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?

Attractive yields of 10-15%

* Cumulative since 2002

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:

Trade Sale

Initial Public Offer

EXIT

Sale of Assets

Put Option

Recent Rasmala Transaction: Real Estate

Structured and placed Deal type Project size Project Country Built-up area

2007 Private Equity – real estate US$ 220 million Development of i-Rise office tower Dubai, UAE 1.9 million ft2 UK and US hedge funds GCC investors Rasmala Investments December 2009 25% (net) Deal structuring Placement of equity Debt arrangement Project management

Equity investors

Project completion Target investors’ IRR

Rasmala’s role

Drivers for Real Estate Private Equity Funds

Government Deregulation

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

Friendlier PE Environment

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

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

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

Deal Structuring

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