Late last year, Berkadia’s JV equity and structured capital team traveled to Abu Dhabi, Dubai and Kuwait to better understand institutional investors’ appetite for commercial real estate opportunities in the US.
Conversations with more than 25 institutional investors in the Middle East – including those from private equity and pension funds, family offices, high-net-worth aggregators and sovereign wealth funds – shed light on the various factors shaping their US investment strategies as challenging market conditions continue into 2024.
Three key changes stood out:
1. From office to residential
Although investors from the Middle East have historically displayed a strong appetite for opportunities in the US office sector, they have recently shifted their focus toward multifamily and student housing. Investors are well informed of the US office sector’s current challenges and understand how post-pandemic remote work and employment trends are shaping the asset class. This has positioned the multifamily and student housing sectors in a more attractive light due to the continued demand for rental units and stronger operating fundamentals compared with other asset classes.
2. From equity to credit
Middle Eastern investors are aware of the lack of available capital in the US, and are reporting a significant influx of US-based funds and sponsors traveling to the Middle East and requesting meetings. This is typical in times of increased uncertainty.
With increased demand for foreign capital, it is important to look at the financing methods of interest to investors. Middle Eastern investors display strong appetite for preferred equity and mezzanine debt due to the current returns in the space and position in the capital stack. They also understand they can achieve “equity-like returns” in the credit space, meaning it is challenging to justify taking joint venture equity-like risk unless they are being paid a premium for that risk.
3. Looking closer to home
Gulf-based investors are getting high returns from their savings accounts, typically 5 percent or greater. This means that when determining investment strategies, they are very focused on high-yielding opportunities.
Recently, Middle Eastern investors are generally more comfortable with and more interested in targeting opportunistic returns in nearby geographies seeing significant growth, such as emerging markets in Asia, than in the US.
Another area of interest is Dubai, which boasts one of the hottest real estate markets in the world amid an influx of investment. Investors that might have looked to the US in the past are now focused on Dubai due to its proximity and the local currency, the dirham, being fixed to the US dollar.
That said, many investors confirmed they were open to looking at secondary and/or tertiary markets in the US to generate opportunistic returns.
It is clear that investors in the Middle East are eager to explore opportunities in the evolving US market, but they are taking a selective approach to deploying capital stateside. This caution is largely due to the vast number of opportunities being presented to them from all corners of the world and their need to weigh risk and return on a global basis. As we head into 2024, Middle Eastern investors are paying attention to the US real estate market and will continue to explore opportunities as they see the value of diversifying their capital into the largest economy in the world.
Noam Franklin is managing director – JV equity and structured capital at commercial real estate services provider Berkadia
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