Consistently over the past 28 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.
Last 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 Q2/2019 :
- Current market state
- Portfolio analysis – Ultimate market positioning
- Market analysis- What’s coming
I. Current market state
The market settlement started. Units can’t get any smaller, payment plans can’t get more convenient, Developers need to start finding more lucrative less traditional approaches to continue building and successfully selling property they develop.
The gap between prices of completed secondary market property and primary off plan sales is currently significant. Most of secondary market properties are currently selling at below replacement value.
Growth in demand from new markets alongside the regional liquidity ease have supported sales specifically in the multiple launched projects by the biggest developers in the city.
Rental prices stay under pressure, although with no clear base yet across the market, some areas seam to have reached a demand zone that may be enough to support some price consistency.
II. Portfolio analysis – Ultimate market positioning
We have taken a caution approach when adding properties to most of our residential diverse portfolios last quarter, we have prudently worked to try and improve the returns in few portfolios that have suffered from drop in rental values . For repositioning purposes we have let go some of the assets linked to few portfolios which resulted in some small confirmed losses. We have now started picking up some good deals and putting the cash into action. The current purchases are being done at a higher CAP rate which will hopefully reflect on the average annual returns to be seen by the end of the current year. The average CAP rate among all (accounted for significant portfolios) sat at 6.9% during the 4th quarter while the highest ROE stood at 21% and the lowest was for a none ideal all cash portfolio of 8.7%.
Our middle end portfolios had very little movement however a significant transaction allowed us to improve the general performance and recover on some of the weak performance evident with some of the properties owned. The pressure is still evident in this sector however opportunities persist and are becoming more interesting as prices become so good. As an over all we maintain a great 8.1% CAP rate and an Average ROE of 19%. We will get more opportunities as it seems in this market segment which is promising. Such opportunities will impact the over all positioning for the current year.
We have not replaced commercial assets at the same pace as market prices have not supported our target movement. While sale prices have seen a significant drop most of the returns are stable which makes a sell none justifiable and a hold of the same asset more logical. Our average Cap rates are still healthy and stood at 11.3%. Adding leveraging to those portfolios is still proving challenging, this said we see that the future is bright for commercial assets as there is lack of new supply coming to the market as the city grows.
We held tight and didn’t add new commercial assets, mainly to consist of warehouses and industrial assets. After concluding our first deal within the portfolio structure we believe that the coming quarter or two we will have access to better opportunities and better insight to prudently take forward such entries.
III. Market analysis- What’s coming
We expect fewer off-plan projects launches through out the third quarter of 2019. This is expected to be boosted again to continue launches in the 4th quarter. Secondary market transaction volumes are expected to improve within the period and through out the year.
The boost in momentum has gained some pace specifically with the most recent moves from the authorities to increase accountability, making business setup and running easier, and working on several laws that boost investor confidence and impact the sustainability of the boost. As we said in our last letter “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 continued rising however we believe have found a napping point, this may be a temporary settlement zone until 1st to second quarter 2021, while as confirmed before ”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. We expect a boost of the movement mid 2020 as plenty of competitive low cost low rise or single family home projects come online.
Institutional investors have started again showing interest in the market and specific parts of it. Although we have not seen many significant acquisitions on an institutional level, As we see several institutions gearing in with already raised funds we expect institutions to start acting on opportunities more often. As mentioned in our past letters “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”.
Consistent regulatory move towards further transparency and investor protection showed us great determination all market stake holders to improve the investment climate. The Introduction and implementation of long term visas, and several other newly introduced laws and proposed laws similar to the addition of a penalty to be paid by developer’s for delays on projects equivalent to a minimum of one year of rent enhance investor sentiment and improve the market reputation.
We see an urgent need to avoid digging deeper in none conventional solutions in property development, sales and marketing. Introduction of modern more advance structures can prove highly valuable in the short term and sustainable in the long term. It is far from advisable that we continue to grow apartments smaller but not more efficient, cheaper but not of better value especially as quality is compromised. A move towards more efficient designs, more lucrative product structures, more thought of communities, is imperative.
As we repeatedly mentioned each market player should perform their task effectively without trying to take tasks of all other market players, to avoid uncertainty of future in probable none calculable risks. A developer is not a financier, a broker is not a developer, neither should a developer act as a broker.
Again, some developers may be launching schemes they can’t afford, to sell properties they may not be able to build.
Our market competitiveness is improving, although it is still to be seen it seems that we will be able soon to change the whole view of our market. I refer our investors to an article written few years ago and published by us with a headline “ARE WE KILLING THE PROPERTY MARKET IN DUBAI BY DEVELOPING THOUSANDS OF HOUSES”. Moves to improve the quality and costs of education and introducing medical schemes are other indicators that we are going in the right direction.
We should not ignore the global tensions on all levels, this said the prospects in the Dubai market seem to be holding on way better than expected.
Makram H. Hani
C.E.O. Arms &McGregor International Realty®
Prepared for Arms &McGregor International Realty’s clients
June/2019
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