middle east private capital survey 2016
TRANSCRIPT
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MIDDLE EAST PRIVATE CAPITAL SURVEY 2016Part 3 | Global property investment
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Contents
Introduction 4
Economic backdrop 7
Global property investment targets 11
Much ado about Brexit? 19
Other locations to watch 21
Understanding GCC HNWI investment rationale 26
2017 property investment targets 29
Conclusion 30
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INTRODUCTION
Cluttons’ Middle East Private Capital Survey, carried out in partnership with YouGov, investigates investment trends and behaviour of the Gulf states’ high net worth individuals (HNWI) in order to gain a meaningful understanding of their global and regional investment intentions.
Effectively tracking global private investment activity is challenging. This study addresses the issue by surveying HNWI across the Gulf Cooperation Council (GCC) states of Bahrain, Oman, the United Arab Emirates (UAE) and the Other GCC states (Kuwait, Qatar and Saudi Arabia) to gauge sentiment, rather than deal activity. The survey was conducted among HNWI who either currently have, or intend in the future to make, an investment of USD 1 million or more in international property.
The results of the study reflect the combined views, investment activity and intentions of 127 HNWI: 34 in the UAE, 30 in Oman, 33 in Bahrain and 30 across the Other GCC states (Kuwait, Qatar and Saudi Arabia). Together the GCC states represent a significant source of global capital outflows.
In fact, according to the Credit Suisse Research Institute’s latest Global Wealth Report, the number of millionaires in the Middle East and North Africa currently stands at 330,000 and this number is due to reach 500,000 by 2020. Qatar was named as having the region’s highest wealth per capita, at USD 157,000 per adult. The UAE followed in second place at USD 144,000, while in Saudi Arabia the figure is significantly lower at USD 39,500. Overall however, personal wealth in Saudi Arabia is the highest in the region and stands at USD 0.7 trillion, followed by the UAE at USD 0.6 trillion.
In this third and final paper as part of our Middle East Private Capital Survey report series, we will specifically be examining the global locations that GCC HNWI are intending to target for property investments during 2016.
The report considers the drivers of these investors’ intentions as an indicator of future trends in international capital allocation, both geographically and at a sector level. There is a particular focus on investor appetite for real estate investment in London, where anecdotal evidence suggests about half of all transactions are associated with international buyers. Within this international segment, about 15% to 20% of residential transactions are to buyers from the Gulf.
SAUDI ARABIA
Jeddah
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Source: Cluttons, YouGov
KUWAIT
OMAN
UNITED ARAB EMIRATES
QATAR
BAHRAIN
Survey sample of 127 respondents across the GCC
0% 10%
20%
30%
40%
50% 0% 10%
20%
30%
40%
50%
One property
2-3 properties
4-5 properties
6-10 properties
More than 10 properties
Prefer not to say
Size of respondents’ property portfolios in city of residence
Size of respondents’ property portfolios outside city of residence
Kuwait City
Dammam Manama
Doha
Abu Dhabi
Dubai
Sharjah
Salalah
Muscat
Riyadh
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ECONOMIC BACKDROP
SentimentAs we reported in the first part of our 2016 Middle East Private Capital Report series, the global economic environment appears to be increasingly fragile. Disappointing economic data from China and the EU, in addition to instability within the EU and the collapse in oil prices, top the list of headwinds hindering global growth.
Previous editions of our survey have suggested that economic conditions play a central role in influencing the investment behaviour of HNWI. In fact, results from our last International Private Capital Survey hinted at regional locations around the world playing a central role as property investment magnets for indigenous HNWI. In this report we will seek to examine this theme further using the results of our 2016 HNWI survey from across the GCC.
For the Gulf states as a whole, the oil price collapse that began in mid-2014 has certainly put budgets under pressure. This has also triggered a series of macro policy amendments, aimed at tackling the projected budget shortfalls. Chief of these has been the phasing out of energy subsidies, which has seen the deregulation of fuel prices and the rise in utility tariffs across the GCC.
Furthermore, with a new value added tax (VAT) regime being rolled out across the region from 2018 onwards and ongoing debates about additional taxes, there is a distinct sense of urgency to diversify state incomes and develop sustainable growth programmes. This will likely raise the cost of living across the Gulf in the medium term.
HNWI viewWe surveyed our GCC HNWI sample to gauge their opinion on the state of the global economy and unsurprisingly, nearly half (47%) felt that conditions were worsening, or deteriorating. Bahrain based HNWI had the most pessimistic view of global conditions, with 61% of those surveyed of the view that global economic conditions were worsening.
