Realty funds outflow from region could touch $180b

Despite all of the off-plan launches and projects that have been happening in Dubai and elsewhere in the Gulf, Middle East investors parked a substantial $13 billion in overseas commercial property last year and nearly double of what it was in 2012. And over the next decade, they could pump in a staggering $180 billion overseas, with Europe entrenched as the favoured destination, according to a new report issued by global consultancy, CBRE, on Monday.

In fact, European commercial properties could absorb up to 80 per cent of the projected Middle East buying spree, with Asia-Pacific taking in 10 per cent. A desire on investors' part not to go heavy on dollar-denominated assets could shade future Middle East fund flow into the US.

Certainly, high net worth Middle East investors, institutions and sovereign wealth funds (SWFs)are chasing better yields outside of their home territory. It is also a case of them spreading their investment bets over a wider geography, despite the Gulf's property markets being among the better performers of late, which is also the case with its stock markets.

So, why do regional investors keep looking outward? ''The buy-and-hold strategy adopted by many Middle Eastern investors within their region and the resultant lack of deal flow opportunities leaves much unsatisfied demand here,'' said Nick Maclean, regional managing director at CBRE. ''Coupled with increased confidence in global markets and the need for diversification, overseas investment has grown strongly.

''This trend is set to continue and with new sources of Middle Eastern capital, particularly from Saudi, set to enter the market over the next couple of years, the demand for real estate is increasing strongly.''

According to Jonathan Hull, managing director for EMEA (Europe, Middle East and Africa) Capital Markets at CBRE, ''The vast majority of Middle Eastern investors are long-term players looking for wealth preservation and strong high income-producing assets, rather than opportunistic investors playing the cycle for short-term gains. This strategy favours prime buildings in core markets and often very large lot sizes.''

If that explains why regional investors are looking overseas, what of the options for foreign buyers eyeing commercial realty in markets here? Could it be that such activity remains limited over a relative lack of transparency? (Between 2007 and the end of 2013, some $6.5 billion were invested in standing Middle East commercial real estate by foreign buyers — a level that would only be on par with those found in Tier B cities in Europe.)

''Any lack of transparency in the property sector will be factored into the price — but a comparative lack of transparency is not, at the moment, putting off investors, or preventing them from looking at the Middle East, particularly Dubai,'' said Maclean. ''Most, therefore, look beyond the transparency issue and look at the opportunity for capital and rental growth.''

In recent months, there have been a few major local deals, including the change of ownership for Atlantis Hotel The Palm, which saw a Dubai World subsidiary sell its stake to Investment Corporation of Dubai (ICD).

Going forward, there could be a subtle shift by some investors at least towards commercial property in Dubai. Yields are definitely getting better — CBRE reckons that while those on residential property has dropped to around 6.75 per cent, that for prime offices is pushing the 7 per cent mark.

''The opportunity within the commercial sector, particularly the office, is fully recognised by international investors,'' said Maclean. ''Their current frustrations relates to the limited stock available to purchase.

''I don't think that this space will be limited to Gulf [based] investment developers, provided there is enough stock to satisfy their demand from overseas investors.''

''Institutional investors by nature are relatively conservative. Their demand is high quality stock, well managed and well-let. If they can find that, then their flows of investment from overseas will increase substantially.''

Source: Manoj Nair, Associate Editor,


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