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Sun 2 Aug 2020 11:11 AM

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Is real estate still a preferred asset class for Middle East investors?

Major challenges, but also opportunities, lie ahead for real estate in the Middle East, writes Swapnil Pillai, Associate Director, Research Middle East AT Savills

Is real estate still a preferred asset class for Middle East investors?

Swapnil Pillai, Associate Director, Research Middle East AT Savills

As we entered the new decade, few could have predicted the challenges that we have faced during the year.

While the disruption and volatility of fluctuating oil prices and global trade wars were already bubbling, even those with a crystal ball must have missed the seismic economic shifts that were set to play out by Covid-19. In the cacophony of noise surrounding the pandemic and changing perceptions, for real estate investors it is an uncertain and rather confusing period.

Recent research by our team at Savills is summarised in the latest Impacts report, an annual look at the most pressing issues facing the industry and its investors. By exploring immediate issues and more long-term challenges, we can help to identify how the real estate sector might evolve over the coming years, and crucially for Middle Eastern investors looking to protect and grow their assets, where the investment opportunities are.

Climate change is a major theme for real estate, with building and construction accounting for 39% of the world’s carbon emissions. As global building stock is set to double by 2050, the use of modern methods of construction (MMC) to create sustainable buildings and reduce carbon footprints, will become increasingly important. The demand for smart buildings that incorporate future-facing technology will increase.

Similarly, the transport sector is set for dramatic change over the coming years. It is the second-largest planned projects sector in the Middle East, with Saudi Arabia and the UAE heading the innovation. Vehicle automation, high-speed Hyperloop capsule delivery and airborne drone transport are set to change daily life. As this technology brings about new forms of logistics, so the demands of real estate will change to allow for different modes of storage and warehousing.

Economic trade wars are also an important theme to consider for Middle East investors, as political maneuvering may change the dynamics of international relationships. China has been a major investor in the region, through the Belt and Road Initiative (BRI) – with the Middle East receiving USD 71.1 billion in funding between 2014 to 2017. As an example, Oman’s Duqm special economic zone is set to receive a USD 10.7 billion boost by 2022, through Chinese investment. It is fair to predict that through state and private interactions, China-MENA relations are likely to continue and shape infrastructure, construction and technology in the region.

On another note, generational events like Covid-19 create maximum volatility in global stock markets. Some predictions surrounding Covid-19 suggest that we may enter a recession worse than that seen during the Global Financial Crisis of 2008. While most stock markets around the world have rallied since the dramatic drops in March this year, analysts are starting to indicate that it may now have reached a point where major stocks are overbought.

Overlooked

In other words, we could see a resultant balancing in share prices in the short term. This is potentially important for the real estate sector as equities account for a large proportion of institutional investment, such as pension fund allocation. Real estate has been proportionally overlooked and now might be the time for investors to consider the long-term benefits of real estate as a quality asset.

Aside from the obvious current health pressures caused by Covid-19, generally the trends show global populations are growing older and living longer.  Globally, the population of retirees is forecast to grow from 1.5 billion to 2.1 billion between 2017 and 2050. A combination of factors, such as financial illiteracy, the population size of different generations, and declining fertility rates will, the World Economic Forum (WEF) suggests, lead to a global pension time bomb of $400 trillion by 2050 in just eight countries with some of the largest pension markets or biggest populations (Australia, Canada, China, India, Japan, the Netherlands, UK and USA).

The deficit between retirees’ needs and pension provision is growing by $28 billion every 24 hours in those same eight countries, and will be five times the size of the global economy by 2050. As Michael Drexler, Head of Financial and Infrastructure Systems at the World Economic Forum (WEF) said: “The anticipated increase in longevity and resulting ageing populations is the financial equivalent of climate change.”

Real estate is an excellent way of protecting and steadily growing long-term capital. It may not have as dramatic growth percentages that are sometimes seen in equities, but with growing populations and demand exceeding supply, it is an invaluable part of a diversified portfolio.

Institutions such as pension funds have traditionally held lower levels of real estate. Finland tops the list with 11.9% of pension fund investment into land and property, while UK funds hold an average of 4.6%, and similar institutions in the US hold just 0.7% in real estate assets.

According to the OECD, an average of 2.7% of global pension fund assets at the end of 2018 were in land and buildings - a relatively modest allocation, but a significant sum in a total of $44.1 trillion at the end of 2018.

This reflects the long-held investor view that land and property are good long-term holds. For property investors, this is important, as rising needs for more pension provision will mean that more pension and annuity fund money will be targeted at the sector. This leads to the assumption that an ageing population will be good for property investors.

Whether it is the effects of climate change, trade wars, innovations in construction and transportation, or the impacts of ageing populations, real estate will continue to be a preferred asset class for individuals and institutions in the short and long term.

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