Interestingly, when queried about the health of their own national economies, almost three-quarters felt their domestic economies were stable or improving, with those surveyed in the UAE (86%) having the most optimistic view. As we revealed in the second report in our 2016 Middle East Private Capital Survey series, this high level of public confidence in the local UAE economy has most likely been a key underpinning factor in driving the desire to look to home markets for real estate investment opportunities before looking overseas.
Elsewhere in the GCC, encompassing Kuwait, Qatar and Saudi Arabia, a third of respondents felt their economies were worsening, or destabilising, which is fuelling a desire to look for property investment opportunities outside their home markets as they look to spread the perceived risk by targeting historically popular locations such as London, New York, or Dubai.
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Improving Stable Worsening / destabilising
GCC HNWI economic sentiment
Investment intentions not impacted by global economic conditions The appetite for global real estate investments by our HNWI sample does not appear to be dented by the global and regional economic slowdown. The majority (63%) of our HNWI sample claim that they are likely to invest in their most preferred real estate investment location during 2016, with one in four saying that they are ‘very likely’ to invest.
In general, there appears to be no urgency to liquidate international assets, despite the apparent negative outlook on the global economy, with just 12% of the GCC HNWI investors we spoke to expecting to sell, or considering selling, overseas property assets this year. UAE based investors are most likely to sell overseas property (18%) in 2016, while respondents in Bahrain are least likely to sell their overseas property assets (6%).
Likelihood of selling overseas property assets in 2016
Source: Cluttons, YouGov
0% 20%
40%
60%
80%
100% 0% 20%
40%
60%
80%
100%
All GCC
UAE
Bahrain
Oman
Other GCC
Global economic outlook National economic outlook
Source: Cluttons, YouGov
Yes, will sell
No, will not sell
Do not currently own real estate overseas
All GCCUAE Bahrain
Oman Other GCC
12%
24%
64%
24%
20%
21%
18%
50%
32%
20%
27%
17%
70% 70%
67%
10% 13%
27%
27%
33%
18%
13%
37%
47%
61%
53%
27%
24%
27%
50%
20%
62%
48%
20%
43%
14%
24%
30%
33%
25% 47% 30% 44% 25%
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As expected, the likelihood of investing in their top global pick was lowest among UAE based HNWI, with just 18% claiming that they would be ‘very likely’ to invest in international property this year. For the Other GCC HNWI (based in Kuwait, Qatar and Saudi Arabia), the likelihood of investing in a location outside their countries was significantly higher at 41%, perhaps reflecting a stronger need or desire to secure income streams outside their home markets.
Likelihood of global property investment by GCC-based HNWI
On average, GCC investors report that just over half (55%) of their real estate portfolio is outside their country of residence. The percentage of overseas property in portfolios is higher among investors from Bahrain and Oman (63% each).
If investors do buy overseas in the next 12 months, the share of their portfolios made up of real estate outside their city of residence is expected to rise to 60% on average.
Source: Cluttons, YouGov
Source: Cluttons, YouGov
UAE 46% Bahrain 63% Oman 63% Other GCC 46%
UAE 44% Bahrain 68% Oman 71% Other GCC 57%
Current proportion of property portfolio that is international
Expected proportion of property portfolio that will be international over the next 12 months
All GCC All GCC55% 60%
Very likely Somewhat likely Somewhat unlikely Very unlikely Not sure
0% 20%
40%
60%
80%
100%
All GCC
UAE
Bahrain
Oman
Other GCC
63% of investors are likely to invest in their preferred location in 2016
27% of investors are unlikely to invest in their preferred location in 2016
26%
18%
21%
23%
41%
43%
42%
40%
24%
9%
9%
10%
14%
16%
24%
17%
10%
14%
3%
10%
10%
37% 10% 17% 9%
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GLOBAL PROPERTY INVESTMENT TARGETS
London is crowned 2016 global property hotspot for GCC HNWILondon has emerged as the favourite global property investment destination in 2016 for our GCC HNWI sample, with 17% naming the British capital as one of their three top international property targets. London also leads as the ‘most preferred’ city for investment.
Following London, New York and Singapore are the leading cities for target real estate investment in 2016 outside the Middle East region.
Top 10 global property investment targets for GCC HNWI in 2016
Unsurprisingly, Indian cities, such as Bangalore, Mumbai and New Delhi, also appear as preferred investment locations for HNWI, perhaps reflecting personal ties as well as a push for foreign direct investment (FDI) from among the diaspora by the Indian government. In particular, recent reciprocal historic state visits by the UAE, Saudi Arabian, Qatari and Indian leadership may have boosted the appeal of a ‘home’ investment amongst the Gulf’s non-resident Indian community.
