ASIA NEWS: The new wave of Gulf capital

Changes in the home market property fundamentals and plunging oil prices have prompted Middle Eastern investors to rethink their investment strategies. State wealth funds, for example, that have traditionally been active investors in overseas property markets, are scaling back. Meanwhile, other sources of capital, most particularly private investors, are indulging more in outbound investments.

Signs of changing investment appetite were reflected in data recently published by the property consultancy CBRE. The report titled “Middle East In and Out 2015”, noted that while $14 billion was invested in the overseas real estate markets last year – making the region the third largest source of capital after North America and Asia – the volume was lower in comparison to 2013, when $16.3 billion was invested.

The fall in large part is due to the sovereign wealth funds’ muted activity. Last year, $5.8 billion was invested in international real estate, a sharp drop from the $8.4 billion invested in the previous year.

The silver lining in the report, however, is the increase in private investor’s overseas exposure, whose outbound investments touched $2.5 billion last year as compared to $1.5 billion in 2013, representing the highest annual percentage increase among all classes of institutional capital.

In the first quarter of this year too, out of the $2.1 billion invested by the Middle Eastern investors in the Americas for instance, CBRE has estimated that as much as $1.6 billion was by private investors.

Shifting sentiment
Iryna Pylypchuk, director, global markets capital research at CBRE, explained that private investors had become much more at ease with making investments abroad; the economic situation at home triggering this shift faster than what would have happened otherwise. And, an analysis of the macroeconomic fundamentals shows why.

Since June last year, NYMEX crude oil has witnessed a 53 percent drop in prices, adversely impacting the crude-rich Middle Eastern economies. Compounding the impact further are curbs on the housing market being enforced in markets like Dubai. According to news reports quoting estimates from the government’s Land Department, real estate sales in Dubai fell 51.8 percent in April 2015 compared with the same period last year.
Felix Kottmann, a Dubai-based independent advisor and head of a family office called Kottmann Advisory, said that he was not this concerned about Dubai even in 2007.
“If you walk through the city, there are a huge number of new buildings and new construction. By 2017, they plan to finish 80 new four and five star hotels. However, insiders say the hotels have not been booked more than 50 percent in the past 9 months.”

In their attempt to diversify away from their home turf, private investors are turning to London, Paris, as well as other second-tier European cities, and the US markets. In the first quarter of this year, a Middle Eastern private wealth buyer is understood to have acquired 1 Mabledon Place, an office property in London, for £72.6 million (€100 million; $112 million). Another example is the estimated $150 million purchase of the Marriott Residence Inn, a hotel in Manhattan, by another high-net-worth gulf investor last year.

It is also worth noting, as Pylypchuk points out, that an ever-increasing number of Middle Eastern private investors are now bidding for prime real estate properties. Analyzing this data along with data on deals actually secured is a further indication of the heightened interest.

While Qatar remains the largest source of Middle Eastern capital, with $4.8 billion invested last year, private capital from Saudi Arabia is fast becoming a major source of outbound capital. From a meagre $200 million invested in 2013, $2.3 billion was invested via the region last year, as per the CBRE report.

The investment outlook for the near future is expected to follow the same trend. “As it stands, it is only the new allocations of capital that might be affected, which in my personal opinion will probably mean $6 to $8 billion of SWF investment going into direct global real estate per annum in the near-to-mid-term, as opposed to what would have otherwise been in a range of $9 to $11 billion per annum,” said Pylypchuk.

The social unrest and economic uncertainty in the region are compelling reasons for these changes.