Build-to-Suit denotes an investment strategy which is particularly appealing to institutional investors in Dubai today, primarily because it has – if well implemented and transacted – the potential to combine highly attractive rental returns on real estate assets while effectively confining the involved risks.
Build-to-Suit by definition characterizes a way of leasing property, in which the landowner builds the property to the specifications of the tenant, followed by a mid- to long-term lease. The counterparts (tenants) are usually large, international corporations operating in the sectors of hospitality, education, transport (airlines), retail and manufacturing.
Such arrangement is typically chosen when the tenant elects to occupy a building of a certain type, however does not wish to own the land and building.
Win-Win for Investor and Tenant
The tenant`s rationale behind the deal is that housing costs account for at least 40% of an employee`s total remuneration package in Dubai today.
With the elevated volatility witnessed in Dubai and rents soaring during upward cycles, this either forces employers to considerably increase their accommodation expenditures (and thus total remuneration packages) or else accept highly negative consequences with respect to staff fluctuation and therefore their business.
Being a typical outsourcing strategy, the Build-to-Suit concept offers the tenant the tremendous advantage of foreseeable and fixed accommodation costs while at the same time enabling the latter to concentrate on his core business instead of obliging him to deal with matters like property development, facility management and the like. Obviously, the avoidance of tying up financial resources in non-core operations is another key objective to most companies today.
The investor`s rewards on the other hand are basically twofold:
First, the landlord enjoys exceptionally high net rental yields (15% and more) with zero vacancies and rent fluctuations in turn for shielding the tenant of potentially excessive future rent hikes.
Furthermore, the lion`s share of investment (construction) need only be committed once the tenancy contract is in place and the future cash-flows are assured.
Dubai`s Market for Build-to-Suit Property
Dubai has just passed the milestone of 100,000 hotel rooms in the emirate, while the Dubai government`s tourism marketing body (DTCM) expects another 34,000 rooms to be added to the inventory by 2018 and to reach a staggering 160,000 units by the time the World Expo kicks off in October 2020 in Dubai.
At the same time, there are other economic segments that are similarly as labour intensive as they are thriving – think in terms of transport (airlines), education (universities and schools) and retail – to name but a few.
That said, it speaks for itself and a constantly growing demand that the price for staff accommodation has increased by about 130% between 2009 and 2014 and is still on the rise to date.
Being „off-market“ by nature and with the absence of non-professional, typically more speculation-oriented small investors, the Build-to-Suit sector in general is more supply-/demand driven.
Critical Factors
As with any other property, the land plot`s location and accessibility are major influencing factors, thereby greatly relevant in determining the attractiveness of the Build-to-Suit object and thus pricing of rents and future valuation.
Getting all necessary building blocks in place at the right time is of paramount importance for the successful outcome of the venture. Quite obviously, a suitably located building plot to be matched to a trusted and financially sound tenant (to be complemented by appropriate collateral) are the most important elements of this strategy.
Equally reputable partners should be chosen for construction and its oversight in order to ensure a handover according to schedule and low running costs thereafter.
Conclusion
Despite some present economical headwinds caused by low oil prices and a sluggish world economy, the UAE is forecast to pick up pace considerably, reaching a predicted GDP growth of 4.3 percent in 2020 (Trading Economics). In light of this, there remains little doubt that Dubai`s successful strategy to further strengthen and diversify its economy will fuel ample future demand for staff accommodation in carefully chosen locations.
In such a context, the „Build-to-Suit“ element entails less risk than it might appear at first, owing to the fact that housing requirements typically do not contrast starkly between corporate tenants of a similar size and industry. This in turn implies that the property will be lettable and/or liquidable at the end of the contract term with little or no alterations. Furthermore, typical amortisation periods of seven years or less grant ample financial leeway at this point in time for disinvestment or subsequent letting.
Without a doubt, the beginning of an economic (rather than property-) cycle marks the sweetspot in timing for such an investment as construction and land prices are still favourable. Meanwhile, a premium on rent is achievable owing to the custom-constructed property as well as the contractually granted shield of future market-rent hikes.
While the presented strategy offers considerable attainable returns, the related risks can be effectively contained if the undertaking is well implemented – potentially offering the best of both worlds.
This article was published in the “Family Office Magazine“.
The author advises institutional investors about property transactions in Dubai. Should you have comments or inquiries, please contact the author on
