An Initial Appraisal for
The Real Estate Diversification Strategy
For
The Halim Group plc
May 2017
Executive Summary
McStrattons has been engaged by the Halim Group to provide advice on a potential diversification strategy to divert profits from existing oil and shipping business into the real estate sector. It is assumed that the group is willing to invest approximately $500m annually for the next 5 years into the new venture.
Real estate as an investment is found to be largely uncorrelated with oil prices, except in certain geographic and asset class segments, and thus is a good diversifier for the Halim Group. The real estate value chain is shown to provide numerous opportunities for participants to engage in investment and/or development activity, and a number of strategies are outlined.
A balanced portfolio of listed and unlisted investments is recommended alongside a tangible real estate strategy for Halim, consisting of three key ‘Pillars’;
- Pillar 1: Indirect Investment
- Pillar 2: Direct Investment
- Pillar 3: Development
The asset classes and geographic regions are adapted for each Pillar, so as to address practical issues reduce operational risks in expansion.
A high-level market analysis of 3 geographic regions is provided; global, regional (MENA), and the local Kuwait market. The core ‘high-quality’ investment market current shows highly compressed yields and is largely ‘crowded-out’ globally, and therefore the recent trend into alternative sectors and secondary cities is examined. Suggestions to focus on specific asset segments are provided, including; retail, affordable housing, and infrastructure.
A range of financing options for the venture are examined including use of retained earnings and leverage, as well as private and public fundraising. The most tax efficient structure is presented as a Limited Liability Partnership open-ended fund, managed by a new subsidiary Management Company. Most probably an SPV structure will also be used, as the logical way to optimize both funding and tax structures.
Resourcing planning, potential business affiliations, and risk assessments are provided as well as a high-level implementation programme. It is concluded that the venture should be able to be formed and resourced by the end of 2017, with the first investments in all three Pillars made by end-2018.
- Introduction & Client’s Brief
The client, Halim Group plc, has approached McStrattons for advice on a potential diversification strategy into local and international real estate. Halim Group (hereinafter ‘Halim’) is a public company listed on the Kuwaiti Stock Exchange, with revenues from oil and shipping operations in the order of US$10 billion annually.
Given the recently volatility and drops in the price of oil, Kuwait and many other net oil-exporting states are pursuing diversification strategies to reduce their dependence on oil (KT, 2017). As a company, Halim is naturally hedged to a degree against oil price declines from its revenues in shipping (which are theoretically negatively correlated to oil prices), however it is assumed here that Halim’s revenues are predominately related to the price of oil.
To further clarify the brief, it is understood that Halim are not looking for hedges against the oil price (which would be easier achieved using a range of financial instruments) but are instead looking for diversification with assets exhibiting low correlation to oil.
Since the group’s revenue is in the order of $10b per year, given oil sector profit margins it is assumed that the group makes approximately $1b annual profit. If half of this is to be maintained for dividends, bonuses, and on-going investments, it is assumed that approximately $500m per year will be made available for the diversification strategy for a period of at least 5 consecutive years.
Finally, in order for such a venture to be good value for the shareholders, the returns should be greater than the company’s cost-of-capital. For the purposes of this initial paper, Halim’s cost-of-capital is assumed to be in the range of 8%-10%.
- The Case for Real Estate
2.1 Real Estate as an Asset Class
The appropriateness of Real Estate as a strategy to fulfill Halim’s diversification needs should be evaluated from first principles. According to the Global Industry Classification Systems (GICS), there are eleven sectors in which a company may engage in activity, each with their own characteristics;
- Energy – includes Halim’s oil operations
- Materials
- Industrials – includes Halim’s shipping operations
- Consumer Discretionary
- Consumer Staples
- Health Care
- Financials
- Information Technology
- Telecommunication Services
- Utilities
- Real Estate
Real Estate itself was added as a separate industry in 2016 as the first change to GICS since its inception in 1999, which reflects its growing importance as an asset class. Many believe this growing importance is due to Real Estate’s proven differential performance attributes which include strong risk-adjusted returns, diversification, stable earnings, and yield (Lazards, 2016).
Table1: GICS Real Estate Classification
Real Estate has proven to show independent investment characteristics, which make it attractive from a portfolio diversification perspective. This is shown for example in Real Estate’s low correlation to other asset classes (Exhibit 1).
