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May 26, 2015

More Middle Eastern money is finding its way into global property markets through syndicate platforms, many of which are opening up to place the swell of private capital emerging from the oil-rich region.

Unlike the Sovereign Wealth funds (SWFs) of the Middle East, which target property deals directly, these collective platforms pool equity from multiple investors and allocate it to profitable assets.

“We always said there are three main categories of investors in the Middle East: Sovereign Wealth Funds (SWFs), privates and syndicates. We’ve talked and dwelled a lot on the first two and now we are observing increased activity in the third category,” said Fadi Moussalli, Head of JLL’s International Capital Group, MENA.

“These investors, by and large, are private families or private money that lacks the expertise to invest in overseas property markets alone so they seek out experts to invest on their behalf,” he added.

Pooling resources

More of these organisations have began to emerge in Europe, primarily in London.

One notable syndicate is 90North. Backed by British billionaire, James Caan, it launched in London in 2012 to satisfy investor demand in the UK and key European markets. Over the last 18-months the group has stacked up an impressive list of acquisitions and in October 2014 it entered North America.

London may be the preferred city for these groups to set up operations, says Moussalli, but the Middle East also offers the requisite business and legal environment. Relatively new real estate investment platforms investing Middle Eastern private money in international  real estate have emerged in Lebanon, Kuwait, Saudi Arabia, Oman and the UAE. These include Gatehouse Bank, Al Salaam Bank, Al Khabeer, Saradar Capital, Corporate Finance House. Some established names are also making a noteworthy comeback, such as Bahrain based Gulf Finance House and Arcapita.

These platforms  have access to a large pool of private capital and knowledge of Sharia compliant investments, which private investors favour with few exceptions. While Sharia compliant investments limits the pool of investable assets, the low level of capital required to enter a syndicate deal allows a broad base of Middle Eastern private money to access commercial property markets.  With US$250,000, investors can gain exposure to income generating investments managed by a professional on their behalf.

The syndicate managers are often shareholders in the deal too, investing their own equity to align interests – and therefore comfort – to those who are unfamiliar with investing through a third party.

A different deal

It’s true that Middle Eastern investors are not strangers to global real estate markets – cross border commercial property transaction volumes hit US$11 billion in 2014 – but the faceless nature of these deals further distinguishes them.

Billionaires and SWFs have displayed healthy appetites for ‘trophy’ properties,  and some prominent Middle Eastern investors favour the cachet of owning an iconic building, but syndicates seek out less salubrious deals. Industrial assets such as warehouses or Data Centres in Europe are proving especially popular because of the higher yield on offer and the stable nature of the cash-flow.

“They are typically interested in six percent net initial yield with some upside at the exit so, typically, they would go for secondary locations and long term leases,” said Moussalli

And the investment horizon of syndicates is usually medium term at five to seven years: “They are not ‘buy-and-hold’ like the other two categories,” said Moussalli. “They have to exit at some point deliver returns to the unit holders and ultimately recycle the money into other products.”

Despite concerns from some real estate market commentators that the recent drop in oil prices will hamper the mobility of Middle Eastern money, there is little doubt that these syndicate platforms will increasingly absorb the region’s abundant wealth.

As these emerging investment houses evolve they will diversify, says Moussalli: “The more the platform establishes its name and reputation, the more it starts attracting sophisticated money like pension funds,”

“Their evolution path is to become, over time, a true investment bank or a multifamily investment office.”

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