Arab outbound investments drop

Aerial view of the Berlin-Mitte district. Berlin’s real estate market grew 8 per cent in the first half of last year / Image Credit: Supplied.Aerial view of the Berlin-Mitte district. Berlin’s real estate market grew 8 per cent in the first half of last year / Image Credit: Supplied.

Out of $14.1 billion (Dh51.79 billion) that Middle East investors pumped into property markets outside the region last year, some $10.2 billion or 73 per cent made its way to Europe, a traditional top choice for Arab investors, according to CBRE’s Middle East In and Out 2015 report. CBRE reveals a major shift in Arab investment strategies — in line with other investor groups — with last year’s activity growing across second-tier European locations such as Amsterdam, Frankfurt, Budapest and Madrid.

The size of the region’s foreign investments makes the Middle East the third-largest source of cross-regional capital globally, according to the CBRE report, although the value of investments last year dropped compared with 2013.

“There has been a fall in outbound capital from the region from $16.1 billion invested globally in 2013 to $14.1 billion last year,” says Iryna Pylypchuk, Director of Global Capital Markets Research at CBRE. “In part, this is a function of difficulty in accessing product, and the large lot sizes these buyers tend to invest in. However, in light of weaker oil pricing, real estate acquisitions by sovereign wealth funds [SWFs] are expected to slow further this year and beyond.”

London remains be the most popular market, but it accounted for only 32 per cent of investments last year, dropping more than ten percentage points from 45 per cent in 2013. James Thomas, Regional Director of financial consultancy de-Vere Acuma, says there was a small slowdown in growth in the UK property market by the end of last year, although he says this should be taken in the context of an average price increase of 11.1 per cent across the year, as well as uncertainty over stamp duty and mansion tax proposals and the typical cautious attitude of investors in the lead up to the election next month.

Long-term growth

Arab investors in the UK, however, can look forward to brighter prospects as Thomas expects growth of up to 22 per cent through to 2019. “Places to look out for include Ilford, Lewisham, Sutton and West Drayton over the coming years,” he says.

Analysts believe a number of measures are also set to drive demand in the UK property market, including changes to rules around pensions and ongoing infrastructure project investments.

“There were no major surprises for overseas property investors in UK Chancellor George Osborne’s Spring Budget, and the backdrop for investment remains an upbeat one,” says Paul Preston, Director and Head of IP Global Middle East, a property investment firm. “Collectively, the overall picture following the UK Spring Budget announcement will see increased demand for homes in the UK. This, coupled with the chronic undersupply of housing, a rising population and positive economic growth, mean that the UK retains its position as a key target market for overseas property investors.”

Paris and New York, on the other hand, grew their shares in the total Middle East international realty investment to 16 per cent and 10 per cent respectively. London and Paris were also the only markets to retain their spots in CBRE’s list of top five Arab investment destinations.

New players

Historically SWFs have dominated Middle Eastern investor tables, accounting for around half of international commercial real estate acquisitions in 2013. While SWFs are still the largest single investor group, CBRE notes that Middle Eastern high-net-worth individuals, the private sector and other collective vehicles played a more significant role in global markets last year.

“Middle East investors’ overseas real estate spending is increasing in importance, particularly among private and family offices and particularly from Saudi investors, as geographical diversification has become more important,” says Nick Maclean, Managing Director of CBRE Middle East. “We feel that this trend will accelerate over the next few years.”

Lower oil prices are likely going to trigger increased International allocations and faster deployment from private capital, according to Pylypchuk. “Our research clearly shows a greater allocation of investment to real estate and desire to diversify away from the home region,” he says. “This has had a significant impact on Europe, where the combined investments of private wealth and equity funds from the Middle East grew by 49 per cent year-on-year to $5.5 billion.”

Emerging destinations

Some cities in Europe, Australia and the US are becoming strong candidates as top foreign investment destinations with property sales continuing to grow in these areas, according to Thomas. He says Berlin, for instance, has established itself as an investment stronghold in Europe over the last few years.

“The city remains relatively cheap and is attracting migration at a high rate that’s predicted to add more than 300,000 new residents over the next decade,” says Thomas. “The concept of home ownership is growing significantly in Germany, and this expansion of the property sales market is making the country particularly appealing for investors.

“The Berlin market in particular has a very low ownership rate of just 16 per cent that is expected to rise significantly over the coming years. Increasing demand, paired with a low construction pipeline, saw the city’s real estate market show price growth of 8 per cent in the first half of last year, almost 3 per cent above the national average.”

In Australia, Thomas says the economic success of Brisbane is translating into significant growth in the city’s real estate market. “Land values in Brisbane’s inner city suburbs rose by 10-20 per cent last year, while construction costs also increased, which will have a significant impact on the city’s supply pipeline.” He says apartment prices will continue to grow after rising 5 per cent in the third quarter, while rental yields of 5 per cent was reported in the same period.

Chicago and Brooklyn are also gaining attention in the US, according to Thomas. “Prices [in Chicago] remain 24 per cent lower than peak, so investors looking long term can expect this growth to continue at a steady pace that avoids the risks of over-inflation, while still delivering healthy returns.”

Brooklyn, on the other hand, presents an excellent option to benefit from the strength of the New York City property market without the hefty price tag of Manhattan real estate. The median Brooklyn price is 32 per cent lower than that in Manhattan, making it an excellent investment alternative for those who want to invest in New York real estate.

Meanwhile, Saudi Arabia is the fastest-growing source of outbound Middle Eastern investment, according to CBRE. The country’s capital outflows reached $2.3 billion last year from virtually nothing in 2013. Qatar was the largest source of Middle Eastern capital last year with $4.9 billion.

CBRE does not see significant short-term impact in terms of inward capital flow, although some segments of the market will have to be closely watched. It notes that Asian investors’ appetite for income-producing real estate and developments across major global geographies will likely extend to the Middle East. “There are initial tentative signs of this sentiment coming through from CBRE’s 2014 Asian Investor Intentions Survey, where a handful of investors expressed interest in diversifying into the region,” CBRE says in the report.

Industry insiders have also pointed out that sustained investor interest in the region has helped unlock the Middle East’s real estate growth potential. “The Middle Eastern region has diversified its economy to curtail dependence on hydrocarbons and contain the growing demand of travel, trade and tourism,” says Brett Schafer, CEO of DIFC Properties. “Sustained investor interest to expand their global outreach in the fast-emerging Middle Eastern market has predominately steered the growth engine of the real estate sector too. With strengths in tourism, logistics, health care, connectivity and transport, Dubai’s commercial real estate market is one of the most lucrative markets for foreign investment.

“Removing more barriers, such as foreign ownership restrictions, has made Dubai an even more attractive trade and real estate investment destination.”

In this regard, Schafer says the Dubai International Financial Centre is “accelerating expansion plans” that include new retail and office developments to facilitate more businesses in the area.

“The number of commercial transactions involving foreign investors does not adequately reflect the interest in real estate in the GCC and if the relative illiquidity could be solved here, the UAE in particular would see substantial inbound capital flows,” says Maclean.

Source: CBRE Research


Source: Jobannie Tabada, Features Editor, Property Weekly


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