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Property investors from the Middle East increasingly play an important role in propelling the growth of major realty markets around the world. According to a report from property adviser CBRE, Arab investors are projected to invest around $180 billion (Dh661.14 billion) in commercial real estate markets outside of their own region over the next decade.
A huge proportion of these investments is expected to come from sovereign wealth funds (SWFs) and ultra-high-net-worth individuals (UHNWIs) looking to invest surplus income into real assets that generate long-term revenue.
While the real estate sector was among the worst hit by the financial crisis that engulfed economies in the US, Europe, Asia and Middle East, property markets are now starting to rebound steadily.
Gulf investors are taking advantage, diversifying their portfolio and geographical asset allocations by investing heavily in overseas real estate markets. In fact, Middle East investors have been pumping huge amounts of money into the global real estate sector since the start of the market downturn.
"Since the global financial crisis, SWFs from the Middle East have become one of the most significant sources of capital in the global real estate landscape. The demand from these institutions has evolved during the past few years into a sophisticated source of liquidity for many of the mature real estate markets around the world," says Nick Maclean, Managing Director of CBRE Middle East.
In return, Middle Eastern investors have managed to benefit from the quick recovery of the UK and US markets starting in 2010. These investors now see the expected recovery of the southern European markets as another opportunity to catch the recovery wave in its early stages.
Gulf investors are historically among the biggest spenders in overseas real estate markets. The past decade wasn't any different as they invested more than $45 billion between 2007 and last year —during a period that also witnessed a global financial crisis.
"Middle Eastern investors have been consistently and reliably acquiring real estate overseas for the past 50 years. SWFs pioneered this trend in the 1960s and private investors followed this path since the mid-1970s," says Fadi Moussalli, Regional Director of the International Capital Group — Middle East and North Africa (Mena) at JLT.
Moussalli explains the main purposes of overseas property investment are geographical risk diversification, recycling of government export surpluses and recycling of dividends from domestic businesses.
Also, the accumulation of wealth and a lack of good opportunities in the region is encouraging local investors to look overseas.
Industry reports suggest European markets have been receiving a major chunk of funds from the Middle East. According to Colliers' Capital Flows Quarterly Report, Middle East investment in Europe rose by 25 per cent year-on-year in the first half of the year to €5.9 billion (Dh28.7 billion), accounting for 13 per cent of the total cross-border capital coming from outside Europe.
In addition to offering opportunities to diversify investment, industry experts say Europe's acceptance of cultural diversity and the high liquidity and transparency in the market will continue to attract Middle East investors in the long run. According to CBRE, Europe is expected to be the biggest beneficiary of capital outflow from the Middle East, with $145 billion targeted for the region over the next ten years.
The report also says that close to $85 billion will flow into the UK, with $60 billion directed at continental Europe. France, Germany, Italy and Spain are among the key target markets.
"Historically, London and Paris have attracted a very high proportion of the total investment and, broadly speaking, we expect this to remain the case," says Michael Haddock, Senior Director of Research and Consulting — Europe, Middle East and Africa at CBRE. "However, Middle Eastern investors are becoming more diverse in terms of the destinations that they are prepared to look at.
"We expect to see a greater amount of investment to Germany and other parts of the UK in the short term."
In the long term, Haddock says Middle East investors will also look for ways to pour more capital into the Americas and Asia. "We can already see Middle Eastern investors looking at development and joint-venture arrangements as routes into these markets."
Colliers' report also highlights a growing interest among Middle East investors to buy alternative products in continental Europe.
"Middle Eastern buyers are increasingly prepared to venture outside central London, looking at alternative asset classes such as hotels and serviced apartments in other tier-one cities," says John Davis, CEO — Mena at Colliers International.
Recent examples include Qatar Investment Authority's (QIA) acquisition of five hotel properties in Cannes, Madrid, Frankfurt, Amsterdam and Rome, and Qatar Armed Forces Investment Portfolio's acquisition of the Hotel Renaissance in Barcelona for approximately €78 million, says Davis.
"We have also seen Middle East investors play a key role in major deals in central London during the first half of the year," says Davis. "For example, China Life [70 per cent] and QIA [20 per cent] taking a 90 per cent interest in the Clifford Chance HQ in Canary Wharf."
