Investment flows from the Middle East into global commercial real estate plunged by 50 per cent in the 12 months to June 2017, as investors faced fierce competition from rivals in Asia Pacific (Apac).
Total outward capital investment flows from the Middle East totalled US$10.1 billion between July 2016 and June 2017, a steep decline from $21.2bn the previous year, according to real estate broker CBRE Middle East.
“The total volume was down about 50 per cent, which is significant,” said CBRE Middle East managing director Nicholas Maclean. “But this is not due to a reduction in demand, or the low oil price. It’s that the market is very competitive at the moment and there are monies coming from other parts of the world that are effectively outbidding investors from this region.”
CBRE’s latest annual report on commercial real estate investment flows in and out of the Middle East said the drop to levels recorded in 2013 and 2014 follows a period of “exceptionally strong investment activity”. The region remains a major source of capital globally, representing 8 per cent of total cross-regional investments.
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However, Arabian Gulf investors are facing unprecedented competition from Asia Pacific – in particular, investment capital from Hong Kong that is being pumped into liquid trophy assets in “gateway” global cities, such as London.
From 1990 to approximately 2014, Hong Kong investors allocated a total of $4bn to central London offices, CBRE claims. However, in the first three quarters of 2017 alone, almost $5bn has been allocated already.
This has been driven in part by China’s new capital controls on outbound property investment imposed this summer. Chinese capital is increasingly flowing through Hong Kong entities instead, explained CBRE’s head of research Jos Tromp.
The subdued oil price had some impact on outbound Middle East real estate investment, as it meant lower inflows to regional funds, the report said. However, this has not dampened investor appetite.
Of the total $10.1bn, London was the top destination for Middle Eastern investment over the period, accounting for around $1.7bn. New York came second with $820 million, followed by Washington and Frankfurt, with $469m and $348m respectively.
In line with previous years, sovereign wealth funds remained the main source of capital outflows from the region, acquiring $5.4bn of real estate assets globally. This represented a 17 per cent decline year-on-year, CBRE said.
However, Mr Maclean said the Middle East would “regain its competitiveness” in the months ahead and levels of outbound investment would recover.
“We are still seeing enquiry levels at historically high levels from GCC investors in particular,” MR Maclean said. “If demand is any indicator of the volume of transactions going forward we would expect that to increase significantly and return to previous levels seen in the last two to three years.
“Further, we believe that if Apac buyers were not in the marketplace, then the level of transactions GCC investors were involved in would be similar to last year. We think that competitiveness will be regained.”
Mr Maclean added: “The GCC economy is worth approximately 2 to 2.5 per cent of global GDP but the amount of investment capital has ranged between 8 and 15 per cent of the total investment globally, so that level of disproportionate importance to the real estate market globally is certainly going to be recovered going forward.”
In terms of inward capital flow, investment activity remained strong despite economic headwinds, CBRE’s report said. However, the regional investment market remains characterised by low deal volumes and relative illiquidity driven by lack of available investment products for sale, according to the report.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Uefa Champions League semi-final, second leg result:
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Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
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