Exhibit 1: Real Estate Low Correlation to other Asset Classes (2001-2010) (Roche, 2017)
2.2 The Relationship between Real Estate and Oil
According to Cushman (2015), the relationship between oil and real estate markets depends largely on whether a country is a net importer or exporter of oil. For net importers, such as the UK, the local economies will see a benefit with drops in oil prices. In Turkey for example, every $10 drop per barrel saves the country $4 billion in energy imports.
Within each economy, different real estate markets may respond differently. Drops in oil price may for example have a positive effect on consumer spend and hence the retail real estate market. Oxford Economics estimated that the recent fall in oil price is equivalent to a 5% cut in VAT. Cushman analysis suggests that this boost to consumer spending equates to an additional 1-2% rental growth for UK retail. Exhibit 2 shows the strong relationship between UK retail rents and household consumption.
Exhibit 2: UK Retail Rents & Household Consumption
On the other hand, office rentals in economies with strong dependence on oil income (and particularly those with higher costs of production) are generally positively correlated with the oil price, and hence are not a good diversification strategy.
Overall however, Cushman conclude that there is little direct relationship between the spot oil prices and total real estate returns. The real driver of property market performance is economic growth, in which the cost-of-energy plays only a small part (Cushman, 2015). This leads us to conclude that real estate is an appropriate diversification strategy away from oil based revenues, subject to careful selection of sectors and geographic regions.
- What Type of Real Estate Developer/Investor Should Halim Group Be?
3.1 The Real Estate Value Chain and Investment Mediums
When considering how Halim should become exposed to Real Estate markets, it is important to consider both technical aspects (business model correlations and diversification etc.) as well as practical issues such as relative difficulty of market entry.
There are number of distinct stages in the real estate value chain (Kohlhepp, 2012) ranging from the initial land banking and packaging, through to building renovation and site re-development.
Exhibit 3: The Real Estate Value Chain
Although not always the case, the highest risk (and hence returns) can generally be found in the activities towards the initial (left-hand-side) stages of the development value chain, with the exception perhaps of the last two stages – renovation and redevelopment.
Whilst there are a myriad of different methods in which investment into any of these stages could be approached, the styles of investing can generally be classified into 3 main categories;
- Indirect
Investment – this generally involves investing in other companies or
trusts, including;
- Equity REITs
- Mortgage REITs
- Private Equity funds
- Other companies involved in the value chain – e.g. construction companies
- Direct
Investment – this involves buying properties directly which are already
built, and hence generally excludes the first 4 stages of the value chain
above. Investments may be structured to entail varying degree of
ownership/responsibility, such as;
- Wholly-owned properties
- Active JV investor (e.g. in 30-70% ownership range)
- Passive minority investor (e.g. in 5-30% ownership range)
- Development – this involves directly approaching one or more of the first 4 stages in the real
estate value chain. Exit strategies can alter the developers business model;
- Trader Developer – the Developer ‘constructs and sells’ the building (likely Stage 4 only), making a quick developer’s profit. This technique is often used by young developers before they are able to build up enough capital to own properties long-term.
- Investor Developer – here the Develop ‘constructs and leases’ the building, retaining ownership and hence gaining from capital appreciation as well as the initial developer’s profit and lease revenues (potentially Stages 3 – 6). This is more popular is less capital constrained situations such as middle-eastern developers.
Exhibit 4: Investment Styles along the Real Estate Value Chain
The practical difficulties and hence operational risks involved are different with each type of investment medium (Table 2).
Table 2: Key Practical and Risk Aspects of the 3 Investment Methods
3.2 Portfolio Theory’s Impact on Strategy
The benefits of diversification through portfolio construction are well documented since Markowitz (1952). Although portfolio theory makes the assumption that risk equals volatility (largely useless for real estate), portfolio diversification benefits still apply to real estate in the sense that it reduces concentration risk. In order to benefit from such diversification, a rule-of-thumb can be applied initially, in that no more than 5% allocation should be to any one investment (Roche, 2017).
In particular a blended portfolio between listed (i.e. secondary) investments and direct investments are recognized to be not just compatible but in fact complimentary within an investment portfolio (EPRA, 2012). The listed investment mediums exhibit greater volatility but higher total returns than direct investments. The weightings between the two investment mediums would require further investigation, however the blended approach is able to push the efficient frontier of the overall portfolio to better risk-adjusted returns (Exhibit 5).
