Middle East investors eye global real estate pie

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More capital has left the Middle East to be invested in real estate worldwide than has flowed in the opposite direction into the region's property market, says an analyst.

"The outflow of capital from the Middle East to be invested into real estate properties worldwide has been higher than the influx of global capital into real estate properties in the Middle East," Nicholas Maclean, Managing Director, CB Richard Ellis (CBRE), Middle East.

He said: "The Middle East investors have been looking to diversify their risk, and transiting into mature markets is rather easy. In the UK, for example, there is minimal taxation for special investors and the tax regime there is more flexible than that of the US."

Maclean said: "The UAE, in particular, has been looking to diversify its investments and part of the reason has been the lack of transparency within this region."

He said Europe and the Far East were the largest beneficiaries of the Middle East capital outflow in the real estate sector.

"London, Paris and Germany have been the largest recipients in Europe while Hong Kong, Singapore and Australia saw the largest inflows from the region in the Far East. Knowledge and liquidity have been the key driving forces for the Middle East investors transferring capital to these areas. Institutional investors from the Middle East are investing in commercial developments in these markets while individual investors are looking at residential properties in the UK."

Maclean said: "About five per cent of global real estate investment revenue originated in the Middle East. Our expectation is that this will grow over the next few years to add investment diversity."

He said the Far East, including India and China, were a particular growth area.

"Regulations in countries such as India and China are making it hard for investors to purchase property in those countries," said Maclean.

He said: "In the UK, the market is liquid, although if you compare a prime location in the UK and a prime location in the UAE, there is a differential of 400 basis points from a return perspective. The UK market is still looking less risky than the Middle East market."

"So in the UK if the return is about 5.25 per cent, it is about 9.25 per cent in the UAE. However, the risk is high in the Middle East market, hence capital has been flowing out to the UK."

Maclean said the UAE capital was flowing into Abu Dhabi's office sector, Dubai's office sector and the hospitality industry. "Capital spent as FDI into real estate within the GCC represents only 11 per cent of the total. Cross-border activity in the world has exceeded 50 per cent and so we have a great opportunity to be the recipient of more investment."

He said investors in markets such as China, the UK, Germany and the US had been eyeing commercial properties in the Middle East.

According to CBRE, Saudi Arabia, Qatar and Abu Dhabi have attracted the interest of international players.

"There has been an upturn of opportunistic funds in the commercial sector within the Middle East. While the interest can be speculative, these are more sophisticated investors eyeing the region. They tend to be high-profile investors who are now looking at the region with keen interest. Investors in China and the US are looking at Dubai."

He said there has been strong demand from people looking for distressed properties but deploying capital has been a problem due to the multiple ownership of commercial buildings.

Institutional investors continue to wait on the sidelines before investing further.

"We know there is more capital left to be spent. There is activity in the funds market but is not as buoyant as we might think. We act on the advice of several funds. Finding the right investors is the key issue."

"We know there is more capital left to be spent. There is activity in the funds market but is not as buoyant as we might think. We act on the advice of several funds. Finding the right investors is the key issue."

CBRE is currently acting for offshore real estate funds based on the Cayman Islands and Virgin Islands that wished to enter the Middle East market.

"The fund managers, principally Europeans, are seeking to raise capital from Saudi Arabia and Qatar as these are the two most liquid markets. The managers expect returns of between 12 and 20 per cent along with realistic pricing of properties.

Maclean said there were a limited number of active pension funds in the Middle East market.

"International institutional investors, though now cautious, are keen on investing in good quality commercial properties in the UAE. Essentially the interest in commercial properties has centred on the areas between the World Trade Centre and Junction Three, and there has been huge demand in these areas."

He said Dubai has the potential to become the region's prime destination for investment in commercial properties.

"Currently there is about 50 million sqft of office space in Dubai and the vacancy rate is about 15 per cent. Only about 15 per cent of the existing stock is strata title."

Maclean said investors in commercial properties here did not want to deal with buildings with strata title.

"With a strata building investors foresee problems such as having to deal with multiple owners."

He said the strata law should be introduced as soon as possible, adding: "It is critical for the commercial market in particular. We need to make Dubai as attractive as possible for new people considering to enter the market. The main challenge is that the government has to maintain Dubai's attractiveness. This is key for the future of the property market."

He said international investors sometimes keep away from a number of attractive areas in Dubai.

"Areas such as Jumeirah and Sheikh Zayed Road, for example, are out of bounds to international investors as these are non-freehold areas and they cannot buy into properties."

Maclean said prices in the commercial sector were balancing out in different parts of Dubai.

"Previously you had good buildings in good locations with a certain price and you had a bad building in Satwa for nearly the same price. What the market is doing is raising the prices of good buildings and lowering the prices of lower-quality ones. There is almost 100 per cent occupancy of the offices in good buildings."

He said there was high demand for single-ownership buildings with good utilities and parking.

"However, it is quite difficult to find space like this. There is a good supply in DIFC but it is non-freehold. Currently, the demand is for good buildings in DIFC.

Maclean said the role of the Real Estate Regulatory Agency was vital to ensure transparency in the Dubai market.

"The introduction valuation standards, for example, has brought a lot of faith into the market. Raising the level to international standards of evaluation is a must."

By Anjana Kumar

© Emirates Business 24/7 2009