Region's wealthy to continue diversification into overseas property

The price of oil may have fallen but Middle Eastern property investors are set to continue to pump billions of dirhams into big-name properties overseas, despite slowing global growth.

Analysts predict that although property prices locally are falling, the amount of money raised by sovereign wealth funds, private companies and high net worth individuals in the region to spend on bricks and mortar in Europe and North America is set to rise this year.

Data on cross-border property transactions from JLL shows that the amount of money spent by Middle Eastern investors on foreign property in the first half of this year stood at about US$9 billion, slightly higher than the same period a year ago.

Other than the Middle East, the US and Canada were the only regions to show increases in the amount of cross-border property investment during the first half of the year as worries over Brexit, an economic slowdown in China and recessions in Brazil and Russia scared off investors elsewhere.

“Middle Eastern investors are usually interested in diversifying risk so we expect to continue to see them putting more money into overseas property assets,” said Craig Plumb, the head of research at JLL’s Dubai office. “The low cost of oil may mean that they are getting less income but generally they are cutting back in other areas.”

On Thursday, Qatar’s sovereign wealth fund paid US$622 million for a 10 per cent stake in the company that owns New York’s Empire State Building as part of a plan to boost its North American assets.

Qatar Investment Authority (QIA), which already owns stakes in Europe’s tallest building, The Shard, the Canary Wharf Estate, Harrods and the Olympic Park in London, said that it had bought a 9.9 per cent stake in Empire State Realty Trust, acquiring 29.6 million shares in the group at US$21 each.

The high-profile property purchase is expected to be the first of many from QIA, which last year opened a New York office as the sovereign wealth fund seeks to grow its North American portfolio and diversify away from the UK and Europe, where it already has a large exposure.

JLL reported earlier this year that Britain’s decision to leave the European Union in June has prompted foreign investors, including those from the Middle East, to eschew their usual investment choice, London.

It said that cross-border capital flows into London property fell by 44 per cent in the first six months of the year compared with the same period a year earlier as investors worried that Brexit would force banks and other financial institutions to move their headquarters away from the City of London leaving thousands of square feet of office space empty.

CBRE also reported that London’s influence as an investment destination is waning. It said that the city received 32 per cent of the cash spent on property by Middle Eastern investors in the first quarter of 2016, down from 43 per cent in 2013.

With demand falling and the price of the pound at historic lows, some investors are already cutting the value of their UK assets. Earlier this month, the world’s largest sovereign wealth fund, Norway’s Global Government Pension Fund, said it cut the value of its UK property portfolio by 5 per cent because of the vote.

According to Knight Frank, average house prices in the upmarket district of Knightsbridge fell by 7.3 per cent in the year to the end of July – their biggest annual falls in nearly seven years – on the back of Brexit uncertainty and tax hikes.

“The pound is particularly low right now and Middle Eastern investors tend to be opportunistic so if they felt that there was value to be had in London at the moment – especially for private individuals buying large houses in prime London addresses – then we could well see some investment,” Mr Plumb added. “However, for sovereign wealth money we expect to see more of a switch towards the US.”

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