Exhibit 5: Efficient Frontier on Portfolios with Private and Listed Real Estate (Roche, 2017)
As well as a mix of listed and private real estate, a further element to improve diversification is across geographic regions. Exhibit 6 shows the correlations between key international markets – similar research can be used to optimize the portfolio construction.
Exhibit 6: Correlations of Key Real Estate Markets (Roche, 2017)
Furthermore, additional diversification can be achieved by investing in a mix of long and short-term investments. Developers can be better protected against the next downturn by having a mix of assets which are ready to sell and those which are to be maintained for the longer-term (Strategy&, 2013).
3.3 Constructing the Pillars of Halim Group’s High-Level Strategy
In consideration of the above issues; portfolio construction, diversification, and practical difficulties, McStrattons would propose a blended investment approach for the Halim Group, based on three key pillars; Indirect Investment, Direct Investment, and Development.
In recognizing the relative practical difficulties and hence operational risks of expanding into the later pillars, it is recommended that the implementation is phased in order to gradually build up expertise within the group. Later Pillars (direct investment and development) are also constrained to smaller and more local geographic regions to reduce operational risks and practical difficulties that will be experienced during the expansion implementation. The high-level proposal is shown in Exhibit 7.
Exhibit 7: Halim Group Real Estate Strategy – 3 Pillars
The concept shown in Exhibit 7 is that the increased risks of direct investment/development and concentrated geographic regions are balanced in each of the Pillars by altering;
- The asset segment invested in; e.g. residential, office, etc – to be further analysed in Section 4
- The asset class/strategy risk; ranging from;
- Core (lowest risk/return)
- Core-plus
- Value-add
- Opportunistic (highest risk/return)
Each Pillar should independently be able to exceed Halim’s cost-of-capital, which is assumed at 10%. Suggested target returns for each Pillar are shown in Table 3.
Table 3: Target Returns
- Market Analysis and Asset Allocation
4.1 Market Analysis
With the high-level principles of the investment strategy (investment mediums, geographic regions, and asset class/risks) set by overall portfolio theory and practical implementation considerations, the final component of each pillar (asset segment) can be selected by informed market analysis.
4.1.1 Global Real Estate Market 2017
Since the GFC, the low-interest rate environment has led to real estate becoming an important part of many more investment portfolios. Now that we are in the mid-to-late economic cycle (CBRE, 2017), the conventional real estate asset classes are fully valued across the globe causing yields to be at record lows (Savills, 2017). This situation of core assets being ‘crowded out’ has been amplified by the rise of REITS and Sovereign Wealth Funds, which typically have lower costs-of-capital and therefore have compressed yields even further (PWC, 2014).
As baby-boomers retire, investors (pension funds) need to change risk-appetite of investments and move to income-producing. As bond-yields are still low, the search is still on for the types of real estate that generate stable incomes for these investors. Investors will look for sound demand and occupier fundamentals.
Whilst aim of the investing game is changing to be income-focused (rather than capital appreciation), the end-cycle move is primarily into secondary and hitherto alternative real estate sectors which often lend themselves to the desired income-producing characteristics. These include; co-working and flexible workspaces, logistics and warehousing for e-commerce including last-mile distribution facilities, as well as care homes, healthcare and retirement living (matching the changing demographics).
It should be noted that globally some cities are pricing real estate at a more substantial discount to bonds than others (Savills, 2017). For example, the return over gilts in London is 1.75%, whilst in Brussels the return over local government bonds is 5.12%, which may not reflect the actual risk-return profile considering that the average effective yield (net of bonds) worldwide is 2.58% (Savills, 2017). Accordingly, European cities such as Brussels, Dublin and Berlin seem to have more scope for yield compression (and hence capital appreciation) than others such as London, Warsaw and Madrid.
Overall, there is a sense that global real estate investors will need to be more adventurous to move away from conventional asset classes to niches and areas where yields (and cap rates) can continue their downward trajectory. Whilst this may be a move up the traditional risk curve, investors may find that such a move will in fact aid diversification and de-risk their portfolios when conventional asset classes start to underperform (Savills, 2017).
4.1.2 Regional MENA Real Estate Market
The Middle-East and North Africa (MENA) region is still considered as high-risk by most global investors, with only a few locations standing out as investible (Savills, 2015). The region however has large potential given its size of population and rate of economic growth and urbanization. The main risks in the region are geo-political/conflict related, as well as the dependency on oil (Exhibit 8). Land banking/speculation, traditionally also very popular in the region, is starting to look risky since Saudi Arabia has recently enacted a new tax system on undeveloped land (CBRE, 2016).
