GCC SWFs allocate 5 to 10% of assets under management to global real estate investments

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A report by global real estate services firm JLL said that it is conceivable the Abu Dhabi Investment Authority (ADIA) could pass the USD 1 tr mark in the next few years, implying over USD 100 bn would be invested in direct real estate if it maintains its 10 percent allocation. “While the outflow of capital has been consistent, the global financial crisis did trim the buying activity of Middle Eastern investors. With the majority of developed markets dipping into a severe depression, the Gulf states did not escape unharmed with the UAE and Kuwait seeing their economies contract significantly in 2009 (by -4.8 percent and -7.1 percent respectively),” said JLL.

More capital was needed within the region to support domestic economies, thus sacrificing global opportunities. “However, investors from the region were some of the first back into the market in 2010 with large deals in London, New York and Paris as attractive buying opportunities presented themselves. 2013 saw a surge in outflows from the region, triggered by renewed political turmoil, surpassing the previous peak JLL recorded back in 2006,” said the report.

Destination London

London has remained the favoured destination for Middle Eastern capital. “The historic links between the UK and the Gulf has long encouraged the two-way movement of people. Many Middle Eastern investors have been educated in the UK while the Gulf has been a favourite destination of British expats for many years, and this has certainly encouraged the flow of money,” said JLL.

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Upmarket London districts like Knightsbridge, Kensington, Mayfair and the City have attracted the most attention. “A focus on the major cities of the world has also seen investment in New York, Paris and Berlin over the last 10 years. The safe and secure nature of these big cities has been a key driver of investment decisions,” said JLL.

Investors have traditionally been focussed on capital preservation and some element of anonymity, although this is now changing somewhat as real estate markets become more transparent and the number of potential investment locations increase. They also selectively invest in other geographies driven by higher return factors.

Hotels

In contrast to many other cross-border investors, Middle Eastern groups have purchased a greater proportion of hotels. Investment into the hospitality sector typically makes up between 5 to 10 percent of a mixed portfolio.

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“But for major Middle Eastern SWFs (since some groups are Shariah-compliant) a quarter of all their activity has been into hotels. The emphasis on hotels reflects the focus on the core cities of the world and the desire to own large, secure, resilient assets,” said the report. . Another unique characteristic of Middle Eastern groups is that they are very reluctant sellers. This approach may, however, now be changing, with an element of capital recycling starting to appear in some funds’ investment strategies.

Change in approach

As the global property market has become more sophisticated, Middle Eastern SWFs have adopted an increasingly rigorous and analytical approach to investing.  “While they are more than capable of undertaking very large single deals, a key component of their move into new and more emerging markets has been a willingness to form joint ventures and partnerships with local developers and investors in countries such as Australia, Singapore, the UK and China.”

The choice of these partners reflects the different investment philosophies of the various funds. QIA, KIA and State General Reserve Fund of Oman remain very core investors while ADIA, OIF, Aabar and ADIC are more opportunistic which has seen them move into new geographies while also employing indirect and debt investment strategies.

“We expect this trend to continue as the competition for assets globally becomes more intense and the need for good local intelligence becomes more important,” said JLL.

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