The distress funds are out there, as are those with interest in them. But a chasm separates their intent from actually getting transferred into the acquisition of properties they can then turnaround. It's certainly not for chancers.

"There are not a lot of assets available in the UAE that have income attached to them. This is the limitation in attracting investors," says Blair Hagkull, managing director of Jones Lang LaSalle MENA. The consultancy is of the opinion that overseas investors, the big pension funds and investment banks, are willing to commit funds to the region, but only to well-packaged investments.

"The vulture funds in the market want a product that's leased out, with a regular income producing stream," adds Craig Plumb, who heads research at JLLS. "There is plenty of money looking for such products."

Is there a way out of the impasse? In the absence of major buying activity at the end-user level, these funds represent more than a beacon of hope.

However, investors by and large remain averse to risk and are shunning development profits in return for lower — and stable — returns in the local market. Sceptical about short-term capital gains, investors are now committing funds based on likely asset performance and tenant quality.

"The level of returns is expected to become more stable and sustainable," says Plumb. "My advice to an investor would be to lease out the building on long-term leases, and in turn, make it saleable."

With investors wanting to quantify the risk of an asset, the valuation industry has assumed pre-eminence like never before. However, the lack of transactions to benchmark data, the inadequate regulatory framework and market volatility have rendered it difficult for valuators to establish the true value.

"Valuations are important in this climate as several companies want to re-evaluate their portfolio," says Andrew Charlesworth, chief of capital markets, Jones Lang LaSalle (MENA region).

With little happening on other fronts that could divert their attention this year, developers are well-advised to ensure the local market adopts valuation codes that are better aligned with international best practices. Unlike in the boom phase, when an upturn in prices in the central business district would prove favourable even for the outlying areas, the market will see a polarisation like never before this year.

This selective stability will see locations such as the Abu Dhabi Corniche, DIFC and the Shaikh Zayed Road corridor — to name a select few — attract occupiers, while those in the periphery will suffer for want of better amenities. "Growth is unlikely in 2010 — selective markets will remain stable at best," warns Plumb.

Citing an abundance of strata title office buildings in Business Bay, Plumb rationalises how investors and tenants are dissuaded by having to contend with multiple landlords. Approximately 30 to 35 per cent of all office space in Dubai is currently lying vacant. The situation in the capital city shows a contrast with single-ownership buildings available for leasing. "But, the capital is some way behind Dubai in getting those buildings finished," says Plumb. "There is a huge shortage of supply in terms of complete buildings. In 2010, there will be a lot of new supply and the commercial market in Abu Dhabi will move from being under-supplied to over-supplied over the next two to three years. It is going the same route as Dubai."

With the market still in repositioning mode, several hitherto upscale projects will be repositioned for the mid segment and actual end users. According to the JLLS data, 60 per cent of the housing stock comprising luxury and secondary homes, built in the last five years, was targeted at just 16 per cent of the marketplace. Of these, the overwhelming numbers were made up of speculators and short-term investors.

Reiterating the argument of a demand-supply mismatch, the majority of units was built for an average monthly salary of above Dh30,000, a segment of the population that is far from being the dominant one. Summing it up with an anecdote, Hagkull states, "There will now be more schools, parks and neighbourhood retail than luxury spas in a community."

Upscale developments, once ubiquitous in Abu Dhabi's masterplan, are now being re-conceptualised and scaled down to meet the demand.

"A lot of the product in the capital hasn't been built as yet, developments that were originally planned as large apartments are now being split into smaller apartments," confirms Plumb.

The price adjustment in Dubai and infrastructure glitches in the northern emirates will strip them of investment potential, he adds.

With limited project financing available, stakeholders will look to co-investment vehicles to raise equity. Private equity and family wealth funds will emerge as the preferred option for developers and investors alike.

Until banks restore their confidence in the real estate sector, lending will remain subdued or will be offered at lower loan-to-values to mitigate the risk.

Flagging demand cannot be solely addressed by industry players alone. The authorities have to come up with initiatives such as sustainable job creation and support for smaller and mid-sized enterprises to boost the resident base. JLLS emphasises the need to convert transient visitors into long-term residents.

"Generating tenant and occupier demand is critical for long-term economic growth in the UAE," states Hagkull.

An increasingly tenant-friendly market will continue to be more so with landlords willing to see reason on fit-out concessions, longer rent-free periods, longer leases and favourable payment terms. The skewed demand-supply ratio will also see a shift in focus from asset creation to better management and value enhancement of existing assets, JLLS reckons.

At the same time, an increase of trust and transparency through regulation is the single biggest challenge the industry needs to address to regain eroded investor confidence.

Regional markets have much to offer

Financially secure local developers should continue trying for an entry into regional markets, especially those with a large domestic demand base such as Saudi Arabia, Egypt and Morocco. As for sovereign and family-owned wealth funds, they are likely to adopt a fine balance between an inward-looking strategy and targeting select opportunities abroad in 2010.

Middle East investors purchased $1 billion worth of property in London in 2009 owing to the favourable exchange rate and competitive deals. The overseas capital flow will spread to other established markets such as Frankfurt, Paris, New York, Sydney and Hong Kong in 2010.

"Investors from the Middle East started looking eastwards for yields between 2007-08," says Fadi Moussalli, regional director, International Capital Group. "They then considered investing in China, India and Vietnam. In 2008, the yields in the West widened, with London offering up to 7-8 per cent returns. In 2009, investors from the region continued to look at the West owing to the attractive prices."

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