For a number of years GCC investors, including HNWIs and regional sovereign wealth funds (SWFs), have invested heavily into international real estate markets, particularly in the United Kingdom.
Whilst the HNWIs have predominantly focused on residential, the SWFs have taken interest in a far wider range of assets. Overall, investment has been concentrated in mature markets, with little appetite apparent outside of core Europe and selected major cities in the US.
Historically, the prime reason for these capital outflows from the Middle East into global markets has been the mismatch between available institutional assets in domestic markets and the huge spending power concentrated in the region.
In 2014 alone, Gulf States directly invested US$3 billion into UK commercial real estate. The majority of the inward capital to the UK came from Qatar, which invested at least US$1.3 billion through transactions including the acquisition of HSBC’s London headquarters.
Other stand-out deals completed in recent years include Qatari Diar’s acquisitions of the Athletes' Village, purchased from the Olympic Delivery Authority (ODA); the Qatari Government purchase of the Chelsea Barracks site; an acquisition of a majority stake in The Shard and in Harrods; and the more recent purchase of the Canary Wharf estate.
Whilst the focus of Middle Eastern investor has always been on traditional hot markets such as London, we are now witnessing another interesting shift with investors starting to look beyond the more traditional markets such as the UK and Germany.
Spain is becoming a strategic destination, with demand particularly focused around the hotel sector. France, having developed very close ties with Middle Eastern investors, also offers a vast choice of trophy assets and continues to attract strong demand for core assets and sectors. In the long term, Middle Eastern investors are also looking for ways of putting more capital into both the Americas and Asia, although for now these markets remain hugely underrepresented in terms of overall allocation of funds.
However, the big question is, as oil prices and oil production declines will Middle Eastern SWFs continue with the strategy of investing in foreign real estate? There are many parallels between the current situation and the fall of oil prices back in 1986. Then, an abrupt fall in oil prices ushered in a period of low inflation, low interest rates and higher economic growth.
We witnessed significant real estate activity primarily driven by a buoyant occupier market and credit expansion. However, the positive activity was short lived and as the property bubble burst the global real estate market came crashing down.
Another factor which may influence investors in the short term is the plummeting value of the Euro. Over the past seven months the Euro has fallen over 20 percent against the US dollar, meaning dollar pegged currencies in the Middle East suddenly go a lot further in the Eurozone.
The dollar has also enjoyed a good recent run against the British Pound, making London property marginally more affordable. Whilst the impact of short term currency volatility may not be a valid long-term investment driver, it may be sufficient to influence those already looking at European markets, with new greater value emerging on virtually a daily basis.
With many analysts forecasting dollar parity with the Euro before the end of the year there may be even more reasons for Middle East investors to continue their focus on Europe, with a growing shift towards perceived better value investments within southern European economies.
The recent fall in oil prices certainly serves as a reminder for the need for diversification within local Middle East economies. In the medium to long term, the requirement to diversify could also drive further investments in gateway cities, particularly through the sovereign wealth funds, which are now starting to look more outside of the core cities.
For now European markets continue to be an attractive proposition for Middle East investors. Therefore, they will continue to attract a disproportionate level of inbound investment.
* Mat Green is head of research and consultancy at real estate consultancy firm CBRE Middle EastFor 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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