Can PPPs drive change for real estate investment in the Middle East?

New laws have been drafted across the region to encourage investment into infrastructure through public-partnerships

November 08, 2018

Housing, education and healthcare real estate are set to benefit from public private partnerships (PPPs) as governments across the Middle East region take steps to make these schemes appeal to the private sector.

New laws have been drafted across the region to encourage investment into infrastructure through public-partnerships in an effort to ease the pressure on the public purse.

Earlier this year, Dubai paved the way when construction began on the region’s first project under the new PPP law – a seven-storey building that will house the Supreme Court as well as commercial and retail space. Abu Dhabi followed suit in July when the government introduced a Dh50 billion (US$1.3 billion) economic stimulus package to reduce costs for real estate developers and PPPs. Saudi Arabia is also looking to follow suit.

The Saudi government has announced plans to generate between US$9 billion and US$11 billion in revenue by 2020 through a privatisation programme, which will encourage public-private partnerships. Like in the UAE, it hopes that partnerships will help to boost economic growth by lowering the government expenditure in these key areas and create investment opportunities for the private sector at a time when market sentiment is lower than in previous years.

Infrastructure and federal building projects aside, housing, education and healthcare could become key beneficiaries in the region, according to Gaurav Shivpuri, head of Capital Markets, MENA, JLL. “In almost every area of sectors, there’s an opportunity,” he says. “The shortage of affordable housing remains a pressing concern for the region, along with providing adequate schools and hospitals for growing populations.”

But, translating policy into profitable deals is proving problematic in some quarters where the returns on offer are not competitive enough to attract real estate investors.

“Several governments have created a PPP structure but they haven’t gone into enough detail to get PPPs moving and many developers are finding that the returns on such projects are too low to build competitively,” adds Shivpuri.

As an example he refers to education projects in Saudi Arabia where developers are being offered 25-year ground leases to develop schools rather than outright ownership. “The return that real estate investors seek, assuming land leases may not be renewed, is far higher than what a school can afford to pay,” he says.

“There is a vision but a gap exists between where they are now and what they want to achieve and so policy makers are in the process of putting a more robust framework together.”

Will PPPs open the door to foreign investors?
Some markets are expected to be more successful at attracting foreign investors than others, says Shivpuri. Dubai is expected to attract foreign capital into public-partnerships because of its more open real estate regulation around foreign ownership. But for markets like Saudi Arabia, overseas investment is some way off.

“Wherever there is a large real estate angle to any PPP scheme, the ownership of the asset is an issue,” says Shivpuri. “In Saudi, without law change to real estate ownership, I expect subdued foreign interest, unless the investors carve out the real estate.”

In this case, they would invest in the operating company rather than the property company, and the operating company then takes a sale and leaseback on the property.

The introduction of REITS on the Saudi Stock Exchange in 2016 was a welcome sign that the market was opening up to non-Saudi nationals but direct investment still remains difficult. Ownership of land in Saudi Arabia is generally limited to GCC nationals or entities and a raft of restrictions and red tape exist to limit foreign property ownership to leasehold agreements and access to financing is heavily regulated

Much of the public-partnership interest will likely come from regional players, led by private equity investors, but a share of foreign capital allocated by global investors to China, India and other emerging markets, would eventually make its way more to the UAE.

“It takes years for investors to get comfortable with new laws and regulation so I don’t see an immediate impact but rather, an evolution,” adds Shivpuri.

With economic growth still slow overall and oil prices down, investors are expected to treat the Saudi Arabia with caution over the next 12 months. But the hope is that governments will find a way to make partnership deals competitive enough to kick-start a new era of investment into the region’s real estate market.

Click to read about how China is growing its economic influence in the Middle East.

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