In the near future, $15.0 billion will, on average, flow out of the Middle East into direct real estate globally, with investors from the area increasingly focusing on U.S. markets, predicts CBRE Group.
With $14.0 billion invested outside of the home region in 2014—the third largest source of capital globally—the Middle East continues to be one of the most significant sources of cross-regional capital in the global real estate market. With $4.9 billion invested, Qatar, driven by its sovereign wealth funds (SWFs), was by far the largest source of outbound capital. Saudi Arabia has become a significant new investor in the world, investing $2.3 billion in 2014, up from hardly any investment that was reported in 2013.
Oil price declines have increased the number of Middle Eastern investors, which has caused a significant shift in global investment strategies towards greater geographic and sector diversification. As a result, activity has spread from gateway markets to lower-tier locations in Europe and the Americas. The $5.0 billion invested globally in Q1 2015 was almost evenly split between Europe and the Americas, with New York, Washington, D.C., Los Angeles, and Atlanta being targeted. This indicates that a larger portion of Middle Eastern capital is now focusing on the U.S. London continues to hold the top spot, but it is no longer as dominant. In 2014, it received 32% of all Middle East outbound investments, down from 46% in 2013.
Across a wider range of industries, Middle Eastern investors are becoming more active. This is blatantly obvious in the United States, where historically these investors have purchased office buildings and luxury hotels in gateway markets like New York, Los Angeles, and others. These investors are increasingly looking for alternatives due to competition from Chinese investors and other international capital sources, such as the 14.2 million square foot industrial portfolio that the Abu Dhabi Investment Authority purchased this year for $725 million.
“Although they have not yet reached their pre-global financial crisis peaks, capital flows from the Middle East to the United States are still substantial, expanding, and diversifying. The capital outflow from the Middle East will intensify as large sovereigns continue to look for safe havens and regions with long-term stable growth potential. We anticipate that a larger portion of this capital will begin looking outside of the gateway markets to accomplish its goals, “stated Spencer Levy, CBRE’s Head of Research for North America.
High net worth individuals (HNWI), equity funds, and other private, non-institutional investors have emerged as significant and growing sources of outbound capital from the Middle East. The potential for non-institutional investors to increase their global real estate investments is becoming increasingly significant as real estate allocations increase and geographic diversification away from the home region is prioritized more. A significant contributor to this is the decline in oil prices, which has sped up the global capital allocation process and increased demand for value-added investments. According to CBRE, non-institutional capital from the Middle East will invest in global real estate at a rate of $6.0 to $7.0 billion annually, if not more, in the near future, up from around $5.0 billion.
“Middle Eastern private capital is once more growing to be a measurably more significant investor group globally. The average lot size will change the most quickly because non-institutional investors typically target assets at around $50.0 million. This naturally leads to a more varied investment strategy, a trend that has already been observed in the market so far in 2015 and is anticipated to gain momentum over the next six to 18 months. With Europe less dominant than it has been over the last five years, we anticipate the Americas region to experience an increase in capital flows from the Middle East “Chris Ludeman, President of CBRE Capital Markets globally, said
In addition to private capital, Middle Eastern SWFs are anticipated to continue to be significant market-makers, albeit with less vigor in their acquisition strategies than they might have had if oil prices had remained stable. Only new allocations are likely to be impacted by radical decisions made by regional governments, not the current capital allocations. In contrast to what would have otherwise been in the range of $9.0 to $11.0 billion per year had oil prices remained at levels above $100 per barrel, CBRE anticipates that in the near- to mid-term, Middle Eastern SWF investment will flow into direct global real estate to the tune of $7.0 to $9.0 billion annually.