Middle East investment flows into global commercial real estate decreased from US$12.2 billion in 2016 to US$9.1 billion in 2017 (by 25%), as a result of an extended period of lower oil prices and intensified competition from other buyers, particularly in global gateway cities. The graph below demonstrates a significant correlation between oil prices and real estate transaction volumes by Middle Eastern investors.
Between 2009 and 2013, increasing oil prices facilitated increase of real estate investment from US$3.8 billion to US$13.7 billion. This period was followed by a short stablization between 2013 and 2014 and a decline in volumes since 2014. With oil prices increasing above $70 per barrel for the first time since 2014, we expect overseas real estate transaction volumes to pick up in 2018 reflecting adjustment in investors’ strategies.
In a region where oil price is a key barometer of how market sentiment moves, the impact of sharp declines in price levels between 2014-2016 could not have gone unnoticed. The region’s Sovereign Wealth Funds (SWFs) have been responsible for the majority of outbound investment in the past, but since their ultimate sources of capital are related to hydrocarbons, they had to cut back their spending on high-profile overseas office blocks and hotels and focus on domestic priorities. Although private investors and aggregators have stepped in and aggressively targeted cross-border opportunities, their average transaction size is much smaller (US$10M and US$100M), so the net effect was still negative.
Another significant cause of the decline in Middle East outbound investment is the increasing competitiveness of the global ‘gateway’ cities such as London, which for years has been the number one destination and accounted for over 25% of flows from the region. In particular, in 2017 US$8.6 billion was pumped into liquid trophy assets in London by Hong Kong investors, accounting for a whopping 25% of total transactions volumes (Graph 2). To put this in perspective, between 2004 and 2016 Hong Kong investors allocated a total of only $4bn to Central London real estate. Very low yields in domestic markets coupled with political uncertainty, the depreciation of the Pound sterling, and China’s new capital controls on outbound property investment (which have seen capital from China flowing through Hong Kong entities) mean that Hong Kong investors are aggressively piling into London property, effectively outbidding Middle Eastern buyers. Nevertheless, we expect that Middle Eastern buyers will regain their competitiveness and dive deeper into other established real estate markets in Europe (e.g. Germany) which will contribute to the recovery of outbound investment volumes in the future.
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Author: Fadi Moussalli
Fadi is a Regional Director based in Dubai and member of the International Capital Group which focuses on harnessing cross-border capital flows between the four regions of the Americas, Asia Pacific, Europe and the Middle East. The group is dedicated to serving global clients who wish to build international portfolios. Working with and extending the reach of the existing Capital Markets teams, the Group’s aim is to develop and manage sell and buy-side mandates, focusing on assets valued in excess of US$ 100 million.
Prior to joining Jones Lang LaSalle in January 2007, Fadi was based in London with BNP Paribas where his remit encompassed of regional bond transaction origination and distribution within the Middle East. Fadi worked on several high profile emerging markets and Middle Eastern structured bond mandates including structuring and raising capital for Islamic Sukuks transactions. During this time, Fadi developed an extensive network of contacts with Middle Eastern investors including banks, government bodies and family offices.
Fadi has an MA in Economics from University of Paris IX Dauphine and an MBA from Paris Graduate School of Management.