Indian nationals account for approximately 30% of the UAE’s population (Embassy of India, UAE), while India was among the UAE’s largest trading partners in 2014/15, which resulted in USD 59 billion worth of cross border trade, according to the Indian Government. No official recent figures have been published for the GCC’s non-resident Indian population, however the Indian Ministry of Overseas Indian Affairs put the number at around 5.6 million in 2012.
Most preferred 2nd preferred 3rd preferred
Source: Cluttons, YouGov
London
New York
Singapore
Bangalore
Mumbai
Istanbul
New Delhi
Los Angeles
Kerala
Sydney
0% 2% 4% 10%6% 8% 12% 14% 16% 18%
11% 4% 2%
5% 7% 4%
4% 4%5%
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London callingLondon has historically been a key property investment target for Middle East investors, so it is no surprise to see the city emerge at the top of the property investment league table of our HNWI sample. Aside from London, 195 other global locations were named as property investment targets by our respondents.
In terms of asset class investment among these intended locations, 54% is intended to be mainly residential, 22% to be mainly commercial, and 23% to be a mix of both residential and commercial investments. Of the commercial investments planned, there is a preference for offices (50%) and also retail investments (36%). Industrial and hotel investments are less favoured outside the Middle East region in 2016.
Tracking private residential investment volumes is challenging, however commercial investment, particularly at an institutional level, is published widely. Indeed, the continued high interest in commercial property from Middle Eastern investors was demonstrated in 2015 as they secured over £3.8 billion in commercial property assets across the UK (Property Data).
The majority of this investment was London focused, with £3.2 billion purchased in the British capital alone. Q1 this year saw a further £320 million pour into London commercial real estate from the Middle East, accounting for 7% of the total invested during this period.
London residential in particular has been a star performing asset class, delivering 70% growth in the last seven years alone.
On the residential front, Canary Wharf, South Kensington and South Bank were named as the top preferred London investment hotspots by our sample. Each of course offers a diverse range of residential assets and price points, catering to different investment drivers.
In Canary Wharf for instance, the abundance of new build stock chimes well with Gulf based investors, as the residential products on offer mirror those from their own home markets. Furthermore, the yields in Canary Wharf, of circa 5%, offer investors significantly better returns than more core areas such as South Bank (3.4%), or South Kensington (2.5%).
Top preferred London locations
Prime Central London Canary Wharf South Kensington South Bank
Average house price (£) 2.3 million 430,000 3.4 million 927,000
Yield 3.72% 5.29% 2.54% 3.40%
15 year growth 98.9% 37.6% 105.2% 150.3 %
10 year growth 75% 19.3% 72.3% 93.7%
5 year growth 46.3% 34.3% 40.3% 44.3%
Source: Cluttons
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Reasons for GCC HNWI choosing London
“For children’s education in the future, I want to make a base there.”Kuwait City investor, targeting London
“It is a safe city and also good for my business.”Dubai investor, targeting London
“For investment purposes.”
Abu Dhabi investor, targeting London
“Global city with great infrastructure, visionary leadership and compelling economics.”
Dubai investor, targeting London
“Great appreciation in property value, and a reasonable rate on mortgages.”Dubai investor, targeting London
“It is a cosmopolitan city and provides reasonable returns.”Abu Dhabi investor, targeting London
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1. London
The top10 global property investment targets for GCC HNWI in 2016
2. New York
8. Los Angeles
6. Istanbul
4%
7%
2%
2%
4%
2%
11%
5%
1%
UNITED ARAB EMIRATES1. London 13%2. New York 10%3. Bangalore and Ahmedabad 7% each
BAHRAIN1. Bangalore 17%2. Singapore 10%3. London 3%
OMAN1. Mumbai 10%2. Bangalore and Kerala 7% each3. Chennai, Guragon and London 3% each
OTHER GCC STATES (KUWAIT, QATAR AND SAUDI ARABIA)1. London 20%2. Istanbul 10%3. Mumbai 7%
Top three property investment targets by sample group
Source: Cluttons, YouGov
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1. London
10. Sydney
4. Bangalore
6. Istanbul
9. Kerala
3. Singapore
2%
4%
3%
1%
5%
1%
1%
1%
4%
Most preferred 2nd preferred 3rd preferred
2%
7%
5. Mumbai
2%
3%
4%
7. New Delhi
3%
2%
1%
5%
4%
3%
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BREXIT AND LONDON’S PROPERTY MARKETLondon’s property market had been stifled by the uncertainty in the lead up to June’s historic in-out referendum and we saw investment volumes fall ever since the referendum date was announced. International investor sentiment was certainly dented, with investment volumes and overall activity from this usually buoyant group slowing markedly as we approached the June 23 referendum.
