Middle East investment in global commercial real estate reached nearly $10 billion in the first half of 2016, according to the latest research from CBRE Group, Inc.
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.
New York ($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).
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 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 percent stake in the company that owns New York’s iconic Empire State Building for $622 million.
Purchases of $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 percent 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 $5 billion.
“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,ˮ said Chris Ludeman, Global President, CBRE Capital Markets.
“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.”
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 percent of the total, with hotels a distant second at 17% percent. In 2015, hotels and offices were tied, with purchases totalling $8.2 billion (35 percent of the total) in each sector. Industrial also saw a sharp increase in 2015 to nine percent of the total, compared to just three over the previous five years.