ME investors turn to UK real estate sector

Despite a falling property market in the United Kingdom, real estate investments from the Middle Eastern region will increase by 67 per cent to £2.5 billion (Dh18bn) in 2008 compared to £1.5bn last year, according to a study conducted by Savills, a UK-based property advisor.

"In falling markets investors get competitive pricing as somebody is always selling in distress," said James Goldsmith, Director International Investment for Savills in the UK.

But he cautioned that investors should be "careful to choose the right property for buying. The residential market is dropping, but the commercial market even faster."

West End of London, City of London and Central London were the top three areas in the UK to attract largest investments from the Middle East. West End of London saw just under £2.5bn inflow, while City of London saw an inward interest from the Middle East of about £1.4bn. Central London saw investments a little above £1bn in the past five years.

According to a recent Savills Research Report titled "Market in Minutes", the UK commercial property index has seen a decline of 15.1 per cent in capital growth over the past 12 months. However, growth rates over a shorter-term suggest that falling values are beginning to level out, according to the report,

"Price correction continues but at a more rational rate in comparison to the latter half of 2007,'' the report said, adding that "rental growth remains positive but is advancing at a lesser rate".

As regards residential in the UK, the "growth of this sector will depend on the segment you invest. High-end London residential market is one particular market doing very well, but overall the residential market in the UK has fallen by 20 per cent", it said.

Meanwhile, according to a senior official of a property management company based in Dubai, UK provides an interesting opportunity for master developers in the UAE who have been looking increasingly to diversify their investments.

"In fact, countries like Morocco, Jordan, Lebanon and especially the UK spell interesting opportunities for the Middle East," said Simon Gray, senior head of Investment Agency for Asteco Management.

He told Emirates Business that the opportunity in this market is to make good returns in a very short time. The opportunity in the UK is to make good returns over a longer period of time with greater stability."

He said the overall returns of commercial developers in Dubai is "considerably lowering owing to the various external influencing factors such as escalating construction prices".

Asteco was unable to put a figure on how much was the decline in the returns. Said Gray: "It's too early to comment on it now but in the past 12 to 18 months owing to the rising cost in construction development and the escrow law coming into place, these have been having an impact on the development market in the UAE.

"Over the next few years there will be an increased supply of office space and there will be a certain levelling out in the commercial scene here in the UAE.

"From an outside perspective, this market needs to change considerably. Pre-letting a building does not always result in a well-managed building. There is always a more long-term interest when a building is not sold off-plan. That will also ensure longevity to the property market," said Goldsmith of UK-based Savills.

"Good quality finishes in the office buildings in the UAE," he said, "will ensure international market prices and rentals on commercial properties. In the UK, the office buildings are landlord managed and he always has a long-term interest in the building since he is expected to maintain standards. If he does not, he will not have another building to manage".

He said the ability to sell smaller office creates a fragmented office building, which for many office goers is not a very good thing. "A developer will build an office building; sell the individual floors or individual units before it is even built. So when it comes to completion, he has made his returns and exited his opportunity. To a certain extent he is not concerned about how the building will operate, how it will be maintained. Reverse of that is a developer who says I am going to build this building and am going to keep it within the portfolio and I will lease it on completion," said Goldsmith.