CBRE warns oil decline could take toll on overseas ambitions of GCC sovereign wealth funds

Huge government-owned funds tasked with spending surplus cash on assets abroad may cut back on their ambitious plans to buy European trophy assets.
The Qatari Investment Authority is currently bidding with the US real estate company Brookfield to take full control of Songbird, the majority owner of the Canary Wharf estate in the London Docklands. Matthew Lloyd / Getty Images
The Qatari Investment Authority is currently bidding with the US real estate company Brookfield to take full control of Songbird, the majority owner of the Canary Wharf estate in the London Docklands. Matthew Lloyd / Getty Images

Slumping oil prices could prevent the GCC’s vast sovereign wealth funds from buying trophy assets abroad, experts have warned.

The property broker CBRE is predicting that if the price of Brent crude continues to drop for a sustained period then the huge government-owned funds tasked with spending surplus cash on assets abroad may cut back on their ambitious plans to buy European trophy assets.

“The biggest impact is potentially on the international property markets than the local markets,” said Nick Maclean, the managing director of CBRE’s Dubai office. “Because we see that the principal component of the surplus where oil is priced and production costs goes to the sovereign wealth funds in the region.

“And the sovereigns in the GCC are such an important component of new cash for the international markets that if that is withdrawn a little then it has an impact,” he added. “Potentially if the price of oil falls to, say, US$60 a barrel for a prolonged period, they could stop buying so many buildings in London. It depends how long this level of pricing goes but the Kuwaitis and Adia [Abu Dhabi Investment Authority] have significant ambitions overseas at the moment.

“We’ve interviewed the sovereigns over the last six weeks or so. The key impact is going to be how much of that money is going to be spent overseas going forward and how much the local governments want to dip into their foreign currency reserves to reinforce what they are spending.”

GCC sovereign wealth funds have been responsible for investing in some of the most headline-making property purchases in London and the United Kingdom in recent years.

Last week the Abu Dhabi Financial Group fund surprised local markets by shelling out £370 million (Dh2.13 billion) – £120m more than the asking price – for the 600,000 square feet New Scotland Yard police headquarters office block in Westminster, London.

And the Qatari Investment Authority is currently bidding with the US property company Brookfield to take full control of Songbird, the majority owner of the Canary Wharf estate in the London Docklands.

However, Mr Maclean said although GCC spending on trophy assets could decline, he added that total global spending on these assets would be maintained as investors from Asia-Pacific increased their appetite for overseas assets.

Yesterday the price of Brent crude fell to below US$59 a barrel for the first time since May 2009 as news hit of a fall in industrial activity in China. Overall oil prices have now nearly halved since June.

Last week the rival property broker Knight Frank predicted that owing to the historically strong correlation between the Dubai Financial Market General Index and house prices in the emirate, house prices would continue to fall in the final quarter of the year, while the commercial market would be unaffected.

CBRE said housing rents in Dubai increased by about 7 per cent during 2014, down from a staggering 24 per cent last year as the market stabilised. It added that rents rose 1 per cent during the final three months of the year, cancelling out a 1 per cent fall recorded during the third quarter.

At the same time sales prices increased 18 per cent over the year – down from 30 per cent in 2013.

The company added that more than 20,000 new homes are expected to enter the market during the course of the next 12 months, which “could have a deflationary impact on sales and rental rates”. It said there were 65,000 new units potentially going to be delivered over the next three years.

“I don’t think we’re going to have a correction like we had a correction before because there just isn’t enough supply in the market,” said Matthew Green, the head of research at CBRE’s Dubai office.

“There is new supply coming through in areas viewed as secondary such as Dubailand. Some of those areas probably will see deflation of rents because there isn’t so much demand for those specific areas. But I don’t see anyone’s rents falling off a cliff in places like Dubai Marina, so I think for now the market is relatively well insulated by the increasing population coming in and the economy growing at maybe 4.5 or 5 per cent.”

lbarnard@thenational.ae

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Published: December 16, 2014 04:00 AM

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