Exhibit 8: MENA – Construction Industry Real Growth and Brent Oil Price (BMI, 2017)
However, the latest forecasts see the MENA region as the fastest growing construction market globally in 2017 (Dey, 2015), with estimated growth accelerating to 6% year-on-year in real terms. The UAE construction industry value has recently overtaken Saudi Arabia in, but Saudi is expected to return to the regional leader by 2020 (BMI, 2017).
Exhibit 9: Construction Industry Value (BMI, 2017)
Many see the smart money and bulk of overseas investment into infrastructure, particularly in Africa (Savills, 2015) as well as Saudi Arabia (BMI, 2014), although the latter is noted as currently underperforming as the government restructures the project pipeline.
The Middle East has the largest development pipeline for hotels relative to existing room supply, with the majority of 2017 openings in Qatar, Saudi Arabia, and the UAE (CBRE Global), however other commentators are predicting that new resorts serving the wealthy in Africa are likely to rise in popularity (Savills, 2015).
Investors in the Middle East are focused primarily on development plays (CBRE, 2016) and, in keeping with global trends, the popularity and growth of ‘alternatives’ is also high. These alternatives include affordable housing (Fattah, 2013), institutional educational, and healthcare.
A further niche sector with significant potential in this region is that of Islamic funds and Sharia compliant asset classes, with such funds popularity set to increase under a Trump Presidency (GulfBase, 2017).
4.1.3 Local Kuwait Real Estate Market
Zooming in further to the local Kuwait Real Estate market, we observe more local supply and demand effects in play (BMI, 2016). The capital and main city is Kuwait City, but also important are the Salem Al-Mubarak shopping strip for retail, and Al Jahra city (see Exhibit 10). As well as local demand factors, a growing REIT scene is enabling foreigners to invest in Kuwait real estate, which is expected to help the sector prosper (Salem, 2015).
Exhibit 10: Map of Kuwait
Rental rates in all sectors are increasing marginally as demand continues with little development activity, including a strong demand for Grade-A office in Kuwait City. There is a sustained demand for modern units in all sectors, particularly retail and industrial bolstered by consumer demand from the young population (BMI, 2016). The growth in retail especially is expected to increase, with additional opportunities for developers who choose to follow Islamic trends such as Muslim fashion (BBC, 2017). Demand for high-quality warehouses is also expected to rise as manufacturing benefits from government policies to diversify the economy away from oil. Infrastructure is also of growing importance on the investment radar with a growing PPP scene, aided by lower government revenues from oil (BMI, 2017).
Land prices are relatively high in Kuwait (comprising around 80% of development cost [Roche, 2017]], however this may drop should government policy change to limit land banking (similarly to Saudi Arabia [CBRE, 2016]). Halim Real Estate should be poised to take advantage of any such drops in land price.
The key economic risk of the country is its over-reliance on oil. However, the relative ease of accessing the energy resource in the gulf keeps production costs low enough to protect the real estate sector from any sudden shocks in the oil price (Cushman, 2015). The government has also been undertaking concerted efforts to diversify the economy away from oil (KT, 2017), as well as maintaining a protective financial arsenal so that overall, the risk relating to oil is minimal (BMI, 2016).
4.2 Example Asset Segment Selection
Following comprehensive market analysis, the selection of asset segments suitable for Halim should be made in line with the 4 principles in Table 4.
Table 4: Four Principals for Asset Segment Selection
The high-level strategy and subsequent example market analysis has lead us to focus on asset allocations of potentially Retail, Infrastructure, and Affordable Residential (Exhibit 11).
Exhibit 11: Completed 3 Pillars with Example Asset Segment Selection
At this stage the real estate developer will move to feasibility stage on specific projects that fall within the wider strategy set above.
- Market Entry Strategy
Having identified the type(s) of developer Halim should be, and the regions and asset types it wishes to invest in, we can now consider different options for entry into these markets.
There are 3 primary entry options in which a business can expand into a new market (KPMG, 2011);
- Greenfield
- JV/Alliance
- Acquisition
An initial analysis of the entry options for each of the three pillars is provided below.
Table 5: Market Entry Strategy Options Analysis
Based on the above analysis, the following market entry methods are recommended for each pillar.
- Pillar 1 – Greenfield. A small number of staff would be recruited and the main financial/portfolio selection function outsourced to expert consultants. This keeps the operation lean and efficient whilst drawing on a wide body of experience.
