Each year in London, it is commonplace to witness a stream of flashy Lamborghinis, Ferraris, Bentleys and Rolls-Royces around the city’s most lucrative and expensive districts. It has become a by-product of the London love affair Arab buyers have with the British capital.
The Shard — Western Europe’s tallest building — is owned by Qatar. Harrods, the iconic department store also is on the country’s books as another high-profile investment asset. From passengers moving through Heathrow Airport to the food bought in Sainsbury’s supermarkets and the Moet champagne being drunk in the most upmarket London clubs, Qatar — or one of its fellow high-rolling Arab neighbours — has its fingers in many diverse sectors.
In fact, in the past two years alone, Middle Eastern investors have ploughed $20bn into commercial property outside their home region and new research shows this trend is not slowing down, with strong evidence showing that they are increasing their interest and investment allocations towards direct real estate.
In a recent comprehensive research paper, market analyst CBRE estimates that Middle Eastern investors will inject at least $180bn into global commercial real estate markets outside their own region over the next decade.
From football stadiums in Manchester to suburbs in France or iconic buildings in Italy, Europe is the clear target for Middle Eastern investors and it is estimated that it will be the recipient of 80 percent of the $180bn cash pool available to sovereign wealth funds over the next ten years. Of this, CBRE estimates that close to $85bn will be heading to the UK alone.
“Culture, openness and favourable taxation laws are significant push factors for Middle Eastern buyers towards Europe, and the UK in particular. Close historical, political and economic relations, as well as Britain’s recent decision to become the first non-Muslim nation to issue Sharia-compliant Islamic bonds, confirm Europe as the top destination for Middle Eastern capital,” says Jonathan Hull, managing director of capital markets for Europe, Middle East and Africa at CBRE.
The forecasts show continental Europe is expected to receive a total allocation of around $60bn — more than five times the level of direct investment by Middle Eastern investors in the previous ten years.
“Germany and Italy are also key targets, while Spain is becoming a strategic destination, particularly focused around the hotel sector. France, having developed close ties with Middle Eastern investors and offering a vast choice of trophy assets, continues to attract strong demand for core assets and sectors,” Hull says.
“The vast majority of Middle Eastern investors are long-term players, looking for wealth preservation and strong high income-producing assets, rather than opportunistic investors looking to play the cycle for short-term gains. This strategy means that their asset preferences are directed towards prime buildings in core markets, quite often very large in terms of lot size.
“Offices feature heavily in their acquisitions, while in the last couple of years Middle Eastern investors have started to show greater interest in retail as was illustrated by a string of high street retail acquisitions in London and Paris, as well as in a number of provincial cities in the UK and France. Interest in hotels is also noticeable and extends from a life-long affair with the hospitality sector in home markets.”
So how did CBRE come to the headline $180bn figure? “It is a long process of looking at certain elements and trying to understand how much capital is available from different sources,” says Iryna Pylypchuk, CBRE’s Germany-based associate director of research and consulting for the Europe, Middle East and Africa region.
“The way we did it is mainly to look at two parts of the market: sovereign wealth funds (SWFs), which is by far the biggest source of capital in the Middle East and then the rest, which is a combination of private individuals’ capital and developers and property companies.
“With the sovereign wealth funds we looked at the assets they currently hold and also try to understand what the current allocations are in terms of what they allocate to real estate and estimate what the projections are in terms of their future allocations.”
At present, Pylypchuk found SWFs allocate on average 7.9 percent of their capital to commercial real estate and it was her conclusion that this would increase “but not by that much”.
A major determining factor is that Middle East SWFs generally prefer real estate and these investors are among the world’s largest and most influential sources of capital, accounting for 35 percent of global SWF AUM (Assets Under Management). Unlike western or Asian SWFs, the Middle East’s wealthy institutions generally prefer bricks and mortar to alternative assets, a trend which look set to continue.
“Since the outset of the global financial crisis, SWFs have become one of the most significant sources of capital in the global real estate landscape and these investors often set the price,” says Nick Maclean, managing director of CBRE Middle East.
The report said that SWFs found equity markets to be too volatile and the bond markets to be too low-yielding. Hence, real estate has presented an enormous opportunity, especially as the market was, and still is, on the road to recovery and competition was much weaker than was the case in 2006-2007.
“This change in investment strategy is the key reason behind the sudden growth inflows to global real estate,” adds Maclean. “In fact, at the very prime end of the market, and as far as the larger lot sizes and trophy purchases were concerned, SWFs faced relatively little competition during 2010-2012. At the same time the supply of high quality product increased as local players and previous owners were looking to exit to raise liquidity or to reinvest and refine their future strategy.”
Another factor in the cash flow is the relative lack of opportunities for SWFs in their home markets. The Middle East region’s immature real estate market leaves much unsatisfied demand and pushes local cash-rich investors outside their home region. Much of the opportunities are taken up by large government-backed developers or institutional operators. As a result, global real estate markets have seen a significant inflow of Middle Eastern capital, with $45bn invested between 2007 and the end of 2013 — seven times the reported activity going into the local home markets.
