LOOK AHEAD 2018: Middle Eastern hearts still trump minds when London is concerned

Whether it's rejecting New York because of Trump or favoring London despite Brexit, Middle Eastern high net worth individuals and family offices will consider factors beyond property fundamentals when considering investments, writes Faisal Durrani, partner and head of research at London-based real estate property services firm Cluttons.

Global property investment safe havens appeared to be few and far between during 2017, with geopolitical tensions ranging from the fallout of the Brexit divorce proceedings and the alleged Russia-links scandal which dogged the Trump administration to Saudi Arabia’s anti-corruption drive and an impetuous North Korea stoking global investor nervousness to levels not seen since the great recession of 2007.

Still, even though the 10th anniversary of the events that triggered the worst global financial meltdown in living memory passed without much fanfare during the summer, I still feel there are compelling global investment opportunities, particularly in the property sector. For Middle East family offices in particular, there remains a fine line between balancing support of local opportunities, while continuing to funnel funds into overseas property markets as they continue to preserve capital, perhaps in preparation for a future without oil at the heart of Middle East economies.

My experience of working with high net worth individuals (HNWI) and family offices throughout the Arabian Gulf has showed that they are very different, each responding to global economic turbulence in very distinctive ways.

For instance, during the last Middle East Private Capital Survey run by Cluttons in partnership with YouGov, I learned that anti-Muslim rhetoric from the Trump administration was enough to turn HNWI off US property acquisitions. The severity of the impact was reflected in the fact that no US cities appeared in the 2017 top property investment targets, when a year earlier, New York emerged as the second most popular investment destination, behind London. Instead, Toronto, which did not feature in the 2016 top 20 list, was propelled into the limelight, in third place, behind Dubai and London. The Canadian commercial hub replaced New York as the most attractive location for Middle East-based HNWI during 2017, perhaps surfacing as a proxy for North American property investments, but also probably due to its sizzling property market, which has seen residential values doubling in the last 13 years. With such fantastic growth, the market is clearly in danger of overheating, with the 2017 UBS Global Property Bubble Index awarding Toronto the notorious title of having the highest risk of a property bubble globally.

My experience with family offices has, however, been very different, with US property assets remaining firmly front and center in their minds. What’s interesting is that the Trump presidency is viewed largely as a short-term challenge which does not feature in their long-term investment strategies. Throughout 2017, family office clients have talked about the appeal of residential and commercial investments from Dallas to Manhattan and from LA to Boston. What’s interesting to me is that the attractiveness of the US appears to remain intact and untarnished, despite the unpredictable nature of the Trump administration.

Closer to home, I can confirm that the appetite for a London-based investment has never been stronger. The strength of the US dollar, to which a range of Gulf currencies have historically retained a fixed peg, has positioned property assets in the capital as being ‘good deals.’ For Middle East investors, or Middle East family offices, the circa 15-18 percent decline in the value of sterling since just before the Brexit referendum has aided London’s appeal. For family offices in the Gulf, outside of Dubai, however, regional investment options remain elusive due in part to the political dispute with Qatar translating into increasingly frosty relations with its neighbors, and Saudi Arabia embarking on a corruption cleansing exercise. This turmoil results in the increasing need to look beyond the regional borders during 2018.

‘But prestige acquisitions still seem very much the flavor of the month and it is hard to imagine London’s rock steady bricks and mortar being substituted for corrugated iron structures, no matter how much higher the returns. Indeed, many clients have been blunt in their view on this’ – Faisal Durrani

When I recently attended a roundtable gathering of Middle East family offices in Dubai, it was abundantly clear that London remains at the heart of Middle East family offices’ global property plans. This is despite heightened nervousness around domestic affordability, a surplus in luxury residential property and the political jostling in Westminster over Brexit.

In the UK, the government endeavors to raise the profile of Manchester and Birmingham as  ‘northern powerhouses,’ and possible investment opportunities. The family offices from the Gulf, however, need more convincing if these locations are to become more than peripheral targets.

I would have thought with total returns for UK industrial property standing just shy of 17 percent over the last 12 months, according to IPD/MSCI, the property type would be well poised to emerge as a favorite for Middle East family offices. But prestige acquisitions still seem very much the flavor of the month and it is hard to imagine London’s rock steady bricks and mortar being substituted for corrugated iron structures, no matter how much higher the returns. Indeed, many clients have been blunt in their view on this.

Still, with signs to suggest that individual Middle East HNWI venturing beyond the confines of London’s Zone 1 in search of better returns, along with a handful of family offices acquiring office assets in regional cities, we may well see more follow suit and test the waters in other markets around the country, although it is likely that vanilla asset classes like residential, retail or offices will retain the most appeal. That said, with residential and office yields in prime Central London under pressure, the allure of the rapidly developing private rented sector may dominate investment portfolios over the next year or two.

In any case, I expect London to retain its position as the number one global property investment target for Middle East family offices during 2018, regardless of the outcome of the Brexit talks. The city’s deep-rooted trading links with the Gulf, combined with its proven track record of delivering stable and strong returns, even in the toughest global economic conditions, will mean the power of its appeal will prevail.