Middle East investors to sink $180bn into commercial property in markets elsewhere

Foreign investors are being frustrated in attempts to buy into the region's property boom due to lack of opportunities and restrictions.

Middle East investors will deploy US$180 billion in commercial property markets outside the region over the next decade, with the majority of that stemming from sovereign wealth funds, according to research by CBRE, the property adviser.

Several billion dollars of foreign capital is also sitting on the sidelines eager to invest in the Middle East, mainly the UAE, but a lack of buying opportunities and other restrictions are holding back the flows.

“The ‘buy and hold’ strategy adopted by many Middle Eastern investors within their home region and the resultant lack of deal flow opportunities leaves much unsatisfied demand here,” said Nick Maclean, the managing director at CBRE Middle East. “Coupled with increased confidence in global markets and the need for diversification, overseas investment has grown strongly. This trend is set to continue and with new sources of Middle Eastern capital, particularly from Saudi [Arabia], set to enter the market over the next couple of years, the demand for real estate is increasing strongly.”

The attractiveness of property as an asset class has regained its allure in cities such as London, Paris, New York and Dubai as valuations pick up in stride with strengthening economies. With their considerable financial muscle, Middle Eastern investors, and sovereign wealth funds in particular, are playing an ever more dominant role within the global property market. Middle East sovereign funds already have close to US$175 billion in property holdings, around 7.9 per cent of their total assets, estimates CBRE.

The Shard in London, part-owned by the Qatari government, and Time Warner Center in New York, part-owned by Abu Dhabi Investment Authority, are among the more iconic buildings held by sovereign wealth funds. Last year, Middle Eastern investors ploughed about $13bn into foreign property, up by 40 per cent from the year before and the highest figure on record.

“The vast majority of Middle Eastern investors are long-term players looking for wealth preservation and strong high income-producing assets,” said Jonathan Hull, the managing director for Europe, Middle East and Africa capital markets at CBRE.

Offices, retail and hotels were among the most sought-after investments, the research showed. Although London captures about 44 per cent of foreign property purchases by Middle Eastern investors, CBRE said other European cities in France, Germany, Spain and Italy are likely to account for a larger chunk in the future as the euro-zone economy rebounds.

Despite a resurgence in domestic property markets, Middle Eastern sovereign wealth funds have focused on buying up property abroad to diversify their holdings geographically and guard against risks. But foreign property players are also largely absent from Middle Eastern markets. Only 12 per cent of Dubai’s property market is subject to cross-border investment, compared with 50 per cent in more developed markets, estimates CBRE. It blames a lack of transparency and a reluctance on the part of many local owners to sell up for the trend.

Mr Maclean said there were three solutions to help open up the market to foreign investors.

“Firstly, the concept of sale and leaseback where the owner continues to be the occupier but is prepared to sell the value of his income stream. Secondly, we think there’s an opportunity to create a headlease hold interest between the freehold and the occupational leases. Thirdly, there is an opportunity for the government to raise significant cashflow as it is a very significant operator and occupier of real estate here.”

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