Heightened geopolitical risk in Gulf also behind purchases in American market
Middle East investors more than doubled their real estate investment in the US in the 12 months to the end of September 2019 over the same period a year earlier, according to a survey released by the Knight Frank global property consultancy.
Their new investment in the US market accounted for 15.4% of all global cross-border property investment, up from 7.2% in the earlier timeframe.
Liam Bailey, global head of Knight Frank’s Research Department, told The Media Line the main reason for this growth was the perception by Middle East investors that the American economy was the strongest.
“Investors [believe] that the US economy is set to outperform other developed nations over the short to medium term – the continued growth in economic activity should support occupier demand and rental performance,” Bailey said. “In addition, the dollar is expected to remain strong this year.”
According to Jim Costello, senior vice president at Real Capital Analytics, which performs commercial property transaction research and analysis, the largest Middle Eastern commercial investors in US real estate last year were Bahrain-based Investcorp and the Qatar Investment Authority.
Manhattan, followed by Dallas and Chicago were the top destinations for this demographic for commercial investment last year, Costello said. “These are all major hubs for economic activities in the United States.”
Costello said the decline in interest rates in 2019 was a key factor in motivating investors seeking better returns on their money to double their investment in US properties.
Low interest rates made bonds, an investment alternative to real estate, less attractive to commercial investors from the Middle East.
“When people are looking at a portfolio a certain [share of] investment is focused on fixed income,” Costello said. “In real estate, it’s a long-lived asset with a set of fixed payments on a regular basis. It’s like a bond but with typically higher rates, as there are higher risks: like asset depreciation and tenants leaving.”
Ali al-Salim, co-founder of Arkan Partners, an alternative investment consulting firm based in the Gulf with international clients, argues that Middle Eastern investors, especially non-institutional investors like families, find the US market a safer bet than real estate investment in their region.
“The business environment in the Gulf has weakened, generally speaking, and we also have a lot of heightened geopolitical risk; that’s the common narrative,” Salim told The Media Line. “I think they feel more comfortable in investing in the US where their asset is safe from conflict and they can hold the legal title without losing it due to any sort of local issue that may arise.”
In residential real estate, Bailey said that owning US property was attractive to wealthy Middle Easterners who wanted to or had relatives who spend time in America.
“The demand for second homes and homes for use by children while they are at university in the US are key drivers for residential property demand,” he said.
Salim said the US real estate market was attractive to Middle East investors because of its size, legal safeguards for property owners, and the fact that for many, the currency is essentially the same.
“The US real estate market is a very large market, one that is mature offers good legal rights and strong owner protections,” he told The Media Line. “Most Gulf countries have currencies that are pegged to the dollar as well, so by investing in the US they are able to do so without taking currency risk.”
For Middle Eastern commercial real estate investors, the US market offers investment opportunities that are unavailable to them where they live. When they invest, they often do so on a grand scale.
“Those [US] markets are very deep, so you can invest large amounts of capital relatively easily as opposed to smaller markets,” Salim said. “It is difficult to deploy a billion dollars, for example, in any local market in the Gulf; it’s very easy to do that in the US.”
Costello agrees, adding that the large amounts of money disbursed are matched by equally hard work.
“One fund manager from the Middle East told me he wouldn’t get on a plane unless he could spend $50 million, and it is just a function of time management,” he said. “Buying an office building is not like buying stocks; it takes weeks of due diligence.”
Costello said that despite the low price of oil, the main source of the capital used to purchase property, there was still plenty of wealth that needed to be invested.
“Even with oil prices down from the peak, they have to put their money somewhere,” he said.