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07 December 2023

Gulf investors weigh up the benefits of UK downturn

By Darren Stubing


The large UK commercial and residential property market is currently in the midst of a severe downturn. The commercial property market has been undergoing a correction over the last six months whilst the residential market is just beginning to register a pullback. The downturn will have implications for Gulf institutions and investment houses, as the region is a major player in the UK property market. Whilst some will be hit by falling values and yields, other Gulf investors see it as a buying opportunity. 

The UK commercial real estate market is estimated to have received net capital inflows of over £80 billion (Dh587bn) in 2006. One of the main drivers of the increase over the years has been from Gulf private debt and equity investors. Gulf Arab investors invested $13bn in direct global real estate markets last year – about five per cent of the region’s current account surpluses. Approximately $5bn was directed to the UK.

Despite the fall in yields in the commercial property market during the course of 2007, the UK remains by far the largest and most liquid commercial real estate market across Europe. GCC investment activity in the UK has increased throughout the 2000s due to the huge liquidity in the region following high oil prices. Gulf investors, historically and culturally, have often preferred property investment than say equities or other commercial paper.  

Private and leveraged investors, banks and funds, including Gulf-based sovereign wealth funds, dominate Middle East investment in the UK property sector. Islamic financial institutions have also been active in the UK commercial real estate market through transactions or real estate investment funds such as those launched by Noriba Bank; Kuwait Finance House; Gulf Finance House; Qatar Islamic Bank; Arcapita Bank; ABC International Bank and others.

Some investment activity has been tailing off from the Gulf during the course of 2007, in part related to the continuing fall in the value of the US dollar vis-à-vis sterling and hence pushing up prices and lowering yields, and increased investment opportunities domestically.

As some Gulf property investors have reduced their activity in the UK sector, and also the US, they have widened their investment reach to commercial property projects in countries such as South Africa, Jordan, Turkey, Egypt, Pakistan and the wider south east Asia region. Large property developers and investors are also looking at opportunities in India, China, Japan and Eastern Europe. Emerging markets are fast becoming a major focus of Gulf investors as they search for yield.

Despite the negative outlook for UK property, a number of investment houses in the region are seeing the current downturn as a buying opportunity.

QInvest, the Qatari-based Islamic investment bank, has recently teamed up with Qatari partners and a UK-based firm to develop a £1.4bn real estate project in London. It is a joint venture among Qatar Investment Bank, Gulf Finance House (GFH) and some corporate and private investors. QInvest stated that the London investment was part of the bank’s policy of seeking good investment opportunities and diversification of assets worldwide.

Gulf Finance House, the investment bank based in Bahrain that specialises in real estate property development, earlier in 2007 set up operations in London specifically with the aim of buying stakes in British property companies.

Maan Abdulwahed Al Sanea, the dynamic Saudi-based businessman, has, through his Saad Group, been a highly successful UK property investor with his large stake in Berkeley Group, the UK property company. Analysts believe that he remains very active in the property sector in Europe, as well as the Gulf. Some market sources believe that his Group has built up stakes in the UK property sector in 2007, capitalising on share price weakness.   The downturn in UK property has been acutely felt through investors in Real Estate Investment Trusts (Reits). Unit prices have fallen sharply, and nearly all have moved to a large discount to net asset value, expecting further value falls. Current sector discounts are over 30 per cent.  

The credit crisis has negatively impacted the property sector. The value of commercial property deals has dived during the second half of the year as buyers struggled to find credit and waited for prices to adjust downwards.   Many bluechip investment and fund management companies, including New Star and Hendersons, are also exposed to the property downturn. In a number of UK real estate funds, investor redemptions and sales have also been postponed.  

Debt will remain very important going forward. Loan to value ratios will continue to fall. Already a number of highly leveraged deals have been called off. There will be fewer buyers and more potential sellers as leveraged players find refinancing terms expensive.

Most in the sector believe that commercial property values will continue to fall well into the second half of 2008. However, many investors are putting in place plans now to capitalise on good opportunities in order to respond quickly to the perceived bottom of the market next year.

Market ups and downs

UK property prices have had an interesting year. Overall it seems likely there has been at the very least a slowdown in the growth of prices. The current average price for a UK property is £225,826. And the Nationwide building society says in 2007 the annual price growth was 9.7 per cent. But a new report has predicted zero per cent house price growth in 2008. It says prices will stay as they are now. This means in real terms that the value of homes will fall, as the cost of living rises.