Over the next ten years, Middle Eastern investors are anticipated to invest over $180 billion in commercial real estate markets outside of their home region, according to global property advisor CBRE Group.
The extraordinary mismatch between the scarcity of institutional real estate in domestic markets and the enormous spending power concentrated in the Middle East is what is driving the significant rise in capital flows from the region into international markets. With 80% of the $180 billion (or about $145 billion) targeted for the region over the next ten years, Europe is the preferred target. The U.K. will receive close to $85 billion, with $60 billion going to continental Europe. Among the primary target markets are France, Germany, Italy, and Spain.
Between 2007 and 2013, the Middle East invested $45 billion in global real estate markets, which is seven times more than what was reportedly done in its home market. There is clear evidence that Middle Eastern players are increasing their interest in and investment allocations to direct real estate given the $20 billion invested in commercial real estate outside their home region in just the last two years.
Sovereign Wealth Funds (SWFs) from the Middle East now make up 35% of all SWFs’ assets under management (AUM) globally, making them one of the biggest and most powerful financial institutions in the world. These funds currently allocate the least amount (9% of the total portfolio) to alternative assets when compared to Western and Asian SWFs. Even a modest increase in Middle East SWF allocations would represent a staggering amount of money that would have a big impact on the world’s commercial real estate market.
Global SWFs have an average 7.9% target allocation to real estate. Applying this to Middle Eastern SWFs’ $2.2 trillion in AUM results in a sum that is very nearly $175 billion. Various scenarios, including faster and slower growth of AUM by SWFs, have been examined by CBRE; a conservative estimate places Middle Eastern SWF investment in global real estate at $130-140 billion over the next ten years. It is estimated that over the next ten years, private Middle Eastern investors, property companies, and developers will spend about $180 billion in cross-border transactions and on international markets.
According to Nick Maclean, Managing Director of CBRE Middle East, “There is a lot of unmet demand in this region due to the ‘buy and hold’ strategy adopted by many Middle Eastern investors within their home region and the resulting lack of deal flow opportunities.” The demand for diversification and growing confidence in international markets have both contributed to an increase in overseas investment.
“One of the most significant sources of capital in the global real estate market since the Global Financial Crisis has come from Middle Eastern SWFs. For many of the established real estate markets worldwide, the demand from these institutions has developed over the past few years into a sophisticated source of liquidity. This trend is expected to continue, and new Middle Eastern capital sources, particularly from Saudi Arabia, are expected to enter the market over the next couple of years. As a result, the significance of this region for international investments cannot be overstated.”
In 2013, Europe received almost 90% of all Middle Eastern commercial real estate investments made outside of the country. Asian capital, on the other hand, has been geographically diversifying more and more over the past 18 months. The majority (80%) of direct Middle Eastern investment will target Europe because it offers diversification, cultural acceptance, high liquidity, and market transparency, even though allocations to the Americas and Asia Pacific regions will rise.
The U.K. will receive about $85 billion of the total investment, while continental Europe is anticipated to receive $60 billion of it. This represents a nearly five-fold increase in Middle Eastern investors’ direct investments over the previous ten years. Spain, particularly in the hotel industry, is now a strategic destination, along with Germany and Italy, which are important targets. Due to its extensive selection of trophy assets and recent development of close ties with Middle Eastern investors, France will continue to see high demand for its core goods and industries.
“The vast majority of Middle Eastern investors are long-term players looking for wealth preservation and strong, high-income-producing assets, rather than opportunistic investors playing the cycle for short-term gains,” added Jonathan Hull, Managing Director of EMEA Capital Markets for CBRE. This approach favors high-end structures in key markets and frequently very large lot sizes. Offices are a major component of their acquisitions, but in recent years, retail has attracted more interest, as evidenced by a spate of high street acquisitions in London and Paris as well as regional cities in the U.K. and France. Historical interest in the hospitality industry in home markets has contributed to the current interest in hotels.
“Middle Eastern buyers are gravitating toward Europe, and the UK in particular, for a variety of reasons, including culture, openness, and favorable tax laws. Europe is the preferred destination for Middle Eastern capital, as evidenced by the region’s close historical, political, and economic ties and Britain’s recent decision to become the first non-Muslim country to issue Sharia-compliant Islamic bonds “Iryna Pylypchuk from CBRE’s EMEA Research and Consulting Group concurred.
The fundamental appeal of real estate as an asset class will be countered by Middle Eastern investors’ need to diversify away from U.S. dollar-dominated investments, despite the anticipated rise in interest in the Americas. According to CBRE, the region will receive 10% of the capital, or about $18 billion. This represents an investment of about $1.8 billion annually on average, which is significantly more than the $1.2 billion made in 2013, which was high by recent standards.
Middle Eastern investors may decide to change their approach in light of the benefits of diversification that the Asia-Pacific region provides. There have been more transactions closed in the area, but it is unclear how quickly this interest will translate into a more consistent pace of acquisitions rather than a few large asset deals. According to CBRE, the remaining 10% of the $180 billion will be allocated to the Asia Pacific region.