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While global capital markets are seeing increasing amounts of investment from the Middle East, the big question is where is all this investment going? As global real estate capital markets continue to show strong performance, our research shows that the first six months saw the strongest start to a year since the financial crisis. Not only are activity levels increasing, average lot sizes are also higher. In Europe more than 19 per cent of transactions in the second quarter were above €500 million (Dh2.43 billion) as opposed to 5 per cent during the same period last year.
Middle East-backed investors have been major players in Europe, but at the start of the year they have been overtaken in terms of activity level by investors from Asia and North America, as well as resurgent European investors.
But with the ongoing real estate activity in the Middle East, why do Arab investors have to look elsewhere? Real estate markets in the Middle East continue to evolve, but due to theh- infancy, they tend to not offer opportunities for institutional-grade investment to satisfy investor requirements in respect of long-term secure income returns.
The changes to the leasing markets (ie. lease length and rent review mechanisms) are starting to enhance the offerings in traditional office areas, but the majority of long-term deals have been in newer office locations or around sale and leaseback in the industrial and logistics hubs.
Scale of investment
In addition to supply challenges, scale and risk diversification also need to be considered. For example, the Abu Dhabi Investment Authority (Adia) has more than $773 billion (Dh3.76 trillion) of assets under management. with the Investment Corporation of Dubai having a further $70 billion. according to the Sovereign Wealth Fund Institute.
These two investors alone would be unable to maintain a balanced portfolio if only focusing regionally.
Europe historically receives the majority of investment being poured into international markets. Our research suggests around 70-80 per cent of global real estate capital from the region has been invested in Europe.
According to DTZ Research, more than 46 per cent of investment in Europe in the second quarter was by non-European investors (see graph above), totalling in excess of €3.4 billion. The Middle East is traditionally a significant contributor to this, usually underpinned by institutional investment from Sovereign Wealth Funds (SWFs) such as Adia and the Qatar Investment Authority (QIA) among others. There has been an increase in private high-net-worth and multifamily investment. particularly in the hotel sector, which saw an increase in hotel acquisitions in Europe.
The yield or annual investment returns vary depending on differing asset classes, locations, tenant characteristics, etc.
DTZ's European office network has also plotted the prime yields in major cities across Europe (see table below). To put these yields in context, we have included Dubai and Abu Dhabi, although it should be noted that both markets are limited by the tight supply of institutionally acceptable investment opportunities.
The majority of investment from the region has focused on a few traditional markets, with London being the most dominant. There have been a number of significant acquisitions in the commercial and hotel spheres over the past few years. The next investment hub of choice is Paris, again with the focus on prime commercial and hotel assets. There has also been a significant increase in development backed capital with the likes of Qatari Diar having acquired a number of key London sites through joint ventures with development partners.
The residential sector - because of shorter tenancies and more personal covenants - is not seen as attractive from an incomedriven perspective, especially in London where residential returns, excluding any capital value increases, are often much lower than commercial returns.
Traditionally, buyers from the region have focused on the key areas around Mayfair, Belgravia and Knightsbridge, with many of the prime and super-prime residences in these locations being owned by regional investors.
Student accommodation as an asset class has also seen increased interest, especially from Sharia investment vehicles and banks.
As highlighted earlier, there is an increase in development- backed investment in London's residential segment, not only from institutional investors, but also from high-net-worth individuals (HNWis), especially in the acquisition of offices for conversion to residential property. Certain planning restrictions and conditions were relaxed, leading to increased activity in this segment, but as a direct consequence supply in this sector has been tightened and opportunities have been more challenging to source.
As the investment strategies of SWFs continue to evolve, so do the geographies that they, along with HNWis, consider. There has been increased investment in North America recently, both in prime cities such as New York and Washington and gateway cities such as Chicago and San Francisco. Investors are also targeting Asia, but a lack of suitable opportunities in very competitive environments have resulted in more joint and indirect investments.
In emerging markets, in particular throughout Africa and parts of South and Latin America, investment has focused on government-backed infrastructure projects, with the main markets lacking both maturity and supply to satisfy the risk profile of many international investors.
According to our research, the returns in more than half of the top 20 cities in Europe are back to pre-crisis levels and investors looking for the biggest potential for yield compression are narrowing their selection, but should look at markets such as Bucharest, Budapest, Dublin, Madrid and even Moscow, where prime office yields still stand roughly 150- 300 basis points above their pre-crisis levels.
We strongly believe the rest of the year will provide a good hunting ground for regional investors and urge a focussed approach to ensure assets are identified and secured potentially in lesser competitive situations and ensure prices remain on the side of the investor.
Source: Simon Townsend, Special to Property Weekly
The Writer is the Business Development Manager - Midle East at DTZ, a property servcies firm.