Lower oil prices have yet to dampen investor appetite for acquiring prime property assets beyond the Gulf, with some set to branch out into high-yield option such as student housing
Take a random sample of central London landmark buildings, from the gleaming City skyscrapers such as the Shard to older iconic treasures such as Chelsea Barracks or Harrods department store, and there is a fair chance the owner will be from the Gulf or have Gulf financing somewhere along the line.
Despite weaker oil prices, there has been little let-up in the Gulfs demand to buy more of these prime property assets. In late January, Qatar Investment Authority (QIA) walked away with its latest UK trophy the Canary Wharf financial district after the prime real estate developments owner, Songbird Estates, dropped its opposition to the Qatari sovereign wealth funds (SWFs) $4bn offer.
This compulsion should not surprise anyone observing Gulf investment strategies over the past few years. According to UK consultancy PwC, equity-rich SWFs and pension funds are poised to play a bigger role in European markets in 2015, continuing the trend of the past several years.
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These players are intending to increase their real estate assets this year. US placement agency Hodes Weill forecasts their real estate allocation will climb from an average 8.5 per cent last year to 9.4 per cent globally in 2015 the equivalent of an $80bn injection into the sector.
The mass entry of the likes of the QIA into Europe has inevitably been blamed for the ratcheting up of asset prices across Europes most attractive locations. Middle Eastern investors have the capacity to offer attractive financing and are crowding out other potential backers, according to PwC survey Emerging Trends in Real Estate, which was published in January.
London may be the most prized target, but other major European cities are also attracting Gulf dollars
These enthusiastic buyers are not likely to be put off by a temporary downturn in oil prices, having longer-term, 10-year-plus investment horizons. They see market opportunities principally focused on four markets in Europe Germany, the UK, the Netherlands and Spain with growing and significant interest in residential investments. Qatari Diar, another state-backed developer, got the ball rolling in 2011 when, in association with the local Delancey, it paid £557m ($860m) for the former Olympic Village in east London. That was a rare UK opportunity to buy big, and the investment has reportedly since doubled in value, says PwC.
Kuwaits St Martins Property Group spent $1.7bn on the 13-acre More London office development on the Thames in December 2013, revealing robust appetite for commercial assets, even in mature and pricey markets such as central London. Another sizeable acquisition was the purchase of The London Edition (Marriott International) by Abu Dhabi Investment Authority (Adia) last year.
Overall, outbound GCC deals to mature markets have risen sharply. In 2013, the volume of outbound deals from the region to mature markets ranked higher than the average reported over the past five years. Large and middle-sized private companies have now joined the state-backed investors who were among the first to seek opportunities overseas.
The range of industries being targeted is also widening to include everything from energy, raw materials and engineering to media, retail and consumer goods companies.
That appetite has fuelled the London property boom in the past few years. Real estate firm CRGE says 27 new tower blocks of multimillion-pound flats are being built on Londons South Bank alone, many of them marketed directly at Gulf investors. Some of these are going to be mixed-use developments with both residential and commercial facilities a theme that plays to the more diverse investment preferences among GCC buyers.
London may be the most prized target, but other major European cities are also attracting Gulf dollars. The QIA last year took a 40 per cent stake in the huge Porta Nuova development in Milan, and has bought Switzerland-based Credit Suisses Italian headquarters for a reported EUR108m ($121m).
Some of the deal-making is stretching into lesser-known markets, such as Greece, where the government has an ongoing asset divestment programme that has yielded some appealing buying opportunities.
Athens former airport at Hellenikon, covering 1,500 acres, has been sold to a group of investors that includes Abu Dhabis Al-Maabar for EUR915m. The plan is to undertake EUR7bn-worth of construction starting in 2016.
Another UAE group, private equity house Abraaj, has been investing in Turkish real estate, focusing on several student housing properties in the Ortakoy and Buyucekmece areas near Istanbul, where the student population exceeds that of London.
Such investments underscore a diversification away from the Gulfs traditional real estate focus on the prized London postcodes of Belgravia, Knightsbridge and Mayfair.
There are compelling reasons why investors are choosing to buy stakes in student accommodation, whether in the UK or Turkey, as these properties can offer some significant yield upside.
