RIYADH — The next decade is expected to witness a major growth in private debt as an alternative to commercial bank lending in the Middle East, with diversified capital sources set to boost development of the real estate market, according to a new report by JLL in conjunction with Clifford Chance.
Despite continued growth in the size of the global private debt market, the Middle East has historically lagged behind, relying on commercial banks as the primary lending source for real estate developers and investors. The report titled “Financing Bricks and Mortar; Opportunities for private real estate debt in UAE and KSA,” outlines how diversified debt sources and alternative financing structures will boost lending competition and in turn inject new capital into the real estate market.
While debt should be an integral part of real estate investment and development, the Middle East has historically seen less use of debt than the more mature overseas markets, primarily due to cultural beliefs and due to challenges related to lack of mortgage and bankruptcy laws and transparency of risk and reward metrics. Steady improvements in market transparency and regulations are providing a more supportive environment for private funding sources to participate debt stack and subsequent growth in the real estate market.
Two major benefits of private debt are recognised in the report, the availability of finance to smaller and less well established borrowers who currently struggle to secure traditional bank debt without providing a high level of collateral as security, and more flexible loan terms for all.
“Developers and investors continue to seek flexible debt terms for the development and acquisition of real estate assets,” said Gaurav Shivpuri, head of capital markets for JLL in MENA. “With historical limitation of terms on lending from the commercial banks, it is not unreasonable to assume that up to 10% of the total real estate debt market could come from private debt providers within the next decade. Collective investment vehicles will also emerge as debt providers, as investors see debt as an attractive capital stack for taking real estate exposure, especially given the interest rate cycle we are entering in” he added.
In 2017, a total of $81 billion (AED300 billion) of bank debt was lent to the real estate and construction sector in the UAE. JLL estimated that around 10% of the $51 billion of private debt that was raised outside of the three main global markets of USA, Europe and Asia Pacific in 2017 could have been lent to the real estate sector in the GCC.
JLL is a leading professional services firm that specializes in real estate and investment management. Its vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. JLL is a Fortune 500 company with nearly 300 corporate offices, operations in over 80 countries and a global workforce of 83,500 as of March 31, 2018. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated.
Clifford Chance is one of the world's leading international law firms and has been advising in the Middle East for over 40 years, with over 30 Tier One directory rankings achieved in the region in 2017, and more award winning first-of-a-kind deals than any other firm. Clifford Chance has a cooperation agreement with Abuhimed Alsheikh Alhagbani Law Firm (AS&H) in Saudi Arabia and works closely with AS&H on a number of complex and innovative mandates covering a wide range of practices. — SG
