How investors will benefit from Dubai’s new law on real estate funds

The move is expected to attract liquidity into specialised commercial segments of the property market, experts say

Dubai’s property sector attracted new foreign investment of more than $27 billion in 2021. Reuters

Dubai’s new law to incentivise property investment funds is expected to attract more foreign capital to the industry, but it is too early to tell how it will benefit retail property investors, experts have said.

The law will provide further transparency to institutional investors, says Prathyusha Gurrapu, head of research and advisory at property consultancy Core.

“It may not be a direct benefit to typical retail investors, as more education is needed on the benefits of real estate investment funds. Retail investors are currently being drawn to smaller real estate crowdfunding and fractional ownership platforms,” Ms Gurrapu says.

A real estate investment fund is a type of mutual fund that invests in securities offered by public property companies, including real estate investment trusts (Reits), according to Investopedia.com.

While Reits pay out regular dividends, the investment funds provide value through appreciation, Investopedia says. Like regular mutual funds, real estate funds can be either actively or passively managed

Private real estate investment funds are professionally managed funds that invest directly in properties. These are available only to accredited, high-net-worth investors and typically require a large minimum investment, Investopedia.com said.

Dubai introduced the new law on Tuesday, which is aimed at promoting the growth of real estate investment funds in the emirate.

The law grants certain privileges to real estate investment funds as part of efforts to strengthen the emirate’s position as a global destination for real estate investment.

It applies to real estate investment funds licensed and regulated to operate in the emirate, including those in special development zones and free zones, such as the Dubai International Financial Centre

It sets out incentives to encourage the funds to invest in various property projects in the emirate, as well as to attract international real estate funds to carry out their investment activities in Dubai.

Property is a vital sector of Dubai’s economy that has been performing well in recent quarters, with heightened foreign investor interest coming on the heels of Expo 2020, says M R Raghu, chief executive of research company Marmore Mena Intelligence.

In 2021, Dubai’s property sector attracted new foreign investment of more than $27 billion, he adds. The new real estate fund law will help to further capitalise on this interest from foreign investors.

The formation of real estate investment funds is integral to the development and maturity of not only property markets, but also capital markets, says Sameer Lakhani, managing director of commercial lender Global Capital Partners.

“They are specialised and pure play in nature in that they offer specific access to annuity incomes in specific segments of the markets,” he says.

“As institutional interest has grown in Dubai’s real estate and capital markets, the law is timely to encourage development of this segment.”

There are a few Reits that have already listed in the emirate and more are in the offing, Mr Lakhani says.

However, by attracting foreign international asset managers and international institutional investors, the stage is set to harness liquidity into the development of specialised commercial segments of the real estate market and enable access to both retail and institutional investors, he adds.

“Given the increasing appetite for annuity income streams, this law could not be more opportune,” Mr Lakhani says.

While Dubai continues to attract record volumes of foreign direct investment, the new law will further encourage real estate funds and institutional investors to enter the market and provide greater regulation and transparency, Ms Gurrapu from Core says.

The law provides for the establishment of a register, called the Real Estate Investment Funds Register, at the Dubai Land Department.

Under the new law, funds are eligible to be included in the register provided that the value of the real estate assets investors own is not less than Dh180 million ($49m) and these funds should not be under suspension from trading on the Dubai Financial Market at the time of application.

A “Committee for Property Investment Funds” will be set up to identify areas and properties that funds are allowed to invest in either through full ownership or lease for a period not exceeding 99 years.

The value of properties that funds invest in should be Dh50m or above, while properties should be listed as commercial properties, according to the new law.

“The fund is for a minimum of Dh50m per property investment, which brings a lot of institutional investment but there is nothing to say that private investments will not be eligible,” says Lewis Allsopp, chief executive of Dubai broker Allsopp & Allsopp.

“The real estate fund law was issued to support more foreign and high-scale investment in Dubai’s already buoyant real estate market. This will keep Dubai at the top of the list for real estate investments.”

The new law comes as the Dubai property market continues to rebound, with prices and transaction volumes, particularly in the residential sector, continuing to rise in recent months.

Average residential property prices increased 10 per cent in the year to June, with apartment prices nearly 9 per cent higher on average and villa prices increasing 19 per cent, a recent CBRE report said.

The new law will help to bring more foreign institutional capital that will benefit the sector and lead to a multiplier impact on the overall economy, according to Siddiq Farid, chief executive and co-founder of real estate crowdfunding platform SmartCrowd.

“The law will also benefit existing investors as it will bring new demand to the market,” he says.

“It’s only a matter of time before laws are passed to facilitate real estate investment at the retail level.”

Dubai apartment prices in July 2022 — in pictures

SmartCrowd delivered its investors a 39.25 per cent total net return — comprising rental income and capital gains — over a 17-month period and 27.9 per cent return on an annualised basis after recently exiting a Dubai Marina property investment, the company said on Wednesday.

The studio in Dubai Marina was purchased by 53 investors through the SmartCrowd platform for Dh530,000 in February last year and sold for Dh780,000 in July, resulting in a 47 per cent gross capital appreciation, the company said.

The property generated a net income to its investors of Dh74,330, representing an annualised yield of 10.04 per cent, compared with Dubai Marina’s market average of 6.2 per cent, according to SmartCrowd, which allows investors to access property in Dubai from as little as Dh500.

The platform has crowdfunded 75 properties valued more than Dh55m and distributed more than Dh3.2m in rental income.

Meanwhile, investors could be given first right of refusal on new real estate developments or even incentives to take over and complete older projects, says Lynnette Sacchetto, head of data and digital transformation at Allsopp & Allsopp.

“At the moment, we don’t know the full details, but it seems like a very positive move,” she says.

As the new law offers incentives to funds investing in Dubai’s commercial real estate, it could be expected to improve demand in the market and, in turn, price levels, thereby benefiting retail investors, Mr Raghu says.

Office capital values in Dubai for the first quarter of this year were 25.5 per cent lower than the same period in 2015, according to the ValuStrat Price Index for Dubai.

“Against this backdrop and reports of increased demand for office space as foreign companies look to relocate or expand, the segment seems to be favourably positioned,” Mr Raghu says.

“Real estate funds are likely to benefit from the segment’s favourable outlook and the incentives that the law offers.”