Middle East Investment Trends
1 August, 2014
Middle Eastern investors are expected to deploy US$180 billion into foreign commercial real estate markets over the next decade continuing to be major contributors to global cross-border capital flows.
According to the latest “In and Out: Middle East” research from CBRE Global Research and Consulting, Middle Eastern investors’ 10-year spending in global commercial real estate outside their home region will reach US$180 billion, while Europe will remain a clear favourite with around 80% allocation.
The International Capital Group, MENA at JLL, ranked Middle Eastern cross-border investors 4th in amount of global investment. JLL’s analysts define three main categories of investors in the Middle East. The first of them is Sovereign Wealth Funds (SWFs) which include Abu Dhabi Investment Authority, Abu Dhabi Investment Council, Aabar; Qatar Investment Authority, Qatar Holding; Kuwait Investment Authority; State General Reserve Fund (Oman), Oman Investment Fund. The second category is Ultra High Net Worth Families and Individuals (UHNW). The third category includes institutions and syndicators such as Gatehouse Bank, Sidra Capital, Corporate Finance House, Al Salam Bank. Among these, SWFs and UHNW are the dominant categories.
“Middle East real estate investors have started spending money outside of their home region forty years ago; it has been caused by diversification of the real estate market exposure by sector and by geography. Foreign markets and the European market particularly have always been less risky,” comments Fadi Mousalli, Regional Director – International Capital Group, MENA at JLL.
According to Iryna Pylypchuk, Associate Director, EMEA Capital Markets Research, CBRE, the two key reasons behind the rapid flows of Middle Eastern capital into global commercial real estate are substantial long-term trade surpluses and lack of the developed local institutional commercial real estate market.
The region’s SWFs, which are some of the world’s largest and most influential sources of capital, were the first to start investing into the real estate outside the Middle East. CBRE consider that this trend is positive for the region.
“The bulk of the capital coming from the Middle East is from Sovereign Wealth funds, and if all of that capital were directed at local real estate the result would be an asset price bubble. The purpose of such funds is to store up capital for the long term without overheating local asset markets,” explains Iryna Pylypchuk.
“The most popular markets among Middle Eastern real estate investors have always been Europe and the USA. In fact, 60-70% of the investments are concentrated in the UK with London as the historically favourite destination,” says Fadi Mousalli from JLL.
According to CBRE, the UK is expected to see a significant share of allocated capital targeting core plus and value-add investments in the next decade, while continental Europe is expected to see three times the level of direct investment by Middle Eastern investors than was the case in the previous 10 years.
“While some increase in allocation to the Americas is expected, it is difficult to see a significant shift in strategy, with the desire to diversify away from the US$ counteracting the fundamental attractiveness of real estate as an asset choice – leading us to predict an overall allocation of 10% to the region. The remaining 10% of the US$180 billion will be intended for allocation towards Asia Pacific,” comments Iryna Pylypchuk, CBRE.
What does attract Middle Eastern investors to European real estate markets and make them disproportionately invest in this region? CBRE believe that this is due to the combination of a number of different factors.
“Firstly, there is the issue of transparency. Europe contains a variety of highly transparent and liquid markets, which have straightforward transaction processes, clear taxation regimes and an easy availability of professional services to manage both the transaction process and, subsequently, the acquired real estate; the availability of professional advice is appreciated by the investors. While in the USA, it is not traditional that the buyers are represented in transactions, and so such advice is harder to obtain,” explains Iryna Pylypchuk.
“Secondly, there is the issue of a balanced global portfolio. Europe makes up a significant part of world GDP, so a balanced portfolio needs to contain a significant allocation to Europe. If we balance this with the fact that North America has a high proportion of global bond and equity markets real estate is a good way of rebalancing and adding more weighting to Europe,” further comments the researcher.
“Among different sectors of foreign real estate markets the residential sector has always been favoured by Middle Eastern investors. Speaking about commercial real estate, office and hospitality sectors become increasingly popular,” says JLL’s Fadi Mousalli.
According to JLL, office investments have been responsible for a majority of the investment volumes. CBRE’s analysts also confirm that Middle Eastern investors disproportionately invest in offices—about 55% of investment by value over the last ten years.
“Offices make sense for overseas investors because of the significant numbers of large lot size transactions and the ease of management once purchased. However, there has been increasing investment in retail and hotel properties in the last few years,” comments Iryna Pylypchuk from CBRE.
CBRE say there is little doubt over the fact that offices and hotels will remain the two key sector choices for Middle Eastern investors in the next decade. For instance, in the Asia Pacific region, some of the capital is expected to be invested in other sectors, such as hotels, residential and infrastructure. While there are clear signs that the investors are starting to be more comfortable to explore other sectors, allocation away from the office and hospitality sectors is unlikely to exceed 30%.
Comparing past and future tendencies in cross-border investment, CBRE state that Middle Eastern investors have become a little more varied in terms of the locations and assets that they chose to invest in.
“They have been more active in the retail and hotel sectors recently (including a number of hotels in Spain so far this year). France has always been a significant destination for Middle Eastern capital, but has also seen a recent increase in flows,” says Iryna Pylypchuk, CBRE.
For those Middle Eastern investors who are in the early stages of building their direct real estate portfolios the focus will remain on the less management intense sectors and assets. Offices and fully-serviced hotels fit into the category perfectly.
“Overall, however, as is the case with the geographic diversification, the larger more established Middle Eastern players will be looking to explore other sectors. Retail (high street retail in particular) is expected to see greater demand,” further explains Iryna Pylypchuk.
Interest in larger lot sizes is likely to remain unabated for the next decade, especially for the SWFs, per CBRE. Equity-rich and eager to increase exposure in direct real estate, SWFs have a significant competitive advantage in this segment of the market. At the same time co-investments, joint ventures and dedicated investment vehicles will be a more important feature of cross-border Middle Eastern investment going forward across all geographies.
“Certainly, Middle East investors will keep their interest in foreign real estate markets. We are sure that investment volumes will continue growing over the next years,” concludes JLL’s Fadi Mousalli.