GCC investors ease off UK commercial properties



Purchases of commercial property in the United Kingdom by Middle Eastern investors have dropped almost 50 per cent to £1.1 billion (Dh7.8bn) in 2007 from £2.1bn in 2005, according to a leading London-based property consultancy.

"The credit crunch has hit the UK, European and United States markets hard, while global recession is in the early stages. People are realising that they need to diversify and look at the real estate market as a global market. And there is desire to spread the risk across the region," Miles Payne, Director of Strutt & Parker Middle East, told Emirates Business. At the same time, however, Middle Eastern investors are holding on to the property they have bought in the past – limited sales have been witnessed in 2007.

Only £300m worth of property was sold last year, compared to £1.6bn in 2006 and £700m in 2005.

Payne said: "The short-term prospects for property in the UK are gloomy. There will be opportunities for investors wishing to take advantage of the longer-term growth prospects.

"London has reinvented itself over the last 25 years and is now using its space more efficiently and benefiting from the growth in cultural and creative industries, the most rapidly growing sector of developed countries.

"Moreover, the US and UK economies are resilient to economic shock and if this is a recession, it is not going to be a long one."

Large institutions have been investing in Asia for some time now, while the Middle East has been gaining increasing publicity, Payne said when asked why UK-based real estate developers were not coming to the region. "One has to see it to believe it and that is one of the reasons why many developers haven't been to this region. They read in the newspapers about the huge developments going on in the region, but can't understand the scale. Only when they see it do they believe it."

Jones Lang LaSalle, a global real estate services provider, recently said that global funds continued to dominate inter-regional investment in 2007, as they invested $152bn, about 20 per cent, in real estate worldwide. "They were strong net acquirers of real estate, with purchases amounting to $104bn (up 16 per cent on 2006) and sales amounting to $61bn (up 37 per cent). Their purchase activity surpassed total investment volumes in the United Kingdom, which is the second largest market in the world," it said.

Purchase activity was concentrated in the United States ($27bn), Germany ($25bn), Japan ($17b) and France ($17bn).

While global funds turned away from the UK, where acquisition activity fell by 70 per cent year-on-year to $5bn, they significantly increased their focus on Asia. Purchase activity in the region increased by 125 per cent, reaching $25bn in 2007.

Payne said Strutt & Parker focuses on three businesses streams – facilitating cross-border investment, which involves advising clients from both the UK and Gulf Cooperation Council (GCC) countries on direct investment and development opportunities in the GCC and the UK respectively; creating strategic partnerships between UK and GCC real estate companies looking to diversify their real estate exposure onto a more global platform either through joint ventures or mergers and acquisitions; and providing bespoke financial appraisals and feasibility studies for mixed use developments in the region.

"We are very active in all the three sectors, but most recently we have been advising our clients on coming to this region," said Payne.

Currently, the company is advising one of UK's largest institutional funds on the various opportunities in the region and is facilitating talks with number of regional banks, developers and private equity players.

"They want to be actively involved in the market and bring equity to the table. I suppose they want to bring their development fund or asset management expertise that they have gained working in mature market in the UK or Europe over the last 50 to 100 years.

"We are in the very initial stages and we need to work with them to gauge the investment and what they expect from the partners."

Strutt & Parker, which helped establish one of the largest Shariah-compliant commercial funds in the UK for Kuwait Finance House, is also working with a number of companies in the UAE on the possibility of investing in the UK realty market and is helping companies set up Islamic funds.

"We are talking to investors and the advice that we are giving now is at a very initial stage," Payne said, declining to reveal the names of the companies.

Although Middle Eastern investors seem to be wary about investing in the UK's commercial property, residential realty has seen significant interest.

"They are investing in the residential market, as they are familiar with Central London and have been investing for a long time. Banks, private offices and high net worth individuals are looking to invest in the UK," Payne said.

Rising construction cost, which is growing 20 per cent per year, is the biggest concern for the regional developers, said Payne.

"There is a common need to ensure accurate estimations of all construction costs at the feasibility study stage. Even utilities are struggling and even if a building is constructed its handover is generally delayed due to lack of utility services."

According to Strutt & Parker, the UAE is a very attractive market in the short to medium term. About 66 per cent of the GCC population is below 30 years of age, providing excellent growth related opportunities over the short to medium term and increasing regulatory change along with 80 per cent of growth in GDP coming from outside the oil sector only adds to the attraction of investing and locating to the GCC.

"The fundamentals are based on strong economic and demographic growth. A lot of these countries are now taking structured approaches to developments such as Abu Dhabi 2030 plan. Regional liquidity is underpinning continued real estate investment and developments. The market here is very attractive for GCC and international investors in the short to medium term," Payne said.