The world’s biggest asset managers, Blackstone and BlackRock, are planning to open offices in Saudi Arabia, buoyed by the kingdom’s investment potential, Crown Prince Mohammed bin Salman told the Future Investment Initiative conference – dubbed Davos in the desert – last week.
Saudi Arabia has been gradually opening up its economy through a series of reforms in recent years. At the centre of its ambitious plan is Vision 2030, which aims to diversify the economy of the world’s largest oil exporter away from crude into other industries, including real estate and infrastructure.
Blackstone and BlackRock’s entry is a sign the Arab state is making the right noises on the global stage. With the enormous pools of capital these groups manage, their move into the kingdom, once officially formalised, could aid the institutionalization of Saudi’s investment markets.
But what is the real estate proposition in Saudi Arabia right now? The most notable capital markets activity is in real estate investment trusts, which are being set up in the kingdom following a change in the law last year. Since the beginning of 2017, there have been six REITs, according to a JLL report. The property consultancy estimates the market size to be worth at least $5 billion short-term. These REITs, which own income-producing assets, could be considered the safest initial investment route for first-time investors in Saudi Arabia.
In terms of actual investible property, meanwhile, large scale and mixed-use real estate development projects are being positioned as important parts of the country’s economic plan. These include ‘smart’ cities and a luxury tourism destination along the Red Sea coast funded by Saudi’s sovereign wealth fund. The Public Investment Fund also recently launched a real estate refinancing company to stimulate the residential sector and become a bridge between investment capital (foreign and domestic) and potential financing opportunities.
In the capital city of Riyadh, JLL estimates that the retail market will be the first sector to eventually witness a recovery, led by the government’s focus on tourism and entertainment sector. The push to increase women’s participation in the workforce (and the increase in purchasing power) will be particularly beneficial for a relatively subdued real estate sector. Over the third quarter of this year, the office and residential sector have faced a downward pressure while parts of the retail and hotel sector are approaching the bottom of the cycle, according to JLL.
PIF’s plans could also create partnership opportunities for international money managers and their investors. The state fund aims to increase its assets under management to over $400 billion by 2020, it announced last week at the conference. That will not be an entirely domestic affair. International real estate, infrastructure, private equity and debt investments are all on the menu and PIF’s $20 billion commitment to an US infrastructure fund managed by Blackstone is already well documented.
But while Saudi’s investment opportunities have been extolled, ensuring overseas investors are comfortable in the politically fragile Middle East is crucial. Riyadh’s diplomatic relations with the US are being rebooted under President Donald Trump, but its standoff alongside neighboring states with Qatar will have an impact. Investors might expect a higher return premium after considering macro concerns or they could just invest in less risky emerging countries instead.
Then again, if sector giants like Blackstone and BlackRock think it is worth playing a game of give and take with Saudi Arabia then it stands to reasons others might, too. Either way, the sign on the country’s door very much reads ‘we’re open for business’ and real estate is one item for sale.
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