At a time when Gulf-based real-estate offerings have lost their lustre to regional investors, the appeal of markets further afield has amplified. The UK, a long-standing haven for Gulf buyers, is witnessing an increase in investment activity, brought about by lower valuations, a competitive exchange rate and the visibility of stable long-term returns.

From high-profile “trophy” assets, such as Harrods, Canary Wharf and Chelsea Barracks, through to less glitzy deals involving student accommodation and regional office headquarters, Gulf investors are heading for the UK. Their appetite for London real estate shows no signs of abating, with many deals in the pipeline.

British real estate assets

The proportion of international investment in UK commercial property from the Middle East has trebled over the past five years to $2.2bn in 2009 – accounting for 16 per cent of all foreign investment in the sector that year, according to data from DTZ Research.

The high end of the market remains dominated by the sovereign wealth funds such as Qatar Investment Authority (QIA), whose hunger for high-profile acquisitions has elbowed aside much of the competition. 

Sales volumes by price range (London)
Price range(£) Aug-10 Aug-09 Difference %
Under 50,000 0 0 na
50,001-100,000 84 74 14
100,001-150,000 385 517 -26
150,001-200,000 1,010 1,263 20
200,001-250,000 1,759 1,691 4
250,001-300,000 863 858 1
300,001-400,000 1,506 1,272 18
400,001-500,000 872 663 32
500,001-600,000 413 274 51
600,001-800,000 516 419 23
800,001-1,000,000 264 171 54
1,000,001-1,500,000 214 152 41
1,500,001-2,000,000 92 75 23
Over 2,000,000 96 63 52
Total 8,074 7,492 8
Source: UK Land Registry

Qatar emerged as the new powerhouse in terms of global real-estate capital flows in 2010, reports consultancy Jones Lang Lasalle in its June 2010 Mena House view. It is Qatari investments in London, however, that have captured the headlines over the past couple of years.

In October 2009, Qatar Holding acquired a 24 per cent stake in Songbird Estates, the majority owner of Canary Wharf Group, which owns landmark office developments in London’s docklands. In May 2010, Barwa Real Estate, 45-per cent owned by QIA, sealed a bigger deal to buy Harrods department store for $2.3bn.

When you enter the UK market … it’s clear what has happened and what is expected in the future

Stephanie McMahon, Jones Lang Lasalle

Barwa followed this in June, with a deal to buy Park House for $370m from the UK’s Land Securities. This Oxford Street development comprises 330,000 square feet of offices, retail space and residential accommodation in the heart of the West End – only a short hop from Grosvenor Square, where another unit of the QIA acquired the US Embassy building in London in October last year, for a reported $664m. 

Qatari investors signalled their hunger for trophy deals in 2007, when Qatari Diar paid almost  $1bn for the 13-acre Chelsea Barracks site – which then became the cause of a controversy involving Prince Charles, who objected to the original, Richard Rogers-designed building. In 2008, Barwa and other Qatari investors bought 80 per cent of the planned 80-storey “Shard of Glass” building on the Thames, a stake subsequently sold on to the Qatar Central Bank.

Qatari firms are showing robust appetite for both direct real-estate purchases and investment in real-estate companies, particularly for prime assets in cities where there is strong demand and limited supply. The preference is to acquire properties that have an element of distress, or have some liquidity needs because of overleverage or capital requirements.

Buying activity is not confined to the cash-rich sovereign wealth funds and state-backed investment vehicles.

“Qataris will say 90 per cent of the increased investment is theirs and in terms of headline-making deals its probably true,” says Nicholas Edmondes, a partner at law firm Trowers & Hamlin, which has advised Gulf investors on a series of real-estate deals. “Whereas three to four years ago, you had a mixture of fundamentals that militated against investment into the UK, these have all turned into positives. You’ve got a perception of a cheap pound relative to dollar-pegged GCC currencies, and you’ve got relatively higher yields, in the sense that although prices have picked up in the last 12 months, it’s still possible to generate decent income out of UK commercial real estate.”

European real estate market

UK real estate is recognised as a strong asset and less volatile compared with Gulf property assets, which have declined by 40-50 per cent since the 2008 downturn.

