Behind GCC's new investment strategy
Many years of high oil price has enabled the wealthy Gulf investors to buy massive properties across the globe. Although there is no lull in their appetite for real estate, the way these groups are making investments is changing, said a report by JLL Global Capital Markets.
Middle Eastern capital has consistently and reliably been acquiring commercial property over the last 30 years. The source of the Middle Eastern investor’s wealth is well known, with the region remaining the world’s largest exporter of hydrocarbons, it stated.
Although new forms of energy production are now coming on stream at a gradual rate, as per EIA estimates, the global demand for oil is forecast to increase by 25 per cent to 2020, the report added.
With costs of production well below current oil prices, the revenue streams of the GCC nations look to be relatively secure for the short to medium term.
Many years of consistent income from the production of hydrocarbons has enabled the Gulf states to create Sovereign Wealth Funds (SWF’s) to manage their budgetary surpluses for the benefit of future generations.
Kuwait was the first country to form such a fund in 1953, the Kuwait Investment Authority. These funds have grown considerably since that time, with four of the largest SWF’s in the world based in the GCC region.
The majority of other large SWF’s are located in Asia, with many of these investing in direct commercial property for the first time. They have quite a way to go to catch up with the Middle Eastern funds who have been allocating between 5-10 per cent of their assets under management to direct real estate for many years, stated the JLL Global Capital Markets in its report.
Saudi's SAMA is a notable exception with the majority of their investments in short term instruments. With budgetary surpluses continuing, the size of the SWFs continue to grow and it is conceivable that the Abu Dhabi Investment Authority (ADIA) could pass the $1 trillion mark in the next few years, implying over $100 billion would be invested in direct real estate if they maintain their 10 per cent allocation, the report added.
While the outflow of capital has been consistent the global financial crisis did trim the buying activity of Middle Eastern investors, according to the JLL Global Capital Markets report.
With the majority of developed markets dipping into a severe depression, the gulf states didn’t escape unharmed with the UAE and Kuwait seeing their economies contract significantly in 2009.
The result was that more capital was needed within the region to support the domestic economies, thus sacrificing global opportunities. However, investors from the Gulf region were some of the first back into the market in 2010 with large deals in London, New York and Paris as attractive buying opportunities presented themselves.
2013 has seen a surge in outflows from the region, triggered by renewed political turmoil, surpassing the previous peak JLL recorded back in 2006.
London has remained the favoured destination for Middle Eastern capital. The historic links between the UK and the gulf has long encouraged the two way movement of people.
Many Middle Eastern investors have been educated in the UK while the gulf has been a favourite destination of British expats for many years, and this has certainly encouraged the flow of money, said the JLL in its statement.
Within London it has been the super prime districts of Knightsbridge, Kensington, Mayfair and the City that have attracted the most attention, it added.
A focus on the major cities of the world has also seen investment in New York, Paris and Berlin over the last 10 years.
The safe and secure nature of these big cities has been a key driver of investment decisions. Coming from a volatile region, investors have traditionally been focused on capital preservation and some element of anonymity, although this is now changing somewhat as real estate markets become more transparent and the number of potential investment locations increase.
They also selectively invest in other geographies driven by higher return factors, the report added.
In contrast to many other cross-border investors the Middle Eastern groups have purchased a greater proportion of hotels. Investment into the hospitality sector typically makes up between 5-10 per cent of a mixed portfolio, but for major Middle Eastern SWF’s (since some groups are Sharia Compliant) a quarter of all their activity has been into hotels.
The emphasis on hotels reflects the focus on the core cities of the world and the desire to own large, secure, resilient assets, stated the JLL in its report.
Another unique characteristic of Middle Eastern groups is that they are very reluctant sellers; they have the smallest proportion of disinvestment of any nationality included in JLL’s global capital flows database. This approach may however now be changing, with an element of capital recycling starting to appear in some funds investment strategies, it added.
As the global property market has become more sophisticated, Middle Eastern SWF’s have adopted an increasingly rigorous and analytical approach to investing.
While they are more than capable of undertaking very large single deals, a key component of their move into new and more emerging markets has been a willingness to form JVs and partnerships with local developers and investors in countries such as Australia, Singapore, the UK and China, stated the JLL report.
The choice of these partners reflects the different investment philosophies of the various funds QIA, KIA and SGRF of Oman remain very core investors while ADIA, OIF, Aabar and ADIC are more opportunistic which has seen them move into new geographies while also employing indirect and debt investment strategies, it stated.
"We expect this trend to continue as the competition for assets globally becomes more intense and the need for good local intelligence becomes more important," the report added.
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