ASIA VIEW: A door-opening deal

In late July, one of Abu Dhabi’s better-diversified sovereign wealth funds, Mubadala Development Company, agreed to acquire a 20 percent stake in Investcorp, the Bahrain investment manager that has the distinction of being the first Gulf firm to invest local capital into Western real estate.

The transaction, which is awaiting regulatory approval, will make the state-backed Mubadala the largest single shareholder in Investcorp.

The deal is a win-win for both groups, occurring at a time when governments across the Gulf, chiefly of the oil-exporting states, are being tested by the plunge in oil prices. Abu Dhabi – deriving more than 50 percent of its revenues from oil – is arguably among the worst affected. Its government has trimmed spending on social infrastructure among other fiscal consolidation measures while continuing attempts to diversify its several state funds’ investment portfolios away from oil and energy-related assets.

For Mubadala, it lays open the doors to investing in US and European real estate via a manager with an established presence in these markets. In 2015, Investcorp closed on nearly $1.5 billion in real estate transactions in the US, and this March, it kickstarted its European real estate operations with the appointment of Neil Hasson, a former senior managing director at Macquarie Group.

For Investcorp, having a state-backed institutional investor would strengthen its domestic capital base and it could pursue more co-investment deals with Mubadala, locally and internationally. This would help it to meet its target of increasing its assets under management from $10.8 billion to $25 billion in five to seven years, according to the local press reports, especially at a time of lackluster financial performance. The group posted a 45 percent drop in its net profit in the first six months of this year, attributing the decline to a rise in operating expenses.

The deal should also be analyzed within the context of an increasing consolidation trend in the region. A month before the announcement, Mubadala, with assets of around $66 billion, agreed to be merged with another similar-sized state fund called the International Petroleum Investment Company (IPIC) to create a combined entity that will realize synergies and growth in multiple sectors including real estate, technology, and healthcare, according to a press statement. The combined fund is estimated to have assets worth $135 billion, according to Reuters.

Mubadala’s merger with IPIC will help create economies of scale by combining resources to invest across asset classes. A majority of IPIC’s assets are energy-related, which explains the net loss of $2.5 billion it recorded in 2015. Mubadala, on the other hand, posted a 12.4 percent increase in profits last year, partly attributed to its real estate investments. According to the sovereign wealth fund’s latest annual report, the real estate and infrastructure division posted a profit attributable to the owner of AED 9.94 billion ($2.71 billion; €2.39 billion).

Unlike some other state-backed funds, Mubadala has a mandate to invest in different sectors that can enhance the development of the local economy, including domestic real estate. The institution has done residential, retail and commercial developments and also owns a stake in local property companies such as Aldar Properties.

The odds are low, however, that the local property market could see more investments from Mubadala-backed Investcorp and the merged Mubadala-IPIC fund, based on the latest property statistics. According to second quarter property data published by JLL, most property sectors in Abu Dhabi saw a decline in performance for the first time in three years. Downsizing in the oil and government sectors has particularly impacted the office market, with JLL estimating a 3 percent decline in average Grade A and B rents in the second quarter. Prime rents for residential apartments in Abu Dhabi also declined by 2 percent, and the residential sector could potentially witness a more dramatic impact from the prevailing economic conditions during the third quarter, the property services firm has warned.

At a time when managers and their investors are looking to mitigate the impact of the oil slump on their portfolio returns, a strained local property market will not be the best bet.