Safe as houses: Emirates REIT's Sylvain Vieujot

A year after the Emirates REIT initial public offering, executive deputy chairman Sylvain Vieujot says that potential headwinds in the Dubai property market bring more opportunities than challenges
Safe as houses: Emirates REIT's Sylvain Vieujot
By Ed Attwood
Fri 10 Apr 2015 09:26 AM

Sylvain Vieujot knows a thing or two about famous buildings. In a previous life, he worked with the company that used to operate the Eiffel Tower in Paris. Nowadays, as executive deputy chairman of Emirates REIT — the UAE’s first real estate investment trust — he spends his time researching and investing in some of Dubai’s landmark properties in a bid to deliver returns to his shareholders.

“A REIT is about being able to redistribute dividend; it’s halfway between a stock and a bond,” the Frenchman explains. “It’s like a bond because it has to distribute a dividend, and it’s like a stock because you expect to pick up the right building that will improve in value and cashflows.”  

So far, it looks like Vieujot’s hard work is paying off. Last year, the company reported a net profit of $49m, up 39 percent, while its total assets rose by 78 percent to $594m. The company’s net asset value per share has risen to $1.41 from $1.35 at the end of 2013. Even more importantly, almost exactly a year ago, Emirates REIT listed on the Nasdaq Dubai, raising $175m. The stock performed well shortly after the IPO, although it fell in line with the rest of the market at the tail-end of last year, largely due to sentiment over the rapidly collapsing oil price.

Launched in March 2011, Emirates REIT bought its first property — Building 24 in Dubai Internet City — just two months later. It now owns seven commercial properties in Dubai, including sites in Knowledge Village, Dubai Marina, Dubai Media City and on Sheikh Zayed Road, the GEMS World Academy school in Al Barsha and 17 of the 25 office floors at the Index Tower in the DIFC.

“What we try for in our model is to buy very high-quality buildings where we believe there is room for improvement,” Vieujot says. “Most of the time this means buying a building with some vacancies, so you get it at a good price, and you manage it for roughly two years — it takes roughly that period to get a significant increase in the value.”

The deputy chairman says that the company is considering divesting from one asset, although he won’t say which. In general terms, Vieujot points out that REITs usually turn around 5 percent of their portfolio annually, although he does add that there are some firms that have held onto their assets for over a century.

“We don’t buy a building because we need to divest it to make a profit,” he says. “However, once we have bought a building and we believe that there is not much more room for improvement, or that the market is a bit too hot and would value a building at a significant premium to what we think it’s worth, then we would sell it.”

One piece of the puzzle that definitely won’t be on the block is the firm’s sizeable holding in the Index Tower. The value

of that investment, which consists of all the tower’s retail space, 17 office floors (about two thirds of the total) and nearly 1,500 car parking spots, is currently worth $229m (AED841.6m). 

Right now, Emirates REIT is working on revamping the retail and office space in conjunction with Foster + Partners, the London-based architect. Given the size of the floorplates on each level, with roughly 200 people expected to be working on every floor, it has taken some time to complete the fit-outs, but Vieujot says that the first two floors will be ready for the first tenants in about two months’ time. However, he does not disclose how many businesses have signed on the dotted line, saying instead that the company has had strong interest from both inside and outside the DIFC, due to the quality of the building. Vieujot also cites the car parking spaces, which cost $8.7m, as a particularly good investment.

“If you buy a floor in Index, you have 40 car parking spaces that come with that, but you have space for 200 employees,” he points out. “In a market like Dubai, usually you have more than 40 employees [out of that 200] that come with a car, so therefore they rent space. Here in the DIFC, you pay a very high price for parking — on average it’s north of AED1,000 [$272) a month – and therefore you have captive clients and a very good yield.”

When the Index Tower is discounted, the rest of Emirates REIT’s portfolio is 95 percent full. As a result, the company is hard at work identifying potential new acquisitions. Although Vieujot won’t discuss specific plans, he says the firm’s war chest for new buys this year is roughly between AED300-400m ($82-109m), with between one and four actual new deals taking place.

“We’re looking at a lot — to date we have done 10 acquisitions, but we looked at roughly 400 properties,” he says. “In the end, what we are trying to do is build strong and reliable cashflows, so we want to buy something that is going to support this. Usually what helps is the quality of the property, the location, the existing tenants and the price.

“So far we’ve found that a lot of the commercial projects could be really improved in terms of the cashflow, and this is what we’ve done in all our properties.”

 The deputy chairman is also relatively dismissive of estimates from property consultancy JLL that predict that as much as 1.2 million square metres of leasable space could be added to the Dubai office market by the end of this year — a substantial increase to the 7.6 million square metres currently on offer.

Dubai’s commercial property market was hit particularly badly by the downturn, with supply well outpacing demand. According to CBRE, only 61 percent of office space in the emirate is occupied, although that rises to 85 percent in Dubai’s central business district.

“We see more opportunities for good acquisitions,” says Vieujot of the hefty supply pipeline. “We saw a lot of people being very careful with the office market, because the statistics were every bad.

“Occupancy was around 60 percent, and now it’s improving towards 70 percent, but there are still bad headlines around that in my view don’t factor in a lot of specifics as to the location of the building, how it’s been sold, whether it’s a single owner and so on.”

In addition, Emirates REIT’s relatively deep pockets enables it to buy property at a size and scale that weeds out most of the competition and also allows it to negotiate good prices. By and large, and with the exception of the Index Tower, the firm also concentrates on buildings that have single owners, thus bypassing the lengthy process needed to get certain approvals carried out.

The company has already branched out into education via the acquisition of the GEMS World Academy — which was immediately leased back to the schools operator — and Vieujot says he is not ruling out any other sector, which would include industry, healthcare premises and so on. However, he hints the sector Emirates REIT is least likely to invest in is hotels.

“We have been a bit careful with hospitality because we thought it was a bit overpriced,” he says. “All the hotels recently have been full, so we would be buying at an already-high price with very limited upside, so that’s not so appealing. But I think the situation might change.”

The company has also not ruled out buying property in other parts of the UAE.

“We can look at other cities like Abu Dhabi, for example, where there are large areas like Reem Island and Saadiyat Island and so on where foreign investors can buy, and we are potentially look at getting the same kind of approvals in other emirates,” Vieujot says, adding that the firm is also not necessarily restricted to the UAE.

“We have to be careful if we expand elsewhere that it makes sense in terms of yields. So in some cases we looked at it, but it didn’t really work – it was more sensible to do two REITs than a single one.”

In other more developed markets, REITs are often specialised to a specific geography, or a specific sector — there are even REITs that deal only in commercial forestry, for example — and Vieujot suggests that this is a trend that could be followed here. When questioned whether the company is actively considering adding another REIT, he replies: “Potentially — if we were to expand, that is probably how we would do it”. 

Vieujot won’t say what sort of net return on investment Emirates REIT is targeting for 2015, although he does indicate that whenever the firm buys a property, it is aiming for a net yield of around 10 percent without leverage. Further down the line, he says that the prospects for the UAE property market remains healthy, despite the drop in the oil price.

“We don’t think that the Expo [in 2020] is going to have such a big impact,” he says. “It will have a huge PR impact, but in real estate terms it won’t have as big an impact as Dubai Parks and Resorts [a state-owned developed building projects near Jebel Ali], for example.

“In the end, in real estate, you always have cycles,” Vieujot says. “Here they tend to be a bit shorter than elsewhere, because you have the macroeconomics and the oil price. For us, it just provides more of an opportunity to be prepared at that point in time to do some good acquisitions.”

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