coming 10 months. Our
Cap rates are still healthy and stand at 8.2% although the ROEs stand at 10.5%
which is way lower than what we would hope for, as those portfolios are
predominantly cash driven. There is a necessity to add a bigger leverage
element to those portfolios which proved difficult in the past.
Although the market is
providing great opportunities for aggressive and opportunistic investors in the
mid-market commercial segment, we will stay away from in the near future until
we get more clarity on the medium and long term prospects.
We are looking at starting
new commercial portfolios to consist mainly of warehouses and industrial
assets. Such a move may see some material steps forward within the coming 2
quarters.
III.
Market analysis- What’s coming
We expect a continued flood
of off-plan projects through out the first quarter and at least the first half
of the second quarter of 2019. This said, it is expected that secondary market
transaction volumes improve within the period and through out the year.
A general government and semi
government sector boost in momentum is expected by the end of the year and
towards 2020, which although may not be sustained alone may offer a good start
to a renewed economical boost motivated and sustained by other market factors,
of which the Chinese entry is one of and several others discussed already and
highlighted multiple times in the previous private portfolio holder’s letters.
Vacancy rates are expected to
rise slightly, eventually reaffirming that well positioned, well designed and
well built property is up to the competition. Inter-Emirate migration is
expected to continue specifically as more affordable housing in better built
communities become ready for occupancy.
Institutional investors are
expected to more aggressively consider our market although a scarcity of
suitable assets is obvious. Built to fit assets will be predominantly looked at
by local investors, attracting larger scale tenants with long term lease
contracts, which by itself will offer an opportunity to far eastern and western
institutional investors and family funds.
We have seen a move by the
regulators, heading forward to align the regulations to meet but exceed in some
instances international acceptable practices. The Introduction of blockchain
powered transactions, long term visas, enhanced holiday home regulation,
property marketing rules and processes, and last but not least the global
initiatives that Dubai Land Department is heading are giving renewed trust to
investors and boosting new market entries.
Other regulation similar to
the time-share law that has been long awaited, and further development on PPPs
will boost the momentum in a market tending to maturity, while still liquid and
attractive compared to many frontier markets, and definitely outperforming
mature markets.
Developments in lending and
the valuations of assets will help the property market evolve an is expected to
continue.
We are confident that,
although the challenges, the Dubai property market will continue to represent a
good opportunity in the long term. By Utilizing the right ratio of leverage and
proper capital allocation, well built portfolios will make more sense than the
most prominent investments offered globally. While we head in that direction the
issue of how we think of real-estate and our expectation while investing
persist.
Not all assets are right for
every portfolio, similarly not all assets are right. It is imperative that we
build our portfolios scientifically with minimum impact of market or
performance pressure. We have always put an effort in doing so and we will
maintain this approach although not fancied by some. We see any other approach
a gamble rather than a step in the right direction.
Makram H. Hani
C.E.O. Arms &McGregor
International Realty®
Prepared for Arms
&McGregor International Realty’s clients
On the date of 11/ Feb./2019
Disclaimer
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or solicitation to purchase or dispose of any asset or to enter in any
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suitability of the information and should obtain independent and specific
advice from appropriate professionals or experts regarding information
contained in this publication. Information contained herein is based on various
sources, including but not limited to public information, annual reports and
statistical data that Arms &McGregor International Realty® considers
accurate and reliable. However, Arms &McGregor International Realty® makes
no representation or warranty as to the accuracy or completeness of any
statement made in or in connection with this publication and accepts no
responsibility whatsoever for any loss or damage caused by any act or omission
taken as a result of the information contained in this publication. This
publication is intended for qualified customers of Arms &McGregor
International Realty®.
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and may at any time broker or provide real estate consultancy services, or
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recipients of this publication should be aware that any or all of the foregoing
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