The Middle East looks West

Funds Director, Andrew Maiden, examines how commercial property in the UK and Europe is more attractive than ever to investors in the Middle East.

With the saga of Brexit still unfolding and with all the drama surrounding the controversial run-up to and result of the United States presidential election, it’s not surprising that many in the West have had their eyes focused on affairs close to home lately.

Brexit and the US election aren’t typically front of mind for most in the Middle East – the region has endured more than its fair share of uncertainty in recent years, with oil prices persistently low and an unstable geopolitical situation casting a long shadow. However, for Middle Eastern investors, what is happening in the West is very much on their radar.

These investors have massive spending power and, with so much uncertainty at home, those seeking long-term capital appreciation and regular income are increasingly looking further afield to new, alternative assets in order to diversify their portfolios, gain better returns and, ultimately, preserve their wealth.

Top of the list of targets is commercial real estate, where Middle Eastern investors are expected to spend US$180bn outside of their own region over the next decade. The main destination is Europe; 80% of that $180bn is earmarked for investment there over the next 10 years. Close to $85bn of this will flow into the UK, with $60bn directed at continental Europe, where France, Germany, Italy and Spain are among the key target markets.

These are sizeable figures and provide a real opportunity for the Channel Islands, which have a proven track record of providing a route to such markets.

Middle Eastern investors are expected to spend US$180bn outside of their own region over the next decade, 80% of which is earmarked for Europe.

 For a sense of the potential impact let’s look at the UK, whose property market is regarded as a safe option for Middle Eastern investors. There is plenty of high-profile precedent – Qatar’s sovereign wealth fund alone owns several London landmarks, including Harrods department store and the Olympic Village. Middle Eastern investors bought at least £5.9bn of UK property in 2015, in a bid to offset losses from the slump in commodities.

Since then, however, the UK market has seen great upheaval of its own, with analytics firm Real Capital Analytics reporting that investment volumes into London real estate were 50% down in the first half of 2016 compared to the same period in 2015, driven largely by the UK’s falling economic growth. And since then the shock of June’s Brexit referendum, in which the UK voted to leave the EU, has meant a third of ongoing property deals either collapsing or having to be renegotiated.

Yet it appears there’s a massive opportunity here too. At the time of writing, sterling has plummeted to a 31-year low against the dollar, giving cash-rich Middle Eastern investors the chance to secure discounted prices for the country’s highly desirable real estate. These investors, many of whom put very little weight on whether the UK is part of the EU or not, will find property 31% cheaper than it was during the last market peak in Q3 2007 – while any USD or UAE dirham investors will find the price of an average prime central London residential asset $96,000 (Dh350,000) cheaper than it was on 20 June 2016.

The post-Brexit plummet in the value of sterling is giving cash-rich Middle Eastern investors the chance to secure discounted prices for the UK's highly desirable real estate.

This isn’t mere speculation. In August, a consortium of Saudi and UK investors bid $1.3bn for London’s Grosvenor House hotel. Meanwhile, Abu Dhabi Financial Group is planning to bid on Hyde Park Barracks in Knightsbridge, a prime London site owned by the Ministry of Defence.

It’s not just a matter of the headline purchases either – UK and European real estate lot sizes in the office and retail sector tend to be below €100 million, which may suit Middle Eastern investors whose own assets have taken a hit from declining oil revenues.

Yet the largest growth in investment may well come from the region’s sovereign wealth funds, which commonly find equity markets too volatile and its sukuk (sharia-compliant bonds) markets too low yielding. Traditionally, sovereign wealth funds have focused on larger lot sizes (above €150 million) in the office sector, so it’d be no surprise to see further headlines about more of the UK’s eye-catching infrastructure being snapped up in the coming months.

It’s fair to say, then, that we may be about to see a significant resumption in property investment activity in the UK. As for the longer-term implications, it’s probably too soon to assess. But we may start to see the unlocking of London’s stalled residential property market, with investors both entering and exiting the market, as we head towards a period of demand volatility.

Real estate investors are increasingly structuring investment in infrastructure and property indirectly through offshore vehicles.

This is where the Channel Islands come in. This rise in demand overall is sure to have huge implications for international finance centres, particularly those offshore. Real estate investors are increasingly structuring investment in infrastructure and property indirectly through offshore real estate investment vehicles, which can provide tangible benefits when acquiring and holding property in the UK and Europe.

With over 50 years of handling international transactions under their belts, Guernsey and Jersey have built a cast-iron reputation as leading offshore finance centres with a specific focus and expertise in UK and European real estate. They offer political and economic stability, a highly skilled workforce and a sophisticated and comprehensive legal infrastructure underpinned by a robust regulatory framework – all with transparency standards that have been publicly lauded by international bodies, such as the World Bank and the OECD.

Crucially, the Channel Islands’ professionals understand Middle Eastern investors. The islands have longstanding relationships with many intermediaries and ultra-high-net-worth individuals and families in the region, and their wide range of investment structures are perfectly built to support the ambitions of its investors.

If these investors do choose a fund structure domiciled in the Channel Islands, it will come with an innovative and flexible regulatory regime, tax neutrality, professional expertise from renowned law firms and auditors, fiscal efficiencies and proximity to both London and Europe, whose professionals are more than familiar with the Channel Islands’ companies, unit trusts and partnerships. All of which, in a period of such upheaval, is precisely the kind of security Middle Eastern investors are looking for.

 

(This article was originally featured in BL magazine, issue 47, November 2016.)

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