- Pillar 2 – Regional alliance or minor equity JV partner. This approach will give Halim exposure to regional markets by co-investing with other experienced developers, as well as firms with property management expertise (particularly in retail). Halim should learn from these experiences in order to later grow their development business (Pillar 3) regionally.
- Pillar 3 – Acquisition of a local or international developer. This approach provides Halim a head-start in the development business, which otherwise may take years to achieve. If a local developer is not available, an international developer (e.g. a UK developer with the current ‘Brexit discount’) could be bought, and it’s operations gradually moved to Kuwait. Alternatively, a real estate advisory firm could be bought, such as BlackRock’s 2013 acquisition of MGPA.
- Structure and Finance:
There are many options available for the legal structuring and financing of the new venture. The key considerations in this regard are;
- Liability of existing Halim Group to the performance of the new ventures
- The most efficient/preferred way for the new venture be financed
- Tax efficiency
6.1 Liability
It is assumed that whilst the Halim Group shareholders would like to be able to benefit from the success of the new venture in real estate, they would not like to be liable for any debts if the new venture should go wrong. This is possible by using a limited liability subsidiary company, known as a WLL in Kuwait, following the English Law principle of separate legal personality in Salomon v Salomon (1897). Limited liability (though not separate legal personality) is also available via more complex Limited Partnership structures.
In practice however, the principle of separate legal personality is negated should the parent company need to give guarantees for the subsidiaries debts, and hence this should be avoided in the financing structure if possible.
The strength of the corporate veil varies in each jurisdiction, and in Kuwait veil piercing may occur on grounds such as abuse-of-power and mismanagement (Saba, 2013). A local legal opinion should be given.
6.2 Financing
There are a number of ways to finance the new venture. The key decision is whether or not Halim Real Estate is purely investing Halim Group’s own funds (or ‘principal’), or if it will be fundraising from other sources.
Possible financing options are shown in the format of a decision tree in Exhibit 12.
Exhibit 12: Financing Options Tree
The most appropriate form of financing will depend on further information regarding;
- Current status of Halim’s finances (in particular the quantum of free cash able to finance the new venture in relation to the minimum efficient size)
- Targeted risk/return levels
- Autonomy of decision making desired
- Tax and financing possibilities for SPVs in the jurisdictions considered
- Overall strategic direction
6.3 Tax
In Kuwait there was historically no Corporate-Income-Tax (CIT) on local companies, however CIT is applied to the extent that the company is foreign owned (at 15% [PWC, 2017]). Since Halim is publically listed, it is likely to have significant foreign ownership and hence tax considerations should be a priority in structuring the new venture. Furthermore, the government seems to be pursuing its strategy to diversify revenues away from oil by imposing a 10% tax on local companies also (BMI, 2016).
It is likely therefore that if a subsidiary company was utilized, both the subsidiary and the parent company would be taxed on corporate profits before these could be passed to shareholders (who then may also be taxed again, depending on their jurisdiction).
A possible way to avoid this would be to use a partnership structure, which is available in Kuwait and closely follows the English Law partnership. A general partner (GP) would need to be set up (with unlimited liability) that could be itself a limited liability company, which would be responsible for the management of the operations. Halim Group itself would then invest as a ‘sleeping’ Limited Partner (LP), sharing in the partnerships profits without double taxation at the corporate level.
6.4 Summary Proposal
On balance of the above issues, the most appropriate structure would be to set up an open-ended fund in the form of a limited partnership in Kuwait, managed by a subsidiary management company (ManCo), and financed from the retained earnings of the Halim parent (but potentially with some project-level leverage where required to achieve required returns). As the new venture matures and starts to hold significant assets of its own, the fund-level leverage can be gradually increased in times of weaker market returns (without the need for a parent company guarantee).
Additional private investors could be added in the form of LPs, particularly during times of restricted investments from the Halim parent. This has the advantage that Halim will make extra fees by way of carried interest from managing other people’s money.
Exhibit 13: Proposed Venture Limited Partnership Structure
- Resource Planning
7.1 Organisational Structure
Of all the factors considered in this report, it is probably fair to say that finding the right management team is the most important for the new venture’s success in both principal investing as well as raising external finance when required.
Having said that, the team should be kept as lean as possible, with outsourcing maximized in the initial stages. As the organization grows certain outsourced elements may subsequently be brought in-house.
