Middle Eastern investment into western commercial property fell more than a third last year as lower oil prices and concerns over Brexit stifled demand.
Regional investment into the US and Europe fell 36 per cent to $5.8bn in 2018, compared with $9.1bn in 2017, according to data from JLL, a real estate consultancy.
“This is the most significant drop in the past ten years,” Fadi Moussalli, an executive director at JLL’s International Capital Group, told the Financial Times. “We are back to the year following the global financial crisis.”
Gulf investors, led by the Abu Dhabi and Qatari sovereign funds, have for decades been prominent purchasers of commercial real estate. Qatar owns the Grosvenor House hotel in London, and Abu Dhabi owns the Berkeley Square estate in the UK capital.
From a low of $3.8bn in 2009, investment flows rebounded to reach $13.7bn in 2013, following the upward trajectory of oil prices to more than $100 a barrel. Outbound flows were sustained at more than $12bn for the next three years, before dipping in 2017.
The sharp reduction last year is testament to lower oil prices filtering through to major investors such as sovereign wealth funds, which depend on budgetary surpluses.
“There is a time lag between the drop in oil prices and its ripple effect into allocations,” Mr Moussalli said, with investment decisions made up to two years in advance based on the money available.
And given that London remains the most important destination for outbound commercial real estate investment by Middle East groups, the effect of the UK’s planned departure from the EU is also taking its toll, he added.
Europe attracted 68 per cent of outbound commercial real estate investment, with the US at 31 per cent and Asia less than 1 per cent.
The UK accounted for 41 per cent of European volumes, with London making up 40 per cent of UK-bound investment. Germany and the Netherlands were the second and third most popular destinations.
“The UK has always been the preferred destination of Mideast investors,” he said. “Now the UK has Brexit, and Brexit means uncertainty — and that means breaks on investments.”
The fall in the pound since the Brexit vote in June 2016 has made British property cheaper for foreign buyers. But institutional investors from the Middle East are becoming reluctant to buy real estate widely believed to be near the top of the market, Mr Moussalli added.
British commercial property values have been affected across the board since the Brexit vote, falling by 2.4 per cent in 2016 before recovering slightly the following year, according to a CBRE monthly index. The sector experienced anaemic growth in 2018, however, and slipped back into negative territory in November and December.
Declining interest from sovereign wealth funds, which make up about a quarter of outbound investment flows, is being partly compensated for by wealthy individuals and families sealing transactions of about $20m-$50m on long-leased commercial property, such as offices, back-office centres and logistics warehouses.
“The geopolitics of the region are pushing them to diversify outside of the Middle East, putting their money to work in a safe haven through long-term income-generating assets,” he said.
The region’s private sector has been struggling with falling government spending and subdued business confidence, which has been hit by the proxy war in Yemen that pits Gulf allies against rival Iran.
Saudi Arabia’s anti-corruption crackdown, which saw some of the kingdom’s wealthiest investors detained for months, has also encouraged capital flight.
“It is perceived as a wise investment to create a source of income not correlated to the turbulence of the Middle East,” Mr Moussalli said.
JLL forecasts similar outbound investment levels this year. “We see a continuation of 2018,” he said. “All things being equal, we see an increase in activity from private [investors] and subdued activity from sovereign wealth funds.”