Skylines for sale

by Sean Cronin Sunday, 22 June 2008

Plummeting property valuations in London's commercial real estate markets have attracted a surge of investment from the Middle East.

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Now the stakes are being raised as Gulf investors move from buying buildings to eyeing company acquisitions.


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Middle East investors have long been big players in London's West End and City real estate markets, snapping up trophy buildings from the Strand to Threadneedle Street.

But as UK property valuations plummet, acquisitions are about to increase as British property companies also emerge as takeover targets for the Gulf's real estate majors.

With many public property companies trading at a substantial discount to their net asset values, cash-rich Gulf real estate developers including Dubai's Limitless and Abu Dhabi's Aldar Properties are eyeing acquisitions.

The UK's debt-driven property market is in desperate need of a cash injection and local banks are not in a position to provide it.

Real estate companies in the UK are finding it increasingly difficult to refinance debt as credit markets remain tight according to Tim Sketchley, chairman of capital markets at Cushman & Wakefield, who believes that valuations in the sector may also appear attractive to Gulf investors.

"The publicly traded UK property companies are trading at a very large discount to their net asset values because yields have moved out," he says.

Commercial property values in the UK declined for an 11th successive month in May, according to research group Investment Property Databank (IPD).

Meanwhile UK property stocks have slumped 18% in three months, representing the worst-performing industry after forestry and leisure goods.

"The market is dominated by debt players and people are being faced with some very difficult questions as to how on earth they are going to take their businesses forward," says Andrew Yeandle, Middle East CEO of Strutt & Parker, one of the largest privately-held UK real estate brokers.

But the decline in property stocks represents a buying opportunity for Gulf property companies and investors seeking to expand their operations internationally and reduce their reliance on the regional industry.

Dubai World last week agreed to buy UK warehouse developer Gazeley in a sale that also attracted at least one other Middle East bidder, according to one international real estate broker close to the deal. Gazeley, a unit of Wal-Mart Stores Inc, is valued at about US$600m.

Minerva, a developer of London office towers, has also received a takeover bid from Dubai World unit Limitless, while Qatari investors bought 80% of London's ‘Shard' skyscraper in January.

The surging price of crude has helped swell government coffers in the Arabian Gulf which has driven investment and acquisitions by state-controlled real estate companies. Oil futures topped US$139 a barrel on June 6, the highest since trading began in 1983.

Gulf Arab investors are expected to spend more than US$20bn on international property acquisitions this year according to research from Jones Lang LaSalle, the world's second-largest commercial real estate broker.

While the Gulf's appetite for real estate increases, the UK commercial property industry is suffering from declining rents, falling purchase prices and a slowing development pipeline.

In 2007, UK buyers of commercial buildings lost 3.4%, the worst performance since 1990. It compares with returns of at least 10% in the four preceding years according to IPD.



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