Certain roles may not require a full-time new employee initially, and instead the existing Halim Group personnel will be able to assist with the role. Such positions are shown in red in Exhibit 14 below, along with the other key new recruits (blue) and key outsourced functions/consultants.
Exhibit 14: Organisational Structure
The final organizational structure employed may be influenced by the acquisition of another real estate developer under Pillar 3, however the above model should be used as a reference for the key roles required (even a new acquisition may be inefficiently staffed and require re-structuring).
In recruiting, the first point of call should be the existing Halim Group staff, and any existing talent should be recognized and promoted into roles as appropriate. A budget for training should be made available.
7.2 Affiliations and Partnerships
Part of the CMO’s initial tasks should be to consider strategic partnerships and affiliations with other reputable companies in related sectors that will help the new company quickly gain a strong reputation. For example, the United Real Estate Co (URC) in Kuwait has affiliations with Kuwait Hotels Company (hospitality and catering services) and SSH Design (architectural and engineering design services).
Some possible examples for affiliations of mutual benefit for Halim are shown in Table 6, which would be explored further at market analysis stage.
Table 6: Business Affiliations and Partnerships Ideas
8.0 Risk Management
A high-level risk assessment for the new real estate venture is provided in Table 7.
Table 7: Key Risks & Mitigation Measures
9.0 Legal/Compliance
Although detailed legal advice should be procured, two of the most important compliance issues are introduced below.
- Board & Shareholder Approval for the new venture. Depending on both the stock exchange regulations and the Halim Group’s Articles of Association, embarking on such a large venture may require approval from the current shareholders in addition to the Board of Directors.
- Sharia Law Compliance. It is not clear whether Halim Group is currently operated as a Sharia-compliant organization or not. Even if it is currently not, there is a trend in the middle east of moving towards Sharia-compliant operations (Saadi, 2012). Should the group wish to be Sharia-compliant, the operations, financing, and investment targets would all need to consider the Islamic principles.
10.0 Implementation Programme
A high-level programme for the implementation of the new venture is shown in Exhibit 15 below. The new business can be fully-formed and capitalized before the end of the year 2017, with the first investments in all three Pillars being made progressively throughout 2018.
Exhibit 15: High-level Implementation Programme
11.0 Budget
An initial operational budget to run Halim Real Estate Capital Management Co Ltd (i.e. not including investments, which are directly injected into Halim Real Estate Partners 1 at an estimated $500m/year) is shown in Appendix A, and a high-level summary in Table 8 below.
Table 8: Projected Annual Expenses of Halim Real Estate (not including investments)
Halim Group should be committed to directly supporting the operations of the Real Estate ManCo for at least 5 years (from retaining earnings of the Group) with a total cost of approximately $90 million.
After this period the assets under management (AUM) should be approximately $2b, and therefore a typical 1% management fee structure could be utilized (i.e. $20m annual fee to cover running costs). This would be particularly appropriate if there are additional private investor LPs (attracted by the ManCo’s new track record) and the entity could start to survive by itself on a more arms-length basis.
12.0 Possible Ideas for Phase 2 Expansion
Departments should be structured to enable cross-sharing of ideas between the 3 Pillars, since this will multiple possible Phase-2 expansion strategies. For example the Pillar 3 ‘Developer’ may decide to venture regionally, or even target specific global markets, based on knowledge gained in Pillars 1 & 2.
Knowledge sharing should be not be confined only to the real estate business. For example a geographic expansion policy for the new infrastructure division could follow the shipping ports around the world, whose systems and logistics the Halim Group are already intimately familiar with.
Finally, a potential 4th Pillar may be added, combining experience from all 3 Pillars to produce a range of Islamic Compliant ‘iREITs’. iREITs were invented in Malaysia in 2006 (Ali, 2015) and would likely be a popular addition to Kuwait’s growing Islamic Financial Services sector (OBG, 2016), enabling the ManCo fees to be steadily increased.
13.0 Conclusion
There is a strong case for the Halim Group to diversify into real estate. A strategy consisting of three distinct pillars both minimizes risk as well as allowing for a diversified portfolio, with targeted returns in the range of 10-20% IRR.
The venture can be funded out of retaining earnings, debt, and private equity, as required. It is envisaged that for the first 5 years, the venture is supported by the Halim parent with approximately $500m of investments annually. The venture can be set up and resourced by the end of 2017, with the initial investments taking place throughout 2018.
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Appendices:
Appendix A: High-Level 5-Year Expenses Budget