“The aim of Middle East SWFs is to diversify into different markets and economies and currencies. Their national resources like oil and gas are priced in US dollars so they would be very much interested in non-US dollar markets and real estate looks favourable compared to other asset markets in this regard,” Pylypchuk says.
Two other factors will also determine how the money flows and how the estimates and balance sheets will be juggled. The first is population growth and CBRE has concluded that the Middle East region is forecast to continue seeing stable population growth and no notable socio-economic shifts in terms of average standard of life and wages. As a result, the rate of investment from private Middle Eastern investors — or high net worth individuals — as well as property companies and developers is likely to remain close to the historical average.
Based on this, it is estimated by CBRE that around $40-50bn is likely to come from wealthy private individuals and investors over the next ten years, which, when added to the $140bn from SWFs, gives us the overall figure of $180bn.
The second obvious factor is oil prices, but CBRE predict these will remain relatively stable. “There will be some movement... We expect some moderate increase but nothing significant,” it forecasts.
In 2013, close to 90 percent of Middle Eastern investment into commercial real estate outside of the home region was in Europe. While this is only likely to fall to 80 percent going forward as other markets come to the fore, there is one white elephant issue which CBRE has not taken into account and that is the recent political shift in Europe, with more right wing, inwardly focused parties — such as UKIP in the UK and Marine Le Pen’s Front National in France — gaining power as European electorates send a protest vote to those in power in Brussels.
Such political changes can have implications, and quickly. Last month, The Netherlands was forced to send a top diplomat to Saudi Arabia to prevent the world’s largest oil exporter from imposing trade sanctions in protest at anti-Islamic stickers printed in the colours of the Saudi flag by a Dutch far-right politician during recent election campaigning.
The Saudi authorities have not officially announced any sanctions on The Netherlands, one of the Gulf Arab kingdom’s largest investors, but Saudi media reported that such measures had already taken effect, citing unnamed officials.
Dutch exports to Saudi Arabia are worth as much as €2bn ($2.7bn) a year, according to the Dutch statistics office, so the move by Geert Wilders, the leader of the anti-immigration Dutch Freedom Party, could have done real damage to the Dutch economy and the chances of it getting a slice of the $180bn money pot over the next decade.
Luckily for the Dutch, Wilders’ plan backfired and he wasn’t elected. But will the rise of ring-wing parties have an impact on how willing Britain and France and other continental countries will be to accept large inflows of Middle Eastern cash and their trophy assets being snapped up by Arab buyers?
“I think it is a difficult one to answer as it is very politically sensitive,” Pylypchuk says, cautiously. “I generally hope not. The relationship between the Middle East and Europe has been good and there were no issues in the UK on purchases they have made. For example they recently bought the former Mayor of London office.
“It should be seen as capital coming looking for a return, I don’t think it should be seen as a political move. If that happens, then it would be unfortunate. It shouldn’t change going forward; I get an impression there are not any issues with SWFs buying an asset as long as the relationship can be managed in the right way and it is not a controlling stake. Most of the businesses and governments know that.”
While Europe is likely to always remain popular, an increase in interest in the Americas is expected. The need for Middle East investors to diversify away from the US dollar will counteract the fundamental attractiveness of real estate as an asset choice. CBRE estimates that about 10 percent of the capital (around $18bn) will flow into the region. This represents an average annual investment of around $1.8bn, above the $1.2bn invested in 2013, which in itself was relatively high by the recent standards.
In terms of Asia and the Pacific region, the number of deals completed and interest expressed has been on the increase, but how quickly that interest will crystalise into waves of acquisitions, rather than a small number of large asset deals, remains to be seen. Therefore, the CBRE report estimates that the remaining 10 percent of the $180bn pot will end up in this market.
Once all the number crunching has been completed, one factor remains difficult to control or predict — politics within the region itself. Ten years ago Egypt would have been seen as a major player. Will its need for capital see it drain money from the SWFs? Will the end of sanctions on Iran see more investment money flow in that direction?
Saudi Arabia has announced it will establish its first formally recognised sovereign wealth fund to manage budget surpluses worth hundreds of billions of dollars. The Shoura Council is reportedly in the process of debating a draft law for the National Reserve Fund, which will take over management of the oil rich kingdom’s investments from the central bank.
Saudi Arabia is the world’s largest crude oil exporter and has significantly benefited from the rise in oil prices, which have been at more than $100 a barrel for several years. The latest data from the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, indicates that the kingdom has $728bn in foreign assets. It has not been revealed whether the fund would change the kingdom’s investment strategy, which has primarily been to take up US bonds. Will it follow suit and, like other SWFs, pump an average of 7.9 percent of its funds into real estate? If so, that would mean even more billions destined for the UK, and London in particular. In the past three years alone, the kingdom has announced budget surpluses totalling about $232bn, so there are enormous amounts of money at stake. It seems the Middle East money flow isn’t drying up any time soon.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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