From gateway cities, investors turn to secondary

As global oil prices continue to slip in an environment of oversupply, investors hailing from oil dependent regions of the world, including the Middle East, are refocusing their attention outward and seeking opportunities to buy stable assets that can provide dependable yields.

The Middle East has significantly grown its influence in the global real estate markets, drawing attention from market participants, analysts and investors alike. The amount of foreign investment in the first half of 2015 makes the Middle East the third largest source of cross-regional capital globally.

Estimates also suggest that investors from the region will allocate an average of $15 billion annually in international real estate opportunities moving forward, with plans to target the US in a big way.

At Ethika Investments, we are witnessing savvy investors continuing to grow their overall real estate holdings as a way to insulate themselves from market fluctuations, with commercial real estate investments providing greater geographic and sector diversification for portfolios.

Much of the investment has been driven by some of the world’s largest sovereign wealth funds in the Middle East, many of which found equity markets to be too volatile and the bond markets too low yielding. Direct real estate investments presented a significant opportunity for these groups, and many faced little competition in grabbing up well-placed assets within Europe’s historic trophy cities during the global financial crisis.


However, as competition from Chinese investors and other global capital sources increased, prices in those cities soared and Middle Eastern investors turned their sights to the US and to our gateway cities — New York, Washington D.C., Los Angeles and Miami.

These types of high-profile purchases have captured plenty of attention, including Abu Dhabi Investment Authority’s acquisition of the Miami Beach EDITION hotel for $230 million (Dh844 million) earlier this year.

More recently, as investors look beyond those primary US markets and the trophy hotels and office buildings they acquired in those locations and seek higher-yielding investments, we have seen an increasing focus on secondary markets that provide more growth opportunities, comparable interest rates and more balance between pricing and fundamentals.

These lesser known areas throughout the Southeast, Midwest and Mountain West have an unbelievable amount of depth and potential, housing the headquarters of many Fortune 500 companies and strong regional firms. Minneapolis, for example, is known as a prominent centre for medical technology and research, and as home to 17 Fortune 500 companies, is currently undergoing strong leasing momentum given the breadth and diversity of its economy.

The weakening of oil prices may lead to sovereign wealth funds reducing their total spend over the long run, but we are predicting continued strong growth in capital from family offices and other institutions.

Lease agreement

Recently, we’ve seen a shift in priorities among these private investors who once preferred assets with long leases that provided a consistent level of annuity income. The standard request for an office building with a 20-year lease agreement to the US government is finally being re-evaluated.

As the real estate market has evolved over the last decade, these private investors are shifting their focus to more niche sectors that allow high net worth individuals to invest into direct real estate with lower commitments. What we’ll likely see is a resulting drop in average acquisition size among Middle East investors. Understanding the depth of the US markets and opening up to more value-added opportunities will allow Middle East investors to achieve better returns in the long run.

While not at its peak pre-recession level, we expect Middle Eastern capital to continue flowing to the US as big sovereigns continue to seek safe havens and long-term growth potential.

We plan to grow our relationships in the Middle East and cultivate new ones, providing investors with a unique platform that enables them to access our unparalleled real estate knowledge base and opportunity pipeline.

Source: Austin Khan, Special to Gulf News

The writer is the Chief Investment Officer at Ethika Investments


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