Sovereign wealth funds (SWFs) in the Middle East remained “active purchasers” of global real estate this year with some 38 deals worth $65bn transacted in nine months up to September, data available with JLL, a real estate investment and advisory firm, show.
While the number of overseas transactions has declined from the 74 deals seen in 2013, the value of investment has remained high and is likely to exceed that experienced in 2014, JLL said.
“The volume of investment is expected to decline in 2016 as we enter a prolonged period of lower oil prices that will cause sovereigns to reconsider their objectives and strategies,” JLL said.
In a recent study, JLL highlighted the impact of lower oil price on capital flows into real estate.
Lower oil prices are leading to a fiscal restructuring across GCC’s hydrocarbon economies, which involve both reduced government spending and increased government revenue through taxation. This scenario will have various implications for real estate investment both in the region and globally.
Fiscal restructuring is already evident in the form of budgetary cuts among GCC countries including the UAE. As governments become more cautious about their finances, there is a likelihood of cuts in infrastructure spending.
While many of the already announced projects are likely to proceed, they may be scaled back or rescheduled over an extended timeframe, with future projects being curtailed. This will inevitably have a knock on effect on local real estate markets. On the other side of the fiscal balance, GCC governments are also seeking to raise additional revenue through sales tax, land/housing tax and reduction/removal of subsidies. Such developments could also have implications for various real estate stakeholders.
Craig Plumb, head (Research) JLL Mena, said, “While we remain positive on the long term outlook for real estate markets across the region, there is little doubt that the rebalancing of the fiscal position will result in headwinds and challenges over the next 12 months. While governments continue to spend on development and infrastructure projects, the level of this spending will inevitably be curtailed over the medium term as spending needs are realigned with the reality of lower oil revenues.”
GCC investors have been active on the global real estate stage for many years. Since 2007, GCC investors have purchased a total of over $45bn of real estate globally. In reality this figure under estimates their exposure to real estate, as it only includes direct commercial real estate purchases and excludes both residential projects and also company acquisitions. While many of the high profile purchases have been made by government controlled Sovereign Wealth Funds, there has been growing interest from private investors over the past two years and this trend is expected to continue further.
Plumb said, “While some SWF’s will retain their existing mandate to invest globally, we expect more funds will be diverted into local real estate (through direct real estate purchases and via funds and external managers). This will provide an important source of additional capital for real estate markets across the Middle East. Some funds will continue to focus on trophy hotel and commercial buildings but more attention is likely to be focused upon emerging locations and alternative sectors of the real estate market in future years.”
Some of the decline in SWF offshore investment is likely to be offset by private investors from the Middle East who are becoming more active purchasers of overseas property.
Plumb added, “The prevailing geopolitical and security tensions across the Middle East are expected to result in an increased flight of private capital as wealthy Middle East investors seek opportunities in more stable and secure overseas real estate markets. JLL expects North America and the United Kingdom to remain the largest recipients of Middle East private capital, with Germany also becoming a preferred location’.