September 6, 2016 – Middle East investment in global commercial real estate reached nearly US$10 billion in H1 2016, with the target markets becoming more diverse and a substantial uptick in activity in the U.S., according to the latest research from global property advisor CBRE Group, Inc. Los Angeles was in seventh place globally and the second most popular U.S. market in attracting Middle Eastern money.
Investors from the Middle East have remained active buyers despite a slowdown in global investment turnover in H1 2016. Purchases of nearly US$9.8 billion account for over 20% of global cross-regional investment in H1 2016. Since being at the bottom of the market in 2009, investment from the Middle East has grown much faster than the market as a whole and faster than any other cross-regional investment. The sharp increase in investment was driven by Sovereign Wealth Funds (SWFs)–in particular those from Qatar and the UAE. Capital flows are expected to remain high as SWFs increase the weighting of their portfolios and include a higher proportion of property.
In Los Angeles, Middle Eastern investors have been mostly drawn to joint venture deals to stay out of the limelight and to borrow local expertise from a domestic partner, according to Executive Vice President Todd Tydlaska.
One of the latest transactions in the area that involved money from that part of the world was the $1.34 billion purchase of a 1.7 million-square-foot office portfolio from Blackstone Group by Santa Monica-based real estate investment trust Douglas Emmett Inc. in a joint venture with Qatar Investment Authority. In July, the same duo acquired a high-end office property at 12100 Wilshire Boulevard in the Brentwood submarket of Los Angeles for $225 million. CBRE Press Release
“The Middle East has shown great interest in this area, whether it’s family offices or sovereign wealth funds,” said Tydlaska. “Most of their focus seems to be on office and hospitality. They, as many other global investors, have viewed U.S. real estate as a safe haven. Particularly LA has seen a lot of activity in the first half, beating out other metro areas and countering the national trend overall due to its relative value proposition as compared with other markets such as San Francisco.”
New York (US $6.5 billion) was the top destination for Middle Eastern investment in the 18-month period from 2015 to H1 2016, followed by London (US$4.7 billion), Singapore (US$2.5 billion), Hong Kong (US$2.4 billion), Paris (US$2.2 billion), and Milan (US$1.3 billion). Los Angeles came in seventh place at $990 million.
The target destinations show a departure from recent history, with substantial activity in the U.S. and greater flows into Asia. Both of these regions had previously been under-represented in Middle East investment. This suggests a move to a more balanced distribution of assets to achieve greater diversification. With substantial ground still to make up, this trend can be expected to continue.
“The destinations of investment flows from the Middle East are becoming more diverse and are no longer solely concentrated on London and New York City. Other U.S. cities such as L.A., Washington, D.C., Atlanta, and Miami, as well as Asian markets are moving up on their agenda. The major Australian cities could be next. We expect investment flows from the Middle East to be substantial for the near future–interest in the hotels sector will remain strong, while the industrial and logistics sector will attract an increased share of capital,” said Chris Ludeman, Global President, CBRE Capital Markets.
The combination of a favorable exchange rate and economic growth has made the U.S. a leading target for Middle Eastern investors. The Qatar Investment Authority (QIA), recently purchased a 9.9% stake in the company that owns New York’s iconic Empire State Building for $622 million. Purchases of US$9.8 billion in a single year in 2015 represents a significant ramping up of exposure to the U.S. market. This increase came partly as a result of two major transactions (QIA’s purchase of a 44% share in Manhattan West; Abu Dhabi Investment Authority’s acquisition of a U.S. industrial portfolio jointly with Canada Pension Plan Investment Board), which between them totaled well over US$5 billion.
Diversification by asset type is also influencing Middle Eastern investment activity, with the sector split seeing a material change last year. Between 2010 and 2014, the office sector dominated purchases by Middle Eastern investors, accounting for 53% of the total, with hotels a distant second at 17%. In 2015, hotels and offices were tied, with purchases totalling US$8.2 billion (35% of the total) in each sector. Industrial also saw a sharp increase in 2015 to 9% of the total, compared to just 3% over the previous five years. The industrial sector typically makes up a larger CBRE Press Release proportion of the market in North America than in other regions; if the strong flows into that region continue, so too should the growth in industrial investment.
Between 2008 and H1 2016, the Middle East accounted for 22.6% of cross-regional investment in the world’s 25 most popular cities for foreign acquistions. In absolute terms, London (US$28.5 billion) has seen by far the most investment from the Middle East. The purchase of major strategic assets in Hong Kong, Milan and Atlanta by SWFs account for the over-representation of Middle Eastern investors in those markets, whereas Houston has attracted investment from a range of different buyer types.
Markets where Middle Eastern investors are underrepresented may also be targeted in the future. Tokyo and San Francisco are popular destinations for other cross-regional investors and have attracted far less than their fair share of Middle Eastern capital. Sydney, Melbourne and Brisbane are all featured in the top 25 destinations for cross-regional investment; to date, they have attracted little investment from the Middle East.
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