Middle East investors, including sovereign wealth funds, are set to buy more overseas property as oil prices rebound to more than $77 per barrel for the first time in three years.
Transaction volumes are expected to pick up this year following a 25 per cent decline of Middle East investment flows into global commercial real estate to $9.1 billion in 2017, according to a report by broker JLL. Regional investors are eyeing new markets in South America and Eastern Europe and exploring new asset classes including student housing and hospitals.
“This change in mentality suggests that in their permanent quest for higher yield, investors are now more willing to move up the risk curve,” said Fadi Moussalli, head of international capital group for Mena at JLL.
In a region where oil prices are a barometer of economic performance and investor sentiment, investment into overseas property slowed in the last three years. The competition from other global buyers into gateway cities like London, which have long been target locations for investment, has also dampened transaction volumes from Middle East investors.
Regional buyers are now looking into alternative asset classes such as senior housing, healthcare and data centres, marking a change in strategy from the mainstream assets they typically favoured. Traditionally, offices and hotels were the “comfort zones” for such buyers and accounted for 85 per cent of commercial investments from the region each year.
Regional investment into US real estate, which had dropped last year following uncertainty around the elections and nervousness around the Donald Trump administration, is expected to improve this year.
“We see more appetite from Middle Eastern investors to increase their exposure to the USA and we expect that flows from the region will recover,” the report said. “With the majority of GCC countries’ currencies pegged against the US dollar, the currency exposure risk of investment into the USA for Middle Eastern buyers is reduced.”
Australia is likely to get on the radar of regional property buyers as markets in Sydney, Melbourne or Brisbane yield attractive returns coupled with reduced currency risk, the report said.
In the long-term, regional investors’ need to balance their exposure to global markets will eventually lead them to Shanghai, Jakarta and other fast-growing cities.
“They will most likely come to accept the risks of a ‘rockier ride’ in order to participate in the demographic and economic growth where it is strongest,” JLL said.