Why and how HNW investors from the Middle East region are targeting sectors such as UK real estate, including commercial property. Cash-rich Middle East investors, tempted by attractive valuations and exchange rate moves, are significant buyers of UK property.
This cohort of ultra-high net worth individuals is an important player in the European bricks-and-mortar space. This is not a new story, of course (this trend started as far back as the 60s), but it does underscore the importance of commercial ties and the need for private banks and wealth managers to curate it wisely, Wealth Briefing writes. The following commentary comes from Alex James, head of private client commercial advisory at Knight Frank.
Growing wealth of Gulf countries
The latest International Monetary Fund data forecasts GDP growth for the GCC nations of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE to reach 3.6 per cent in 2023.
The UAE economy had a tremendous 2022, with trade volumes reaching AED1 trillion ($272 million) and re-exports hitting AED300 billion for the first time ever. This was reflected in the country’s 6 per cent GDP growth, compared with 3.8 per cent in 2021. The various maturing economic subsectors, buoyant capital markets and new socioeconomic measures implemented are expected to propel the UAE economy's growth above 6.5 per cent this year and in 2024.
The impact of the Ukraine conflict and global macroeconomic headwinds has also been mitigated by rising commodity prices, which creates a more optimistic outlook for Middle Eastern economies in times of uncertainty. These favourable conditions have also contributed to robust levels of wealth creation and appetite for capital deployment in global real estate markets.
Estate is the top opportunity
Knight Frank’s latest Wealth Report Attitudes Survey, which represents ultra-high net worth individuals and advisors with $2.5 trillion of private capital, found that real estate was the top cited opportunity among 46 per cent of our survey respondents, whether for its attributes as an inflation hedge or due to the benefits of diversification.
Commercial property investment
Globally, we witnessed a rapid rebound in commercial property investment over 2022, with $400 billion of private capital invested during the period and Middle Eastern investors acquiring over $700 million of UK commercial property assets. The UK hotel sector received 65 per cent of the total Middle Eastern private capital invested into the country in 2022, compared with 29 per cent in the office sector and 6 per cent in senior housing and care homes. Compared with the previous year, offices (17 per cent in 2021) and senior housing and care homes (0 per cent in 2021) accounted for a greater share of overall Middle Eastern investment, while hotels saw its share fall from 72 per cent in 2021.
We can expect UHNW investment activity to increase in 2023, as cash-rich Middle East investors take advantage of currency benefits, and less competition from larger institutions, to target the UK amongst other locations across Europe and beyond. Private capital will increasingly be able to compete with institutions or private equity firms, who are more sensitive to rising debt costs and generally hold assets for shorter periods. We forecast that UK commercial real estate investment from Middle East investors will hit $1 billion, representing an annual rise of 30 per cent.
This year we expect a larger volume of capital to target the office market, with over £300 million ($361.3 million) of assets within this sector being bought by Middle East investors in 2022. Our survey of Middle East UHNW individuals found that office assets were one of the most popular real estate asset classes in 2022, constituting a third of allocations. This is higher than the global average of 16 per cent for this category of investors around the world. As secure long-term, inflation-linked rental income from blue chip office tenants continues to top investor wish lists, we anticipate that more than half of all significant cross-border deals this year will target this subsector.
Weakening of the pound
Middle East private investors will be more acquisitive in the UK this year due to the weakening of the pound and possibility for repricing, which has already been witnessed in several UK markets. The value of the pound is $1.22, up from the record low of $1.03 reached in September but still below the $1.37 it reached in January 2022, when it was already offering favourable exchange rates. 2023 is expected to see ongoing fluctuation in currency, energy prices and inflation.
As a result, we will continue to see volatility in debt costs. This will provide an opportunity for new commercial real estate investors to take advantage of repricing, as they are less dependent on loans than institutional purchasers. In this context, active Middle East’s dollar-pegged investors, who are looking at diversifying and strengthening their portfolios in core UK markets, are set to be a prominent part of in global real estate capital investment.