Real estate has long been a core economic sector and investment of choice in the Middle East region, buoyed by strong demand fundamentals from solid population and GDP growth, as well as excess liquidity from oil. Realizing its importance in shaping their nascent economies and its action as a catalyst for growth and diversifying the economy through reduced dependence on oil, many local governments have set up large national real estate development champions and pushed to establish ambitious mega-cities and urban developments. The sector was instrumental in addressing the needs of the region’s burgeoning youth, especially in housing and entertainment.
Albeit emerging, the regional real estate landscape has been rivaling the world’s leading markets, with plenty of media attention paid to the success stories of local champions and the grandeur of the many pioneering urban developments.
The region however is not a single uniform market, and remains divided into “old” markets and “new” markets, each with its own specificities that shape the real estate landscapes within.
Founded in the early 2000s, Strategy&’s Middle East real estate practice is the oldest dedicated practice for this sector among top-tier consulting companies in the region. We have supported over the years four main types of clients:
Real estate developers/Asset managers
Single- and multi-segment master and property developers, in the context of startups, growth, strategic evolutions, and restructurings.
Family businesses and investors
Family businesses and large land owners looking to optimize value creation from their large land banks and property portfolios.
Diversified industry (non-real estate) corporate entities such as car distributors, banks, telecom companies, and airlines looking to effectively tap into real estate as a support to their core operations and optimize value creation from their large property portfolios.
Government and government-controlled entities
Ministries, municipalities, and other government-controlled entities and authorities looking to tap into their real estate portfolios to support the delivery of their core agendas (housing, entertainment, education, etc.) and drive economic diversification and financial sustainability .
Over the past two decades, we have been working in tandem with our regional clients, offering end-to-end strategy-to-execution support across all facets of real estate — strategic diagnostics, strategy definition, digital and customer experience strategy, portfolio and asset management, operating model design, fund design and setup, project feasibilities and development support, and end-to-end implementation support.
Key industry trends across all real estate entities in the Middle East are as follows:
Tougher macroeconomic climate
The triple effect of low oil prices, political uncertainty, and impending tax reform is temporarily curbing fundamental demand and creating volatility in the real estate markets, evidenced by the recent slowdown in sales and transaction growths, developer performance, and project pipelines. The macroeconomic climate has also put a damper on funding, with liquidity-constrained banks limiting cheap financing, and equity investors preferring to invest outside the region. Real estate developers and investors are thus redefining and evolving their business models, strategies, and operating models to ride the wave and emerge stronger.
Emphasis on asset management
With curbed growth prospects and dwindling public finances, local governments, family businesses, and developers alike are looking to extract maximum value from their land and operating property portfolios. Large RE portfolio owners are now actively exploring value creation strategies on their dormant plots and optimizing the asset management of their operating properties across all facets, in an effort to generate additional income, hedge against core business slowdown, and maintain/enhance margins. Similarly, governments are increasingly adopting PPP models to maximize private-sector participation.
Financing via funds
Real estate financing in the region customarily was limited to basic structures and sources, mainly traditional corporate and project-level debt and equity funding. Now real estate players are looking to expand their financing models and are starting to use alternative models such as private RE funds, club deals, and RE investment trusts (REITs). REIT regulation has recently been introduced in Saudi Arabia, the UAE, and Bahrain. This new mode of financing not only provides access to cash, it diversifies risk, and generates other revenue streams, while still affording control of projects.
Selling the experience instead of the product
As the landscape and capabilities mature, and markets become more efficient, the region’s developers are increasingly seeking new ways to win against the competition and differentiate their products. They are slowly evolving their traditional “product-based” business to an “experience-based” one through actively offering innovative and commercially viable digital products and enhancing the end-to-end tenant/customer experience, from marketing and sales down to daily operations. This will help solidify developers’ brands, and help them emerge stronger and differentiated from the slowdown. This experience-based innovation can be seen in the new urban plans and master plans, characterized by the emergence of next-generation cities and smart cities to support the rapid adoption of new urbanization trends and requirements.
Affordable communities for young residents
As the young people who make up the population bulge come of age, demand for affordable housing is at an all-time high. However, old preferences of living in large single units/villas is difficult to achieve at the right price or location. Newer and smarter community planning is much needed, where smaller units (apartments and town houses) are introduced in the context of a vibrant self-sustainable community, where residents can share a plethora of common amenities, facilities, and social infrastructure to fulfill the desire for an active social life and seamless social inclusion.