Middle East property investors are targeting the UK’s commercial property sector after the Brexit vote, according to investment specialists from CBRE.
Ed Bradley, a senior director for investment properties in CBRE’s London capital markets team, said that the decline in prices as a result of the fall in the value of the pound, and the improvement in yields available for investors is leading to more interest in the UK from clients across the region.
“I would say that there is a new wave of capital coming out, in Abu Dhabi, of two groups who have not historically bought in London that are now bidding on assets. That has all been in the last two months,” he said. He also said that there was “a huge wall of capital coming out of Saudi that we have never previously seen”.
Chris Brett, the head of CBRE UK’s international capital markets arm, said that a tour that he and Mr Bradley took to meet Gulf clients last week found that attitudes towards UK and European investments were “much more positive than we expected”.
Mr Bradley pointed towards two post-Brexit deals that have been entered into by private Qatari buyers – the purchase of the 5 King William St office building and the Sony Headquarters building in London – as evidence that buyers from the region were taking advantage of the potential for improved returns in the UK.
“In the first half of the year, the market was looking fairly developed through the cycle. London was looking quite expensive on a relative basis,” he said. “Post-Brexit, sentiment has fallen and yields have shifted 25 to 50 basis points. Suddenly, a lot of Middle East investors see this as a big buying opportunity.”
A Brexit update published last month by JLL’s research arm said that the vote to leave the EU has had an immediate effect on property investment in the UK, with property valuations dropping. This meant that yields had started “moving out for the first time since the financial crisis”.
Meanwhile, a report by Mat Oakley of Savills also said that yields for primary and secondary offices should start to rise, but that this would depend on the amount of distressed property sales that take place.
It said talks it held before the referendum “indicated that there is a significant volume of opportunistic capital” that would target London from the Middle East, the US and Asia Pacific. “These investors all stated that they would be attracted to the income return of London offices if the yield were to rise 50 basis points.”
Mr Bradley said that demand from Saudi Arabia was coming from private family offices, and is typically looking at long-term, “10-year-plus” investments with secured tenants in place.
Saudi buyers were reported to be among a consortium of Middle East investors that has bid US$1.3 billion (Dh4.8bn) for London’s Grosvenor House hotel, as well as for majority stakes in New York’s Plaza and Dream Downtown hotels that are all being sold by India’s Sahara Group.
Mr Brett said that this is part of a growing trend among family-owned businesses across the Middle East and Asia, where second-generation family members who are more familiar with countries such as the UK and US seek to diversify family wealth outside its country of origin.
A report published last week by CBRE stated that Middle East investors spent $24bn on property outside the region last year. Accounting for disposals made, net purchases were at $16bn – up 190 per cent on the $5.5bn of net purchases made in 2014.
In the first half of this year, Middle East investors spent $10bn on international property.
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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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