Increased geopolitical unrest and low oil prices are having an effect on the U.K., driving private Middle Eastern investors towards property assets.
The trend first emerged five years ago in the wake of the ‘Arab Spring’ but has accelerated in the past 24 months, says Fadi Moussalli, Head of JLL’s Middle East and North Africa group within its International Capital division.
“The evidence of this ‘flight to safety’ trend can be seen in the types of assets investors are seeking,” Mr Moussalli says.
“The deals we are seeing are in the sub-institutional range, typically priced between US$20 million and US$50 million, and the preferred assets are high-yielding with long lease tenures. In short, they are seeking long-term, stable properties with good yields.”
“Recent currency movements have given this purchasing trend additional impetus, as the British pound is at a seven-year low against the US. Dollar, to which most Gulf currencies are pegged.”
The pressure to buy is also prompting Middle East investors to consider non-core assets, and they are increasingly looking at property outside their traditional London hunting grounds, where higher yields are easier to achieve.
While typically Middle East investors have favoured core office and retail assets, the chase for yield is now leading them to buy non-core offerings such as logistics, healthcare and student accommodation properties, particularly those with a long-term, high-income profile.
“With demand for London properties heating up, these investors are now also willing to consider residential property in Northern England, especially where reasonable yields can be tied to good capital returns,” explains Moussalli. “A property yielding 5-6 percent per annum, and appreciating by 10-12 percent annually, will be very attractive to an investor – especially when you consider returns for comparable London properties will be half that.”
Although the potential for a British exit from the European Union – the ‘Brexit’, which will be decided by referendum in the UK on 23 June, 2016 – may have given some investors cause to delay investment, others see any slowdown in the market’s pace as a buying opportunity.
“We see Middle East investors increasingly willing to take on more risk in their purchasing decisions, and many don’t see Brexit as cause for concern,” says Moussalli.
“In fact, so willing are some investors to move up the risk curve that they are now taking on development projects, although often in conjunction with a well-established local developer as partner.”
However, while Middle Eastern investors have been trending towards acquisitive strategies, they will still be more than willing to sell UK assets over the short to medium term, Mr Moussalli says,
“In order to generate better returns, some Gulf sovereign wealth funds take a trading approach to their property portfolio strategy – they buy, they create value, then they sell,” he says. “Those SWFs that bought UK property in the credit crunch of 2009-2011 will now be assessing those assets with an eye to the value they’ve created in the past five years.”
Head of JLL's International Capital Group in MENA