Middle East appetite for UK commercial real estate is ramping up with wealthy investors expected to spend $1.5 billion this year, with office buildings — particularly in the City of London — the top target as easing Covid-19 restrictions unleash pent-up demand.
The region's accelerated investment in Britain’s commercial property landscape is set to be 33 per cent higher in 2022 than last year, according to Knight Frank, with office assets taking centre stage despite Britain’s employees making a slow return to city centres following the pandemic-induced work-from-home trend.
The investment figure could be even higher, according to Alex James, head of private client commercial advisory at Knight Frank, with the consultancy tracking £4.17bn of active central London office requirements from Middle East investors this year — up 6 per cent on 2021 — with premium green office buildings that comply with Britain’s tighter energy regulations a key focus.
“There is going to be a big pick-up in transaction volumes this year off the back of restrictions easing off with a build-up in demand especially over the summer when a lot of clients from the Middle East travel over here,” Mr James told The National.
“There's already been a huge uptick this year in Middle East interest and inquiries have gone through the roof for UK investment opportunities over the past two months as people fly again — you can definitely feel the momentum.”
Rising interest in UK commercial property was already evident last year, with Iraq's Al Khashlok Group snapping up Mulberry and Delvaux flagship stores on New Bond Street in central London for £227 million in August.
Meanwhile, the UAE’s Oryx Real Estate Partners made its first acquisition in the London real estate market, spending £100m acquiring 3 Bunhill Row, a freehold office property in the City, while Saudi Arabian sharia-compliant asset manager Sidra Capital acquired Coca-Cola's UK head office in Uxbridge, on the outskirts of London in December for £43.65m.
This year is expected to be a record for global cross-border real estate investment activity, said Knight Frank, with $6.5bn of capital from GCC countries set to target global outbound real estate investment opportunities.
UK commercial real estate — one of the region’s favoured outbound investment destinations — will lead the charge, with office buildings the most popular real estate asset class, constituting 24 per cent of allocations within the property sector, according to a Knight Frank survey of wealthy investors, whose wish list includes long-term office income from blue-chip tenants.
A lack of A-grade stock as well as Britain’s green transformation, which will see office buildings forced to comply with stricter energy regulations by 2030, will help to fuel this investment, said Mr James, who expects the second, third and fourth quarters of this year to be “busy”.
“We've had a very busy start to the year already with clients looking to reposition their portfolios,” said Mr James.
While low supply of premium assets has been a challenge for investors, Mr James said the “right kind of investment opportunities” have begun to enter the market this year, such as “blue-chip office tenants on long-term leases”.
Although interest in Britain's office sector is surging, the country's back-to-work campaign has stuttered over the past few months, after the Omicron variant of coronavirus reversed the return to work seen in the run-up to Christmas.
Despite restrictions easing in February as the threat posed by the latest variant retreated, many companies are sticking to hybrid working solutions rather than enforcing a full-time return to the office.
“We are expecting to see a recovery in the office sector and forecast more than half of all major cross-border transactions to be focused on this sector this year,” said Mr James.
“Core long-term office income from globally recognised tenants continues to be the primary focus from investors and we expect there to be an increase in appetite for both London and UK regional cities.”
A desire to have contact with other employees will help to drive people back to work, added Mr James, as people become increasingly frustrated with Zoom meetings and working alone.
However, he concedes that the hybrid approach “is here to stay”, partly because offices have already evolved in recent years from nine-to-five workplaces to hubs for staff to “meet, socialise and increase productivity and creativity".
Big tech firms and banks are already making it clear that offices are still the future, with plans in place to modernise buildings to become spaces where workers collaborate.
In January, Google committed $1bn to buying its office space close to Tottenham Court Road, while the Scalpel office tower in the City of London, owned by WR Berkley, will be sold to Singaporean property investor Ho Bee Land for more than £800m — in another show of confidence that staff will return to the capital’s offices.
Meanwhile, in Canary Wharf, Citigroup unveiled plans to give its iconic skyscraper a £100m, three-year refurbishment, with the trend also seen outside the capital with £8.9bn spent on offices outside central London last year — the third-highest annual total ever recorded — according to consultancy JLL.
While investors are betting that office attendance will creep up further now that the UK government has lifted all UK restrictions, occupancy levels in London remain below 25 per cent, according to Remit Consulting, much lower than the 55-60 per cent averages commonplace before the pandemic started.
This is failing to deter Middle East investors however, who are prepared to pay for relatively new offices with strong environmental credentials, Mr James said, with the flow of overseas capital into London offices already on the rise.
“There's still really strong demand for the best quality space; spaces that have roof terraces, that meet ESG credentials,” he said, adding that Middle East investors are starting to understand the significance of strong green credentials on property value.
Corporate occupiers in central London offices are willing to pay up to a 13 per cent rental premium for green buildings, depending on their energy rating, while prime central London office buildings with top green ratings enjoy a 10.5 per cent capital value premium compared to equivalent unrated buildings.
With the UK capital containing the highest number of green-rated commercial assets in the world, at almost 3,000, it is no wonder London is the most popular destination for Middle East interest but cities such as Birmingham, Bristol and Cardiff are also gaining recognition.
As well as real estate, Middle East demand for the UK's fiercely competitive industrial and logistics sector is on the rise.
“Middle Eastern investors own limited properties within this sector. We therefore expect there to be an increase in transactions over the next few years as investors look to diversify their portfolios,” Mr James said.
Retail warehouses and supermarkets are also seeing strong demand from regional investors, who see this sector as a hybrid of retail and last mile logistics, and provides investors with long-term leases with inflation-linked rent reviews at attractive yields, he added.
The surge in interest in the UK comes after the pandemic saw dampening demand from the region, with many wealthy investors adopting a “wait and see” approach while some investors repositioned UK assets, said Mr James.
The UK's “safe haven” status, coupled with the strength of dollar-pegged currencies in the GCC region against a weakening pound, will continue to make it attractive particularly in this high-inflation environment as real estate is often considered an effective inflation hedge, Mr James said.
The Middle East's ultra high net worth population — those with a net worth of more than $30m — is set to increase by 22 per cent by 2025, with the region's close ties with the UK also helping to fuel the investment drive into Britain.
“A lot of those investors will have families that want to diversify their portfolios or are looking at global markets, and top of the list is the UK,” said Mr James.
“A lot of our clients have been educated here, so it's the psychology of bias and being educated at a university in London, Oxford or Cambridge, and knowing the areas you're comfortable with. If you've got a lot of your wealth stored in your domestic market, where's your first point of call internationally? It tends to be the UK because of that comfort.”