Feature: JLL advisor explains why the Middle East is going direct

This month saw two direct investments in the City of London by Middle Eastern investors better known for making third party investments into blind pool, discretionary funds. PERE spoke with the agent behind these deals about their wind change in investment priorities.

Chris Brett, a director of the UK international desk at global property services firm Jones Lang LaSalle, advised the Oman Investment Fund on its £445 million (€525 million; $731 million) purchase of a 75 percent stake in UK developer Hammerson’s Bishop Square development in the City of London as well as the Al Salam Bank on its £127 million acquisition of the nearby Milton Gate office building from the UBS Triton Fund.

He says the two deals exemplify a wind change in investment priorities for Middle Eastern investors seeking to take control over capital deployment decisions after experiencing indifferent returns from taking the third party, blind pool route. This, he says, has been evident in London first.

“This is a time of disintermediation of third party fund management and of investors with a lot of capital wanting to have more control over how their money is deployed,” he declares.

Brett says these investors will not shun fund managers completely or forever, but the advisor believes they are unlikely to make the large commitments seen prior to the credit crisis and will be more selective about which managers they commit funds to going forward.

“This is not a complete strategy shift for our clients but an opportunity for them to gain control of significant prime assets at relative value pricing and to have big ownership stakes in direct assets.”

Brett says the main attractions for Middle Eastern investors in the UK today are the re-pricing of the London market, the weakness of the sterling and the ability to buy into joint ventures which have established local asset management capabilities. In the case of the Hammerson deal, it was important for the Oman Investment Fund to keep the London-listed property company as a part-owner of the asset.

Brett says that while attractive yields and currency positions stay in their favour, the market should expect further direct investments from Middle Eastern investors. When deal volumes pick up and yield compression starts again, however, it is likely that more commitments will be made to fund managers and that fund managers are unlikely to witness the same volume or style of limited partner investing as before.