Middle Eastern investors are likely to spend US$180 billion in commercial real estate markets outside of their own region over the next decade, according to the latest study from global property advisor CBRE Group, Inc. Adhunters
The remarkable mismatch between the dearth of institutional real estate in domestic markets and the huge spending power concentrated in the region has resulted in a significant increase in Middle Eastern capital flows into global markets. Europe is the favored destination, with the area receiving 80 percent of the $180 billion (about $145 billion) allocated over the next ten years. Nearly $85 billion will flow into the United Kingdom, with $60 billion going to continental Europe. The main target markets are France, Germany, Italy, and Spain.
Middle Eastern cash has poured into global real estate markets, with $45 billion spent between 2007 and 2013, seven times the amount reported in its home market. There is clear evidence that Middle Eastern players are increasing their interest and investment allocations to direct real estate beyond their home region, with $20 billion invested in commercial property outside their home region in the previous two years alone.
Sovereign Wealth Funds (SWFs) from the Middle East are currently among the world's largest and most powerful sources of money, accounting for 35 percent of global SWF assets under management (AUM). When compared to Western and Asian SWFs, these funds now devote the least amount of capital to alternative assets (9 percent of overall portfolio). Even a slight rise in Middle East SWF allocation would constitute a considerable quantity of cash that would have a significant influence on the global commercial real estate market.
Global SWFs have an average goal allocation of 7.9% to real estate. When you multiply this by the $2.2 trillion in AUM owned by Middle Eastern SWFs, you get a figure of around $175 billion. CBRE has looked at a variety of scenarios, including quicker and slower growth of AUM by SWFs; a conservative estimate puts Middle Eastern SWF investment in global real estate at $130-140 billion over the next decade. When this sum is combined with the estimated expenditure of private Middle Eastern investors, as well as property companies and developers, the total amount flowing cross-border and into global markets over the next ten years comes to roughly $180 billion.
"The 'buy and hold' strategy followed by many Middle Eastern investors within their home region, and the resulting lack of deal flow prospects, leaves significant unfulfilled demand here," said CBRE Middle East Managing Director Nick Maclean. Overseas investment has increased significantly as a result of greater confidence in global markets and the desire for diversification. SWFs from the Middle East have become one of the most important sources of money in the global real estate sector since the Global Financial Crisis. These institutions' demand has matured over the last several years into a sophisticated source of liquidity for many of the world's mature real estate markets. This trend is expected to continue, and with fresh sources of Middle Eastern capital, particularly from Saudi Arabia, expected to enter the market in the coming years, the region's prominence on the global investment stage cannot be overstated."
In 2013, Europe accounted for about 90% of all Middle Eastern commercial real estate investment outside of the home region. This stands in stark contrast to Asian capital, which has become more geographically varied in the last 18 months. While allocations to the Americas and Asia Pacific will increase, Europe will get the vast majority (80%) of direct Middle Eastern investment because it offers diversification, cultural acceptance, high liquidity, and market transparency.
Around $85 billion of the overall investment will go to the United Kingdom, with $60 billion going to continental Europe - nearly five times the level of direct investment by Middle Eastern companies in the preceding decade. Germany and Italy are primary priorities, with Spain, notably the hotel industry, emerging as a strategic location. France has formed good ties with Middle Eastern investors in recent years and provides a diverse range of trophy assets, so demand for core products and industries will continue to be high.
"The vast majority of Middle Eastern investors are long-term players looking for wealth preservation and robust high income-producing assets, rather than opportunistic investors playing the cycle for short-term returns," said Jonathan Hull, Managing Director, CBRE EMEA Capital Markets. This method prioritizes premium buildings in central locations with large lots. Offices are a big part of their acquisitions, but retail has gotten a lot of attention in the last few years, as evidenced by a slew of high-street acquisitions in London and Paris, as well as regional locations in the UK and France. Hotel interest is also obvious, and it stems from a long history of interest in the hospitality industry in home markets."
"Culture, openness, and favorable taxation regulations are important push factors for Middle Eastern purchasers towards Europe, and the United Kingdom in particular," said Iryna Pylypchuk of CBRE's EMEA Research and Consulting. Close historical, political, and economic ties, as well as Britain's recent decision to become the first non-Muslim country to issue Sharia-compliant Islamic bonds, confirm Europe as the preferred destination for Middle Eastern capital." According to CBRE, nearly 10% of the capital (about $18 billion) will come into the region. This equates to an average annual investment of about $1.8 billion, which is significantly higher than the $1.2 billion invested in 2013, which was considerable by recent standards.
The Asia Pacific region's diversification benefits may cause Middle Eastern investors to reconsider their strategy. The number of deals executed in the region has increased, but it remains to be seen how soon this interest will translate into a more robust pace of purchases rather than a few significant asset deals. The remaining 10% of the $180 billion is expected to be allocated to Asia Pacific, according to CBRE.