UK Islamic bank Gatehouse has completed more than $280m in student property acquisitions on behalf of GCC investors. Having acquired Oxford Brookes student accommodation in September 2010, investors have benefited from an uplift from 9 per cent to a higher dividend payment of a 9.3 per cent cash yield return.
Purpose-built student accommodation is understood to be worth £6.5bn in the UK alone, with universities there forecasting student numbers to rise at 10 times the rate that new accommodation is being completed. This provides a high-performing asset class out of the imbalance between supply and demand in the market, says Gatehouse.
Despite the lower oil price climate, other economic fundamentals make a strong case for investment positions in overseas markets, particularly with the euro remaining weak and domestic Gulf equity markets failing to match past performance levels.
For that reason, the oil price weakness since the summer of 2014 is not yet a factor in shaping the overseas investment activities of GCC investors.
The oil price will affect [the market] at some point, but Gulf investors have been very active in recent months, says Craig Plumb, head of research at US consultancy JLLs Middle East and North Africa (Mena) division. The largest London deal for many years closed in December 2014, with the QIAs acquisition of HSBCs headquarters in Canary Wharf. So the evidence suggests there is still a lot of appetite for London in particular.
Egypt has been popular with GCC investors for a while, but interest declined Now its back on the radar
Craig Plumb, JLL
While weaker oil revenues will have an impact eventually, this has not been reflected in recent demand.
According to JLLs Mena Investor Survey, released late in 2014, Middle Eastern investor interest in overseas real estate assets remains strong. This sentiment is supported by a string of high net-worth family groups, large developers, and some of the largest SWFs in the world, and their target allocation to real estate has increased over the years.
Europe continues to be the preferred global destination for real estate capital from the Middle East, says JLL.
Middle East investors spent $3.6bn on European real estate in the first half of 2014, more than three-quarters of their total overseas spending. The UK was the largest beneficiary of these cross-border flows, which reflects its position as the most liquid real estate market in Europe.
One reason for Londons lingering appeal is that it offers guaranteed long-term rental increases, underscoring the safe haven investment theme prevalent in the Gulf, in which stability of income is particularly valued.
UK commercial property is underpinned by long-term leases with upward-only rent reviews. That, plus the iconic nature of much of Londons real estate, is what is pulling in GCC investors even when the up-front prices are exorbitant.
Middle Eastern investors have indicated a willingness to acquire office assets in the UK at yields of 5-6 per cent, says JLL. The trouble is, recent yields in London have undershot this. In reality, the weight of demand has compressed prime office yields in London to 3.8 per cent in the third quarter of 2014, leaving investors priced out of the market.
However, the JLL data also shows that yields in the outer core markets of the UK averaged 5.5 per cent per cent, which means Gulf investors still have opportunities to buy office investments in areas outside central London.
Continental European office space is also luring Gulf buyers, given the shortage of grade A facilities. Saudi Arabias Olayan family acquired Italy-based Risanamentos Paris portfolio last year, consisting largely of office assets, for $1.5bn.
North America is also appearing on GCC investors radars. JLLs survey found 47 per cent of respondents are now keen to invest in the market (up from 24 per cent in 2013). Middle Eastern investment flows to North America increased 51 per cent year-on-year in the first half of 2014 to reach $1bn.
Closer to home, the relatively stable Mena markets, such as Egypt, will also feature prominently in Gulf property investment portfolios. Egypt boasts a recovering real estate market and some well-capitalised local players that are preparing to finance new projects in conjunction with Gulf backers.
Egypt has been popular with GCC investors for a while, but interest declined for about three years as a result of the Arab [uprisings], says Plumb. Now its back on the radar, with Emaar announcing plans for an IPO [initial public offering] for its business in Egypt, and Arabtec and other big Gulf players entertaining major ambitions in Egypt.
That reflects the returning confidence in a large market, where middle income and affordable housing schemes are high on the policy agenda. Europe has also benefited from the appreciation of the dollar, and more tourists are heading to Egypt in 2015 compared with the past five years.
The traditional risk aversion of GCC outbound investments will keep the large funds and individual investors focused on the traditional real estate plays. Recent buying evidence indicates that SWFs seem content to put their dollars into high-profile trophy assets for now. However, the next few years may see a broadening of the GCC investor footprint into less glamorous but stronger-yielding plays, such as provincial student accommodation.