Middle Eastern investors are expected to spend US$180 billion in commercial real estate markets outside of their own region over the next decade, according to the latest research from global property advisor CBRE Group, Inc. house for sale
The extraordinary mismatch between the lack of institutional real estate in domestic markets and the huge purchasing power concentrated in the area has resulted in a significant increase in Middle Eastern capital flows into global markets. Europe is the preferred destination, with the region receiving 80 percent of the $180 billion (roughly $145 billion) allocated over the next ten years. Nearly $85 billion would pour into the United Kingdom, with $60 billion going to continental Europe. The main target markets are France, Germany, Italy, and Spain.
Middle Eastern capital has poured into global real estate markets, with $45 billion invested between 2007 and 2013, seven times the amount reported in its home market. There is clear evidence that Middle Eastern players are growing their interest and investment allocations to direct real estate outside their home country, with $20 billion invested in commercial property outside their home region in the last two years alone.
Sovereign Wealth Funds (SWFs) from the Middle East are now 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 currently devote the least amount of capital to alternative assets (9 percent of total portfolio). Even a small increase in Middle East SWF allocation would represent a significant amount of capital that would have a significant impact on the global commercial real estate market.
Global SWFs have an average target allocation of 7.9% to real estate. When you multiply this by the $2.2 trillion in AUM held by Middle Eastern SWFs, you get a figure of around $175 billion. CBRE has looked at a variety of possibilities, including faster and slower growth of AUM by SWFs; a conservative estimate places Middle Eastern SWF investment in global real estate at $130-140 billion over the next decade. When this number is combined with the projected investment 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 about $180 billion.
"The 'buy and hold' approach embraced by many Middle Eastern investors within their home country, and the resulting lack of deal flow opportunities, leaves much unsatisfied demand here," said CBRE Middle East Managing Director Nick Maclean. Overseas investment has risen significantly as a result of increased trust in global markets and the need for diversification. SWFs from the Middle East have been one of the most important sources of capital in the global real estate environment since the Global Financial Crisis. These institutions' appetite has grown over the last few years into a sophisticated source of liquidity for many of the world's developed real estate markets. This trend is expected to continue, and with new sources of Middle Eastern capital, especially from Saudi Arabia, expected to join the market in the coming years, the region's significance on the global investment stage cannot be overstated."
In 2013, Europe accounted for nearly 90% of all Middle Eastern commercial real estate investment outside of the home country. This stands in stark contrast to Asian capital, which has grown more geographically diverse in the last 18 months. Although allocations to the Americas and Asia Pacific will increase, Europe will receive the vast majority (80%) of direct Middle Eastern investment because it provides diversification, cultural acceptance, high liquidity, and market transparency.
About $85 billion of the overall investment will go to the United Kingdom, with $60 billion going to continental Europe - about five times the amount of direct investment by Middle Eastern investors in the previous decade. Germany and Italy are primary targets, with Spain, especially the hotel industry, emerging as a strategic location. France has formed close relations with Middle Eastern investors in recent years and offers a diverse range of trophy properties, so demand for core products and sectors will continue to be high.
"The vast majority of Middle Eastern investors are long-term players looking for wealth preservation and good high income-producing properties, rather than opportunistic investors playing the cycle for short-term profits," said Jonathan Hull, Managing Director, CBRE EMEA Capital Markets. This approach favors prime 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 shown by a slew of high-street acquisitions in London and Paris, as well as regional cities in the UK and France. Hotel interest is also evident, and it stems from a long history of interest in the hospitality industry in home markets."
"Culture, transparency, and favorable taxation laws are major push factors for Middle Eastern buyers towards Europe, and the United Kingdom in particular," said Iryna Pylypchuk of CBRE's EMEA Research and Consulting. Close historical, political, and economic links, 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, about 10% of the capital (roughly $18 billion) would flow into the area. This equates to an estimated annual investment of about $1.8 billion, which is significantly higher than the $1.2 billion spent in 2013, which was high by recent standards.
The Asia Pacific region's diversification benefits could cause Middle Eastern investors to reconsider their strategy. The number of deals completed in the area has increased, but it remains to be seen how quickly this interest can translate into a more vigorous rate of acquisitions rather than a few large asset deals. The remaining 10% of the $180 billion is expected to be allocated to Asia Pacific, according to CBRE.