The UK is not the only market where Middle Eastern investors have been active. They invested e1.1bn ($1.4bn) in the second quarter of 2010 in Europe as a whole, says DTZ, with deals benefiting from the depreciation of both the pound and the euro against the dollar.

However, the availability of strong returns have compelled most to head for London first, a market that has the distinct advantage of being well known to many Gulf investors. More than familiarity, though, it is the UK’s offer of strong returns that is the key commercial driver.

A big competitive advantage for the UK is the transparency of the market, with strong visibility of historic performance and forecasting.

“When you enter the UK market, whether through direct or indirect property investment, it’s very clear as to what has happened before and what is expected to happen in the future. That’s a big plus for international investors,” says Stephanie McMahon, European research director at Jones Lang Lasalle.

Another contributing factor to the attraction of the UK’s market is that the institutional property market is structured in a much more certain way than in continental Europe. UK commercial property is underpinned by long-term leases with upward-only rent reviews. The life of the lease also tends to be longer, at an average 15-25 years, which can yield a long-term stable income stream. Elsewhere in Europe, lease lengths tend to be shorter, about three to six years and renewable, so investors are always taking a greater degree of risk in terms of tenants moving on at the end of the term rather than renewing.

This stability of returns has ensured interest has spread well beyond the trophy assets the Qataris have bought over the past couple of years. Other parts of the market are showing activity, with Middle East investors also eyeing properties outside London.

In December 2009, Trowers & Hamlin advised the UK-based Islamic financial institution, Gatehouse Bank, a wholly-owned subsidiary of The Securities House of Kuwait, on the leveraged acquisition of the UK headquarters of Procter & Gamble in Weybridge, Surrey, for £31.6m ($49.1m). Gatehouse’s real estate team funded the investment for a syndicate of private clients from the GCC region.

In April 2010, it bought two student accommodation properties for £29.2m and in July, acquired for £43.7m the regional headquarters of telecoms provider BT in Leeds.

Attractive return on investment

Deals such as these, says Trowers & Hamlin, reveal that Gulf investors are increasingly interested in properties outside London and the southeast of England if the deal is well structured and provides an attractive return.

The way in which Gulf investors invest in UK real estate is also shifting.

“Five years ago there was a trend for setting up funds and promising a certain return on the back of promises to try to acquire the assets,” says Edmondes. “What is happening now is more difficult. Players are having to go out and do a deal and hurriedly [see] their clients in the Gulf and say, ‘Right, we’ve done the deal, it’s a building that produces X amount of income over the next five years – do you want to participate and put the thing together on a club basis?’”

Such deals are more challenging because of greater time pressure, but the fact they are still happening suggests there is abiding interest in UK property.  

As real estate is a comfortable asset class for Islamic investors, this is leading to some innovative deal structures.

Evans Randall, a UK private equity group, teamed up with Al-Salam Bank last year to buy Milton Gate in the City of London, a 200,000-plus sq ft office investment for $195m. Al-Salam Bank’s participation in the transaction was structured according to sharia principles, with Evans Randall providing the equity for the acquisition.

New investment opportunities may arise through the 2012 Olympics. The QIA has identified a number of investment opportunities associated with the Olympics, as well as in hotels – long a focus for Gulf investment. The UK newspaper the Times has reported that talks are under way for QIA to buy a 33 per cent stake in the Savoy Hotel, and is in the bidding to buy the Grosvenor House Hotel.

Yet although the market has been active in the first half of the year, investors may find fewer bargains to be had as the prime-end of the market becomes tighter.

“It’s more difficult to access those trophy assets than previously. That said, our investor confidence survey indicates that the balance between buyers and sellers may be levelling, so perhaps there’ll be more product coming to the market in the next few months – though we don’t know the quality of that product yet,” says McMahon.

Sovereign wealth fund buying activity will continue to capture the headlines and is likely be dominated by the Qatari entities. Abu Dhabi Investment Authority was also rumoured to be interested in a UK market acquisition recently, but that has not materialised. With lingering concerns over how large its financial commitment to Dubai might end up being, Abu Dhabi may be holding its cards close to its chest when it comes to overseas real-estate investment. 

Investors may have to accept paying a higher price for getting their toehold in London real estate. If past history is anything to go by, the city’s attractions, from the West End to the Square Mile and beyond, will keep Arab investors coming back for more.