Middle East investors are expected to increase their investments in real estate deals in the US in the next 12 to 24 months as property values fall amid higher interest rates, according to analysts.
The US has aggressively raised interest rates in the last two years to bring down stubbornly high inflation and reduce living costs in the world’s largest economy.
However, this has affected the US real estate sector as owners struggle to repay the loans in the higher interest rate environment, forcing them to sell assets at a discount price to refinance maturing debt.
“Distressed opportunities that are starting to arise not only because some people need to sell to reimburse their investors but also for refinancing,” Fadi Moussalli, executive director and head of capital markets and international capital coverage of Mena at JLL told The National.
“Today, if someone who has a loan that is maturing and is unable to secure decent debt terms … [he/she] has no choice but to sell, banks are no longer lending with the same appetite.”
Dropping valuations
Valuations have dropped by 10 per cent to 40 per cent in the past two years amid refinancing challenges as well as due to lower occupancy levels in offices as the remote working trend picked up following the Covid-19 pandemic, Mr Moussalli said.
Middle Eastern investors, including sovereign wealth funds and family offices, are expected to take advantage of the current situation and grow their investments in the sector, according to analysts.
“Middle East investors are actively scouting for opportunities to access quality deals that were otherwise either too expensive or inaccessible previously,” Mr Moussalli added.
GCC economies are continuing to grow amid higher oil prices and “there is extra liquidity and dry powder to invest” in new deals.
Dar Global, the global arm of Saudi Arabia’s biggest developer Dar Al Arkan, recently said it plans to acquire property in New York and Miami.
“Miami, which used to be one type of market for mainly Latin Americans, now is attracting investment and buyers from all over the globe,” chief executive Ziad El Chaar told The National last month.
Dar Global is also looking to work with a developer to buy projects in New York, he said.
“We are also looking at the market of Manhattan in New York because the market was hit very hard with so many factors because of what happened with Covid and after Covid … inflation, interest rates … and we believe now it's the right time to partner with one of the developers to acquire some projects,” Mr El Chaar said.
Institutional investors rush in
Bahrain’s GFH Financial Group announced this week that it has concluded investments totalling $450 million in the US real estate sector between the fourth quarter of 2023 and the first quarter of 2024.
It said it invested $300 million in student housing and $150 million in acquiring medical clinics.
Investcorp, the Bahrain-based asset manager that counts Mubadala Investment Company as its biggest shareholder, is also teaming up with two sovereign wealth funds to form a $526 million fund that will invest in industrial real estate in the US.
“We plan to make further investments this year within the residential and industrial sectors and expect to be able to announce acquisitions in the US very soon,” Yusef Al Yusef, Investcorp’s head of distribution, told The National.
Investcorp has acquired more than 1,300 properties for a total value of more than $26 billion since 1996 globally, with the US real estate portfolio worth $9.2 billion.
“It is very likely that a growing number of opportunities across the commercial real estate sector will emerge for Middle East investors with available capital to take advantage,” Steve Bramley-Jackson, global head of real estate research at HSBC, said.
“With real estate capital values falling in response to higher policy rates, compounded by structural challenges facing retail and office assets in particular, it is likely that refinancing will prove problematic for some and that lenders will be more cautious in extending funds, particularly for borrowers with extended loans to values ratios or limited free cash flows post debt servicing.”
Kuwait's Kamco Invest also expects more opportunities for investors in the US property market.
“2024 presents a rare opportunity for profitable capital deployment and property acquisitions in a recovering market with attractive price entry points that will emerge to create appreciation potential for investors in the long term,” Ziad Chehab, director of real estate at Kamco Invest, said.
Bahrain's Arcapita, which already has investments in the industrial and logistics sectors, as well as housing for senior citizens in the US, plans to invest further in acquiring industrial and data centres as well as rental apartments amid new opportunities.
The distress in the commercial real estate market is partly because of decreasing tenant demand in retail as a result of greater demand for online shopping, Brian Hebb, managing director and head of Arcapita US Real Estate, said.
Offices stay vacant
Meanwhile, demand for office space has also reduced amid the shift to remote working.
In the fourth quarter of last year, the national office vacancy rate rose to a record-breaking 19.6 per cent, breaking the previous record of 19.3 per cent, according to a report from Moody’s.
Construction of office buildings also dropped amid lower demand, with only 24.47 million square feet of new office space added since the beginning of last year, the lowest since 2012.
“Despite the increasingly optimistic consensus on the likelihood of a macroeconomic soft landing along with positive news from the labour market, the permanence of dynamic hybrid models has effectively muted office demand, making the year of 2023 the most downbeat since the Great Financial Crisis,” Moody's said.
Asking office rents rose by 0.1 per cent in the fourth quarter, but effective rents declined for a second straight quarter by 0.3 per cent due to considerably high vacancies, according to the report.
In the fourth quarter, Moody’s Analytics preliminary data showed over half (50 of 79) of US primary metros experienced negative absorption.
Fifty-two primary office markets experienced vacancy increases in 2023, with San Francisco, Austin and Raleigh-Durham underperforming significantly.
The retail sector remained largely steady throughout 2023 as the vacancy rate stayed flat at 10.3 per cent in the fourth quarter, the report found.
“Office properties have been negatively impacted across the board while apartment and retail have been impacted unevenly,” Mr Hebb said.
