JEDDAH: Although investment appetite exists, the Middle East and North Africa (MENA) region is missing out on significant regional and global capital flows because of the shortage of investment grade product and the lingering price gap between buyers and sellers, Jones Lang LaSalle, the world's leading real estate investment and advisory firm, said Sunday. In its 2011 MENA Real Estate Investor Sentiment Survey, Jones Lang LaSalle highlighted two clear trends. First, the amount of overseas capital allocated to investing in MENA real estate is negligible. Second, although local investors are seeking to increase exposure within the region - particularly in those countries considered stable like the UAE and Qatar - activity is limited by type of product available and asset pricing that does not fully incorporate local market risks. "In a region awash with liquidity, the lack of tenable investment opportunities leads investors to deploy capital overseas," the report said. Clearly, the MENA real estate markets have the potential to capture a much higher proportion of capital flows from both international and regional buyers. Unlocking this potential, however, will require a few adjustments, such as an increase in the product available, willingness of owners to transact with greater transparency, and realistic pricing that is benchmarked against global markets, the report noted. Andrew Charlesworth, head of Capital Markets for the MENA region at Jones Lang LaSalle, said: "While recent events have created some uncertainty across MENA, there are areas within the region, particularly the GCC, where there remains a reasonable level of demand among local investors. The problem is one of finding and securing the right product at a price that makes sense." The report also noted that investors continue to be frustrated by the lack of bank finance and the cost of financing when it is available. Increased risk aversion is leading investors and developers to adjust their corporate strategies and focus on building stable income generating portfolios. Lack of product, mispricing, and limited finance availability thwarts transaction, portfolio restructuring and rebalance of portfolio risk, the report said. Even for investment grade commercial properties (buildings in central locations of high demand with long term leases and strong tenant covenant) available in the region, institutional investors are simply not willing to purchase at yields available in mature markets like London. Together with limited transaction activity, the custom of privately conducting local investment deals discourages international investment and inadvertently stifles recovery of the regional real estate markets. The survey also indicated that buyers outnumber sellers in all markets with a distinct polarization occurring between those countries perceived as stable, like the UAE and Saudi Arabia, and those still characterized by political uncertainty. In the prevailing atmosphere of risk aversion, factors like political stability and security of income are at the forefront of investment decisions, the survey pointed out. The majority of respondents indicated plans to increase investment in the MENA real estate market over the next 12 months, but actual transaction activity will remain constrained by the lack of suitably priced product, the survey said. In terms of yield spread, the lack of differentiation between cities and asset classes suggests investors are focused on achieving a specific return threshold and thus are focused on the strength of the tenant covenant rather than the asset risk. Moreover, driven primarily by supply concerns in almost all sectors, investors anticipate further capital declines in many MENA markets, the survey said. Nonetheless, office assets remain the most attractive investment class for this investor base, but this preference is not necessarily in line with short-term market conditions, the Jones Lang LaSalle survey noted.
