No boundaries making big-ticket investments outside the region

No boundaries making big-ticket investments outside the regionImage Credit: Supplied

Despite weakening oil prices, outbound investment from the Middle East reached a historic high in the first half of the year, powered mainly by sovereign wealth funds (SWFs). Around $11.5 billion (Dh42.23 billion) flowed out of the region and into global real estate markets during the period, according to a report by property advisor CBRE, with SWFs accounting for $8.3 billion or around 72 per cent of total spend.

''It is true that the outbound investments were the highest six-monthly result on record,'' says Iryna Pylypchuk, Director of Global Research at CBRE. ''At first glance, the SWFs look to have been particularly active, but actually a couple of very large deals have influenced these results.''

According to the CBRE report, the half-year results were boosted by two large hotel acquisitions — in London ($2.5 billion) and Hong Kong ($2.4 billion) by the Qatar Investment Authority (QIA) and Abu Dhabi Investment Authority (ADIA) respectively.

''The size of the region's foreign investment makes the Middle East the third-largest source of cross-regional capital globally as Arab investors look for brighter investment prospects internationally,'' says Nick Maclean, Managing Director of CBRE Middle East. ''Qatar remains the largest source of outbound capital, investing a total of $9.83 billion, while the UAE invested $6.64 billion in global assets in 2014 and the first half of 2015 combined.''

Qataris are traditionally known for making big-ticket investments outside the region, so it's not surprising that QIA made a $2.47-billion acquisition of Maybourne Hotels in London and acquired the Porta Nuova mixed-use property in Milan for $1 billion.

''It is true that there has been significant investment in the UK in the last six months by the likes of QIA as part of the targeted expansion of their hospitality portfolio,'' says Nick Witty, Director of Real Estate Advisory at Deloitte Corporate Finance Limited. However, he notes that financial institutions such as Global Investment House in Kuwait and Seera Investment Bank from Bahrain have invested in out-of-town office parks and in central London.

Despite the effects of reduced oil prices, Witty says investors still need to diversify their portfolios, and while there are no mega deals on the horizon, the current trend is likely to continue. Furthermore, investments in the first half of the year were already 83 per cent of last year's total outflows.

''We expect an average of $15 billion to be invested by Middle Eastern investors per year in the next five years, with 2015 on target to bypass that by a significant amount, potentially reaching as much as $20 billion,'' says Pylypchuk. However, analysts believe it's not just the sovereign funds that are heavily investing overseas.

There has been growth in non-institutional capital flows as well. Private and non-institutional investors such as property firms, high-net-worth individuals (HNWIs), equity and private funds are also increasingly becoming major sources of outbound capital from the Middle East, according to the CBRE report. Pylypchuk says weakening oil prices are contributing to the growing global investment activity of non-institutional investors from the Middle East, triggering and accelerating global deployment of capital. ''Our research suggests that global real estate investment by non-institutional capital from the Middle East will range from $6 billion-$7 billion per year, if not higher, in the near term, increasing from about $5 billion per year in 2010-13.''

But will this capital outflow have any significant impact on the regional investment market? As far as SWFs are concerned, Pylypchuk says many of them were set up specifically for investments outside of their home region, so the overall impact on the Middle East is not as significant. ''However, as far as non-institutional capital is concerned, there ought to be some impact on the local markets as these investors are increasing their international allocations to diversify away from natural-resource dependent economies.''

According to CBRE, London remained the main beneficiary of Middle East investments during the first half of the year, receiving $2.8 billion or around 24 per cent of Middle Eastern outbound capital. Apart from QAI's $2.47-billion hotel acquisition, other notable deals included the $110 million purchase of the London Midtown office by a private investor. Hong Kong came in second with $2.4 billion, followed by New York with $1.1 billion.

''It is not really a case of seeking better yields, but more of looking to diversify their real estate investment portfolio,'' says Mark Proudley, Director of DTZ Qatar Consultancy. He says countries such as the UK are seen as low risk, being developed markets that benefit from greater transparency and well-established legislation and regulatory systems.

Witty adds, ''London and New York are the top-ranked markets, both benefitting disproportionately from relative trading volumes and liquidity.'' Despite the recovery in 2014, he adds there is still good relative value in most US markets, which despite the relatively stringent tax regimes are attracting Middle Eastern investors into asset classes such as senior housing and multifamily communities across the Sun Belt cities, notably Dallas, Houston and El Paso.

''Investment in the UK has historically focused on London, however, there has been a noticeable shift to secondary gateway cities such as Manchester, Birmingham, Edinburgh and Leeds, where higher yields are achievable,'' says Witty, adding that besides the UK, Brussels has topped the European rankings followed by Dublin, Warsaw, Amsterdam and Frankfurt.

In terms of asset classes, Middle East investors are becoming more active across a wider range of sectors, but hospitality in particular is gaining momentum. According to CBRE, Middle East outbound investments in hotels totaled $6.8 billion in the first half of the year, a gigantic leap compared with $1.8 billion total investments last year. The hospitality sector has certainly grown in importance in the past year and continues to attract large foreign capital.

''Recent acquisitions in Asia Pacific—close to $3 billion invested in Hong Kong and Sydney in the first half alone — as well as a broader selection of markets invested in Europe showcase the ongoing evolution of their investment strategies,'' says Pylypchuk. ''This extends to sector selection, with hotels growing in importance recently as SWFs and HNWIs focus on real assets that generate long-term revenue.''

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Source: S. A. Kader, Special to Property WeeklyPW


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