EUROPE NEWS: UK a magnet for Middle East

Real estate professionals in Europe have been hearing “noise” for some time that Middle Eastern money wants a home in UK real estate.

Two deals recently suggested that this is not just white noise. In August, a Bahrain bank Oasis Capital struck a development pact with student accommodation provider, Unite Group, to invest £39 million ($64 million; €45 million) to further three projects in London. Also recently, British boutique bank Evans Randall acquired refurbished office Milton Gate office in London for £127 million in a joint venture with Al Salam Bank Bahrain.

Both these recent deals mark the entry for these groups to UK real estate at a time when many private equity real estate firms remain cautious to invest because of pressure over values, rents, occupancy levels, and the general ill-health of the UK economy.

To add to the list, over the summer the Libyan Foreign Investment Company paid listed property company Land Securities £155 million ($254 million; €181 million) for a West End London property through its subsidiary Kinloss Property. More groups still are waiting on the sidelines.

In a recent interview with the Financial Times, Jadwa Investment Company, the Middle Eastern investment bank part-owned by the Saudi royal family, said the firm wanted to expand abroad, and has placed the UK on its list. Middle East investors have

Middle Eastern investors: looking at buying lease to London's O2

even been looking at buying the lease to the O2 Centre – formerly known as the Millennium Dome where Michael Jackson was to have performed his last shows.

In addition, in April WW Advisors announced its formation in London to advise Middle Eastern investors wishing to expand investment activities in UK and European property. The firm has been established by Wafra InterVest Corporation, owned by the Public Institution for Social Security in Kuwait, and Watheeqa Holding Group, a boutique investment group for private and listed organizations. It is advising a newly-formed $225 million Saudi Arabia-backed investment vehicle.

David Swan, managing director at WW Advisors, who is a former professional at the Middle Eastern private equity group, Arcapita, points out that investors from the Middle East have always liked UK real estate, which has traditionally played a larger part of their total net worth compared to many Western investors. “Though Europe and the UK have had a rocky time, it is clearly a stable well developed market and they certainly like investing in cities that they know,” he adds.

Some of the recent investors are sovereign wealth funds who seem to place diversification near the top of their agenda. Fadi Tabbara, chief investment officer of Jadwa Investment Company, told the Financial Times the house wanted to expand abroad to continue diversifying revenue streams so as to make them “less sporadic and more predictable”. Brad Bourland, Jadwa’s chief economist, added: “We are focusing on areas where there is currently a favourable exchange rate, attractive asset prices and a historical connection. The US and UK markets meet these criteria the most at the moment.”

Swan says SWFs and high net worth individuals that have clubbed together in collective funds are often associated with trophy assets, but he says that this is not always the case. In the case of WW’s Saudi clients, they are looking for value added asset management transactions, which can involve identifying potential operators.

It is not right to assume that Middle Eastern investors are necessarily buying in markets where values are continuing to fall. Swan said surprisingly yields had fallen over the last few months – meaning values have gone up – perhaps because of limited property for sale especially as banks are not generally foreclosing. “There is quite a lot of capital, but very limited supply of property to buy,” he says. “Where a property is on the market, there have been incidences of 30 groups viewing it.”

Notably, the Middle Eastern names being talked about are not really the very large houses of the past, many of whom got burned from 2006 and 2007 property investments. The poster child of this is the Qatari Investment Authority, which acquired the UK’s largest care home group Four Seasons for £1.4 billion in 2006, and this summer was desperately trying to restructure debt to stave off an outright sale.

Arguably, these houses’ were badly advised. What is also interesting is that many of the Middle Eastern investors seem to be cautious about private equity houses' model of money where there is no incentive for managers to remain whenthe going gets tough. The smaller Middle Eastern houses and wealthy families are seeking to set up their own platform, or preferring
to have sole discretionary outfits that they can influence.

Chris Brett, a director at adviser Jones Lang LaSalle, advised the Oman investment Fund on its £445 million (€525 million; $731 million) purchase of a 75 percent stake in London’s Bishop Square development and Al Salam Bank on its Milton Gate deal. He told PERE earlier this year the two deals exemplified a “wind change”. “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 said.