Within Europe, the UK is expected to attract Middle East investors more than any other country. Industry experts say there is a range of different factors that make the UK market more desirable, including political stability and its reputation as a global financial centre.
"There is also a degree of cultural and historic familiarity, with many Arab investors having been educated or having family homes in the UK," says Moussalli. "It is a transparent, well-regulated, tax-efficient and well-established international real estate investment market."
Furthermore, London is not only a sanctuary for capital investment, but also as a vibrant urban hub.
"For international buyers, prime London property, in particular, is still seen as the holy grail of investment, offering steadfast capital gains," says Peter Rollings, CEO of Marsh and Parsons, a London-based estate agent. "With double-digit annual house price growth being experienced across the capital, smart buyers can earn more money from their house in a year than by working in a very well-paid job."
However, Rollings cautions there are signs that measures to increase the taxation on property investors are affecting the prime London market.
"We've witnessed a decline in overseas buyers over the past three months," says Rollings. "Both the enhanced capital gains tax for overseas buyers, announced in last year's Autumn Statement, and the punitive rates of stamp duty being charged on unoccupied property purchased by overseas investors, announced in this year's budget, are causing uncertainty in the local markets and threatening to seriously dent inward investment to the UK."
But experts say until other forms of investment become more attractive, prime London property will continue to be seen as a rock-solid investment akin to a global reserve currency.
Slow investment activity
Industry players tracking the London market point out that Middle East buyer activity has been so far quiet compared to previous years because of the Ramadan falling earlier in the year. Hence the market expects an influx of Middle East buyers in late summer or early autumn.
However, in the super-prime market (for property worth in excess of £10 million) activity has been good so far this year, although purchasing decisions have been delayed due to the Ramadan.
With so much capital flowing out of the Middle East market, the pertinent question is whether this trend will cause a slowdown in the domestic property market.
Experts say the trend is unlikely to impact the local market as Arabs will also continue to invest heavily in local real estate and remain the biggest property investors in the Middle East.
Dubai, for example, has already received Dh12.56 billion worth of property investment from Emiratis in the first half this year. Investors from other GC C states invested Dh6.5 billion, with Saudis spending Dh3.37 billion, Qataris Dh1.46 billion, Kuwaitis Dh839 million, Omanis Dh482 million and Bahrainis Dh247 million, according to the Dubai Land Department.
As the local market improves, experts say this will encourage Middle East investors to divert some of their earnings outside their region.
"We see a positive correlation between domestic growth and the willingness of Middle East investors to buy overseas property in larger volumes," says Moussalli, who is also a member of the Rics Valuation Professional Group. "We observed that the more dividends and surpluses are generated from domestic activities, the more Middle East investors show appetite for overseas real estate."
With attractive opportunities in the region, why are Arab investors still looking overseas to buy property?
Moussalli explains even if things are going well in the domestic market, rational investors will not want to put all their eggs in the same basket.
"Diversification of risk and geographical asset allocation will always remain among the main drivers of overseas property investment," he says.
Middle East investors in overseas property markets have been mainly investing in offices, followed by hospitality property.
"The emphasis on hotels reflects the focus on core cities of the world and the desire to own large, secure and resilient assets," says Moussalli.
Analysis of the past ten years shows that offices account for about 55 per cent of investment from the Middle East.
"Offices make sense for overseas investors because of the significant number of large lot size transactions and the ease of management. However, there has been increasing investment in retail and hotel property in the past few years," says Haddock.
Aside from Arab investors, global SWFs and UHNWIs are also now targeting luxury hotels in major locations.
In January, Qatar-based Al Rayyan Tourism Investment Company bought the St Regis Bal Harbour Resort in Miami from Starwood Hotels for $213 million. In the same month, the Abu Dhabi Investment Authority purchased three Marriott Edition hotels in London, Miami Beach and Manhattan for $815 million.
Industry observers say these types of buyers are generally seeking steady and reliable returns over the long term, rather than short-term revenues.
"SWFs are, by their nature, long-term investors," explains Haddock. "By investing in markets throughout the cycle, they are able to take advantage of their long investment horizon, rather than being put off by the possibility of short-term volatility."
As the local markets grow stronger and offer better yields, Middle East investors will also increasingly play a greater role in accelerating the growth of global realty.
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Source: Syed Ameen Kader, Special to Property Weekly