Mideast investors reduce foreign commercial realty purchases

Several investors have been taking advantage of Brexit to secure opportunistic acquisitions in the UK capital.

The Middle East's outbound capital flows into global commercial real estate reached $10.1 billion between Q2 2016 and Q2 2017, according to CBRE Middle East. This compares to $21.2 billion in the previous year. Despite a slowdown in outbound investment, Middle East investors still remain a major source of capital globally, representing eight per cent of total cross-regional investments.

Whereas traditionally investors from the Middle East were competitive in winning trophy assets, most of the ultra-large tickets in the last 12 months have been picked up by Asian investors.

While international investors remain largely focused on the traditional commercial real estate sectors such as offices, retail and logistics, Middle East investors typically have a strong appetite for alternative asset classes such as hotels, residential, student housing, healthcare and infrastructure. Investors from the Middle East continue to target core assets with long leases in safe haven locations. The UAE, for example, has made major investments in large-scale infrastructure projects in the UK, such as Gatwick Airport.

London was the top destination for Middle Eastern investment at $1.68 billion and New York ranks a distant second at $820 million. Washington and Frankfurt received $469 million and $348 million respectively.

Several investors have been taking advantage of Brexit to secure opportunistic acquisitions in the UK capital, most notably family wealth from ultra-high net worth individuals and certain sovereign wealth funds (SWFs). While this was partly driven by a correction in yield levels and a favourable currency effect due to the depreciation of the sterling, it reaffirms London's status as global gateway market.

While the US remains the top destination for Middle East investors as measured by total investment volume, US inbound capital flows have retreated to $3.9 billion in the year to Q2 2017 from $10.3 billion in the same period previous year. The little anticipated result of the US presidential election was initially received by Middle Eastern investors with calm and reason, although the first months after inauguration proved to be politically sensitive. Policies that specifically targeted migration from certain Middle Eastern countries have likely affected decision-making over the last six months.

Nick Maclean, managing director, CBRE Middle East, said: "In spite of fluctuating oil prices, capital leaving the Middle East has continued to target global real estate markets. Investors have expressed their intention to increase global real estate spending as a proportion of all investment asset allocations. This is driven by a perceived need to diversify income streams by asset class and geography."

In line with previous years, SWFs remain the main source of capital for investments from the Middle East. Outbound investments by SWFs witnessed a decline of 17 per cent year on year, but still acquired $5.4 billion in real estate assets globally. High-net-worth individuals and private investors were less active compared to previous years, which indicates that this group might be more susceptible to adverse market conditions.

Inward capital flow
In terms of inward capital flow, despite economic headwinds, investment activity has remained strong in some core locations. During H2 2016 and H1 2017, some major investment deals were completed, including high profile commercial office deals in Dubai. However, appetite for hospitality assets has waned considerably.

The bulk of overall investment activity is focused on the land sales market and on single and multiple residential unit sales.

The regional investment market remains characterised by low deal volumes and relative illiquidity. However, the relative illiquidity is not driven by a lack of capital for deployment, rather it is the lack of available investment product for sale.

- deepthi@khaleejtimes.com