Middle Eastern Capital Increasingly Targeting U.S. Markets
Private Investors Emerge as Major New Source of Outbound Capital
Los Angeles – Kyiv, August11, 2015 – An average of $15.0 billion per year will flow out of the Middle East into direct real estate globally in the near term, according to the latest research from global property advisor CBRE Group, Inc.
The Middle East continues to be one of the most important sources of cross-regional capital into the global real estate market, with US$14.0 billion invested outside of the home region in 2014—the third largest source of capital globally. Qatar, driven by its sovereign wealth funds (SWFs), was by far the largest source of outbound capital with US$4.9 billion invested. Saudi Arabia has emerged as a significant new source of capital globally, investing US$2.3 billion in 2014, up from almost no reported investment in 2013.
The Middle Eastern investor base has expanded, fueled by weakening oil prices; this has led to a major shift in global investment strategies towards greater geographic and sector diversification, with activity spreading across gateway markets to second-tier locations in Europe and the Americas. A greater proportion of Middle Eastern capital is now targeting the U.S.—the US$5.0 billion invested globally in Q1 2015 was almost equally split between Europe and Americas, with New York, Washington, D.C., Los Angeles, and Atlanta targeted. London, while retaining the top position, is no longer as dominant, with a 32 per cent share of all Middle East outbound investment in 2014, compared to 45 per cent in 2013.
Middle Eastern investors are becoming more active across a wider range of sectors. This is clearly evident in the U.S. where, historically, these investors have bought office buildings and trophy hotels in New York, Los Angeles and other gateway markets. Competition from Chinese investors and other global capital sources means that these investors are increasingly seeking alternatives, such as Abu Dhabi Investment Authority’s $725 million acquisition this year of a 14.2 million-sq.-ft. industrial portfolio.
Private, non-institutional investors (property companies, high net worth individuals (HNWI), equity funds and any other form of private capital) have emerged as a major and increasing source of outbound capital from the Middle East. With a greater allocation to real estate and more concentration on geographical diversification away from the home region, the potential for non-institutional investors to expand their global real estate acquisitions is of growing importance. This growing trend has had a significant impact on Europe—where their combined real estate investments grew by 56 per cent year-on-year to $4.8 billion—creating a shift in the balance between institutional investors and non-institutional. Non-institutional capital accounts for close to 60 per cent of the total Middle Eastern investment in Europe in 2014.
Weaker oil prices are a strong contributing factor to the growth of non-institutional investment from the Middle East, triggering and accelerating global deployment of capital, with value-add investments in high demand. CBRE forecasts that global real estate investment by non-institutional capital from the Middle East will range from US$6.0 to $7.0 billion per annum in the near-term, if not higher, increasing from approximately US$5.0 billion per year during 2010 to 2013.
“Private capital from the Middle East is once again becoming a measurably more important investor group globally. The most immediate change will bring down the average lot size, as non-institutional investors tend to target assets at circa US$50.0 million. This extends naturally to a more diverse investment strategy—a trend already felt in the market so far in 2015 and is expected to become more pronounced in the next 6-18 months. In particular, we expect the Americas region to see more capital flows from the Middle East, with Europe less dominant than it has been over the last five years,” said Chris Ludeman, Global President, CBRE Capital Markets.
In addition to private capital, SWFs from the Middle East are also expected to remain important market-makers, albeit not as strong in their acquisition strategies as they would have been if oil prices had not fallen. It is very unlikely that regional governments will make radical decisions to affect the existing capital allocations, with only new allocations likely to be affected. CBRE expects US$7.0 to $9.0 billion per annum of Middle Eastern SWF investment to flow into direct global real estate in the near- to mid-term, compared to what would have otherwise been in the range of US$9.0 to $11.0 billion per annum had oil prices remained at levels above $100 per barrel.
Radomyr Tsurkan, the managing partner of CBRE Ukraine, said:
“Economic recession coupled with geopolitical tensions and destabilization of the situation in the East of Ukraine had significant negative repercussions on the investment climate in Ukraine. Non-institutional investors from the Middle East might consider investment into Ukrainian real estate by taking advantage of low prices in the sector and opportunity to earn higher risk premium once the investment climate improves. Futhermore, the costs of entry into the project/operating property are substantially lower compared to 2012-2013. However, no actual investment transactions involving Middle Eastern capital were recorded during 2014 – H1 2015. In the long run retail and office segments will remain attractive investment opportunities in Ukraine. Stabilization of the situation in the East of the country is therefore fundamental to making Ukraine an attractive destination for foreign investors, including Middle Eastern players.”
