Middle East investors turn attention towards US as London property prices soar

Concerns about peak pricing in some of London's prime markets see Middle East investors move across the Atlantic in search of higher returns.

Middle East property investors are turning their attention towards the United States as some of London’s prime property markets show signs they are peaking.

A new report monitoring global capital flows in property by CBRE shows that Middle East investors spent US$5 billion during the first three months of this year, with the destinations for investment split equally between the US and Europe.

CBRE said New York, Washington, Los Angeles and Atlanta were all becoming favoured locations for investment. Although London is still the city that attracts the most funds, its importance is waning – the city received 32 per cent of the money invested by Middle East buyers in 2014, down from 45 per cent in 2013.

It also said the type of assets sought were changing. Prominent trophy buildings and high-profile office blocks were historically favoured, but competition from Chinese investors and other global capital sources means that Middle East buyers are widening their net. As an example, Abu Dhabi Investment Authority paid $725 million this year for a 14.2 million square feet American industrial property portfolio.

Buyers from the Middle East spent $14bn on global property assets last year and are expected to spend an average of $15bn a year over the next three to four years. A bit more than half of this is likely to come from sovereign wealth funds. CBRE estimates they will spend $7bn to $9bn a year on property over the next few years, although this figure would have been $9bn to $11bn if oil prices had been sustained at more than $100 per barrel.

“The Middle East will remain one of the most important sources of cross-regional capital in the global real estate market,” said Nick Maclean, the managing director of CBRE Middle East.

“The weakening of oil prices is likely to lead to the sovereign wealth funds reducing their total spending, but we see strong growth in overseas investment from families and other institutions – in many cases, for the first time.”

Private buyers – consisting of companies, equity funds and high net-worth individuals – actually bought a higher amount of property in Europe than the major Middle East funds last year. They were responsible for the purchase of close to 60 per cent of European purchases, or $4.8bn in total. This was a 56 per cent increase on the previous year.

The investment from sovereign wealth funds, meanwhile, was driven by Qatar. It spent $4.9bn of the $14bn invested in 2014. Saudi Arabia is also playing a much more significant role. Its funds bought $2.3bn of global property assets last year, up from almost nothing in the prior year.

Knight Frank’s latest Prime Central London sales index found that growth in prices for residential property slowed to 2 per cent in June, compared with 8.5 per cent a year earlier. An increase in transaction costs was partly to blame, but the main concern was pricing.

“Prime central London prices grew by an exceptional 42 per cent in the five years to June 2015,” said Knight Frank’s head of London residential research, Tom Bill.

He added that the slowdown in price inflation “reflects a more moderate pricing environment and greater sensitivity to asking prices on the part of buyers”.

However, supply restrictions in the office market mean that current rent levels are likely to be sustained. In the second quarter, rents remained flat across the West End, the City of London and Docklands, but the amount of vacant stock in each area dropped – to 4.1 per cent, 5.2 per cent and 5.5 per cent, respectively.

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