In the near term, an average of $15.0 billion per year would flow out of the Middle East into direct real estate globally, according to CBRE Group, with investors from the region increasingly targeting U.S. markets. villa
With $14.0 billion invested outside of the home area in 2014--the third largest source of capital globally—the Middle East remains one of the most significant outlets of cross-regional capital into the global real estate sector. Qatar was by far the largest source of outbound money, with $4.9 billion invested, thanks to its sovereign wealth funds (SWFs). Saudi Arabia has emerged as a major new source of capital in the global economy, spending $2.3 billion in 2014, compared to almost no reported investment in 2013.
Because of lower oil prices, the Middle Eastern investor base has grown, resulting in a significant shift in global investment strategies toward greater geographic and sector diversification, with activity spreading through gateway markets to second-tier locations in Europe and the Americas. The United States is now receiving a larger share of Middle Eastern capital; the $5.0 billion spent globally in Q1 2015 was almost evenly divided between Europe and the Americas, with New York, Washington, D.C., Los Angeles, and Atlanta being targeted. Though London retains its top spot, it is no longer as dominant, accounting for just 32% of all Middle East outbound investment in 2014, compared to 46% in 2013.
Investors from the Middle East are becoming more involved in a broader range of industries. This is apparent in the United States, where these investors have traditionally purchased office buildings and trophy hotels in New York, Los Angeles, and other gateway cities. Due to competition from Chinese investors and other global capital sources, these investors are increasingly looking for alternatives, such as Abu Dhabi Investment Authority's $725 million purchase of a 14.2 million-square-foot industrial portfolio earlier this year.
"While not back to pre-global financial crisis levels, Middle Eastern capital flows into the United States remain high, rising, and diversifying. The influx of capital from the Middle East will become even greater as major sovereigns continue to seek safe havens and long-term stable growth opportunities. We anticipate that a larger portion of this capital will begin to look beyond the gateway markets to achieve its goals "CBRE's Americas Head of Research, Spencer Levy, said.
Property companies, high net worth individuals (HNWIs), equity funds, and every other form of private capital have emerged as a significant and growing source of outbound capital from the Middle East. With a higher allocation to real estate and a greater focus on geographical diversification outside of the home market, non-institutional investors' ability to extend their global real estate investments is becoming increasingly important. Weaker oil prices are a major contributor, triggering and speeding up global capital deployment, with value-added investments in high demand. According to CBRE, non-institutional capital from the Middle East would invest in global real estate at a rate of $6.0 to $7.0 billion per year in the near future, if not higher, up from $5.0 billion per year from 2010 to 2013.
"Middle Eastern private capital is regaining prominence as a globally significant investor community. The biggest shift would be a reduction in the average lot size, as non-institutional investors prefer assets worth about $50.0 million. This inevitably leads to a more diverse investment approach, which has already been evident in the market this year and is expected to become more pronounced in the next six to 18 months. We expect more capital flows from the Middle East into the Americas region, with Europe being less dominant than it has been in the last five years "CBRE Capital Markets' Global President, Chris Ludeman, said.
SWFs from the Middle East, in addition to private capital, are expected to remain significant market-makers, but not as aggressive in their acquisition strategies as they would have been if oil prices had not dropped. Regional governments are unlikely to make drastic changes that would change current capital allocations, with only new allocations likely to be affected. In the short- to mid-term, CBRE expects $7.0 to $9.0 billion in Middle Eastern SWF investment to flow into direct global real estate, compared to $9.0 to $11.0 billion if oil prices stayed above $100 per barrel.