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| 14 May, 2018

Outbound real estate investments from Middle East set to pick up

Investors from the region are looking beyond mainstream asset classes

The Canary Wharf financial district is seen at dusk in London, Britain, November 17, 2017.

The Canary Wharf financial district is seen at dusk in London, Britain, November 17, 2017.

REUTERS/Toby Melville

Middle East investment flows into global commercial real estate, which had plunged 25 per cent in 2017 as a result of the sharp dip in oil prices, are expected to pick up with oil prices above $70 per barrel for the first time since 2014, a new report released on Monday by JLL said.

Investments in commercial real estate from the Middle East dropped from $12.2 billion in 2016 to $9.1 billion in 2017 as a result of the sharp dip in oil prices and intensified competition from other buyers in global gateway cities which for long have been a preferred target location.

"However, Middle Eastern buyers are expected to regain their competitiveness and dive deeper into established real estate markets of continental Europe, contributing to the recovery of outbound investment volumes in the future," said the report titled 'Top themes driving Middle East outbound real estate flows in 2018'.

JLL analysts said investors from the region are looking beyond mainstream asset classes and are following the global trend of investing into alternative assets such as student housing, hospitals and senior housing.

"Historically, offices and hotels have represented their 'comfort zone' and accounted for 85 per cent of commercial real estate investment flows from the region each year. This change in mentality suggests that in their permanent quest for higher yield, investors are now more willing to move up the risk curve," said Fadi Moussalli, head of international capital group, Mena at JLL.

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He said investors are becoming more creative not only with diversifying their portfolio by sector but also by geography as the conventional asset classes become more expensive.

According to the report, Middle Eastern buyers are looking towards more 'exotic' destinations such as South America and Eastern Europe. Within more familiar markets, activity of Middle Eastern buyers is spreading across from gateway markets to second-tier locations.

"With recent recovery of oil prices, sovereign wealth funds are taking a more active management approach to their real estate stock. Their activity is expected to pick up although for country-specific reasons, some will be more active than others," the JLL report said.

"Between 2009 and 2013, increasing oil prices facilitated the increase of real estate investment from $3.8 billion to $13.7 billion. This period was followed by a short stabilisation between 2013 and 2014 and a decline in volumes since 2014. With oil prices increasing above $70 per barrel for the first time since 2014, we expect overseas real estate transaction volumes to pick up in 2018, reflecting adjustment in investors' strategies."

Another significant cause of the decline in Middle East outbound investment is the increasing competitiveness of the global 'gateway' cities such as London, which for years has been the number 1 destination and accounted for over 25 per cent of flows from the region. In particular, in 2017, $8.6 billion was pumped into liquid trophy assets in London by Hong Kong investors, accounting for a whopping 25 per cent of total transactions volumes.

"However, property investment in India originating from the GCC is not driven by GCC sovereign wealth fund, but by Indian expats who repatriate their earnings. The 3.2-million strong Indian expatriate community in the UAE is investing billions of dollars every year, regardless of the ups and downs in oil prices," property analysts said.

Indian cities such as Bengaluru, Mumbai, New Delhi, Hyderabad, Chennai and Pune appear as preferred locations for investors, with a few luxury developments also attracting the affluent. Particularly, Bengaluru has been the fastest growing city in India over the past few decades, where IT has been the major growth driver responsible for aggressive real estate development.
 

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