Middle Eastern investors are expected to invest $180 billion in commercial real estate markets outside of their own region over the next decade, according to research from global property advisor CBRE.
The major increase in flows of Middle Eastern capital into global markets is emerging from what the firm called “the extraordinary mismatch” between the lack of institutional real estate in domestic markets and the huge spending power concentrated in the region.
Europe is the preferred target with 80 percent, equating to around $145 billion, targeting the region over the next decade. Close to $85 billion will flow into the UK, with $60 billion directed at continental Europe. France, Germany, Italy and Spain are among the key target markets, the report adds.
Middle East sovereign wealth funds (SWF) are among the world’s largest and most influential sources of capital, accounting for 35 percent of SWFs assets under management globally, said CBRE. When compared to Western and Asian SWFs, these funds currently allocate the smallest share - 9 percent of their total portfolio - to alternative assets. A further increase in allocation by Middle East SWFs, even by a small fraction, represents an extremely large amount of capital that would have a significant impact on the global commercial real estate market, it said.
The average target allocation to real estate by global SWFs is 7.9 percent. Applying this to the $2.2 trillion in assets under management (AUM) held by Middle Eastern SWFs, this gives a total close to $175 billion. CBRE said it explored a range of scenarios, including faster and slower growth of AUM by SWFs and a conservative estimate puts investment in global real estate by Middle Eastern SWFs at up to $140 billion over the next decade. Taking this figure with the expected spending of private Middle Eastern investors, as well as property companies and developers, equates to around $180 billion that will flow cross-border and into global markets over the next ten years.
Nick Maclean, managing director, CBRE Middle East, said: “The 'buy and hold' strategy adopted by many Middle Eastern investors within their home region and the resultant lack of deal flow opportunities leaves much unsatisfied demand here. Coupled with increased confidence in global markets and the need for diversification, overseas investment has grown strongly.”
He added: “Since the global financial crisis, SWFs from the Middle East have become one of the most significant sources of capital in the global real estate landscape. The demand from these institutions has evolved during the last few years into a sophisticated source of liquidity for many of the mature real estate markets around the world. This trend is set to continue and with new sources of Middle Eastern capital, particularly from Saudi, set to enter the market over the next couple of years, the importance of this region on the global investment stage cannot be understated.”
Iryna Pylypchuk, a director of EMEA Research and Consulting, added that “culture, openness and favorable taxation laws are significant push factors for Middle Eastern buyers towards Europe, and the UK in particular. Close historical, political and economic relations, as well as Britain’s recent decision to become the first non-Muslim nation to issue Sharia-compliant Islamic bonds, confirm Europe as the favored destination for Middle Eastern capital.”
While some increase in interest towards the Americas is expected, the need for Middle East investors to diversify away from US dollar-dominated investments will counteract the fundamental attractiveness of real estate as an asset choice. CBRE estimates that about 10 percent of the capital - around $18 billion - will flow into the region. This represents an average annual investment of around $1.8 billion, notably above the $1.2 billion invested in 2013, which in itself was relatively high by recent standards.
However, the report does not address longer-term issues facing the Middle East. Even for the hugely influential Gulf States, question marks have been raised over continued oil-wealth generation. Agence France-Presse (AFP) last year repored that US shale oil production "could pose a threat to exports from the Gulf region”.
Saudi Arabia is the world's top oil producer but only marginally ahead of the US, said the report. "Saudi billionaire Prince Alwaleed bin Talal has joined in raising the alarm over the kingdom's dependence on oil exports to generate revenue, warning that the threat from shale oil and gas is ‘definitely coming’” the report continued.
Arguments supporting the thesis have cropped up elsewhere. Though the International Monetary Fund said in a July 2013 paper that Saudi Arabia would retain a central position in the global oil market over the medium term, it also said the shale gas "revolution" in North America would reduce demand for oil products going forward. Kuwaiti analyst Kamil Harami said he actually saw the threat of US shale production coming sooner for oil-producing Gulf Arab nations, along with Iraq, which together sit on around 40 percent of global crude oil reserves.