Prior to the referendum, we asked our sample about their views on a potential British exit from the EU and of the small number who expressed an opinion, some respondents felt that the renegotiation of Britain’s relationship with the EU would be positive. However, views were more negative on the prospect of the UK leaving the EU, with investors acknowledging the damage that could be done to the UK’s economic standing and ability to maintain a positive growth trajectory.
Following the decision to leave the EU, uncertainty has persisted as many questions remain regarding the complexities of a British exit. This has caused continued volatility in the market, with sterling falling to a 30-year low against the dollar overnight on June 23rd, and the weakness persisting throughout the summer. However, going forward this volatility could present a window of opportunity for international buyers who are looking to enter the market, particularly for buyers purchasing in dollar denominated currencies, such as those from the Middle East
Impact on the residential marketThe residential market is really a tale of two halves, with the supply starved domestic market grappling with affordability issues, while also struggling to keep pace with the government’s home ownership programme. On the international front, we have certainly seen a ‘wait and see’ approach grip the market, with many opting to wait for the Brexit storm to clear. With the results now behind us, it’s clear that some international buyers are taking advantage of the weakness in sterling, which fell to a fresh historic low against the US dollar on August 15 (USD1 = £1.292), while others are waiting on the sidelines, anticipating a value correction, which may well present better deals.
With average residential values in London recording marginal growth so far this year, the current economic conditions suggest that a quick turn-around in the market’s performance, both in terms of the volume and value of transactions, is unlikely in the short term, particularly where currency based investment strategies are being impacted.
The significance of currency fluctuations is often overlooked and this is understandable given the relative strength of sterling in recent years against most major global currencies. Yet, the current weakness of sterling, which has been in large part fuelled by the Brexit referendum, coupled with a 35% rise in average prime Central London values since the last market peak in Q3 2007, means that
some international buyers are in quite an enviable position. For example, a £1 million property for a US Dollar investor will become approximately $190,000 cheaper only as a result of the weakening of sterling.
Those from India, Malaysia and the EU, for instance, could in theory exit the London residential market 61%, 13% and 17% better off on their 2007 investments, respectively. This has been driven by both strong capital value growth and a weakening in sterling against their own.
Impact on the commercial marketOn the commercial front, the market had been showing signs of cooling since late in 2015, with economic wobbles in China, the collapse in oil prices and the slowing global economy all negatively impacting investor sentiment. Even prior to the EU referendum, the urgency had certainly gone out of the market.
In the wake of the decision to leave the EU, capital values have been subject to downside risk and there is greater uncertainty about achievable prices post-Brexit.
However, market fundamentals remain strong and the current volatility is in many ways a response to the shock of the result. With very low office vacancy rates and a robust occupier base, the prospects are for a steady, rather than declining, market profile. In the medium-term, this is likely to be beneficial as recent rental performance is neither sustainable, nor affordable for many occupiers.
Source: Cluttons, OANDA
Currency pricing on a 2007 purchase
Euro UAE Dirham Indian Rupee Maylaysian Ringgit Chinese Yuan US Dollar
70
50
30
10
-10
-30
-50
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
% in
crea
se in
pro
pert
y va
lues
in lo
cal c
urre
ncie
s
Q3 2007 house price peak
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OTHER LOCATIONS TO WATCH
New York remains a key target for GCC HNWIResults from our survey of HNWI shows that across the GCC, New York was the second most preferred city for international real estate investment outside the Middle East, just behind London. Indeed, findings from a survey carried out by the Association of Foreign Investors in Real Estate also show that the city tops the investment destination list for global investors in 2016.
The city has historically been a beacon for both institutional and private investors from the GCC, with a wide range of recent headline deals. Indeed, in our survey, an investor from Bahrain cited the city’s attractive rental yields and expected strong capital value growth as key reasons for targeting the city.
On the institutional side, 2015 saw the Qatar Investment Authority (QIA) launching its New York office and announcing plans to invest up to USD 35 billion in US assets by the end of 2020. Following the announcement, QIA has acquired a 44% stake in a USD 8.6 billion Manhattan West mixed use project.
“Investment made will yield high rental value as the USA’s economic expansion drives the demand for real estate, leading to higher capital value gains.” Bahrain investor, targeting New York
Another example of investment in the city from the Gulf is the Abu Dhabi Investment Authority’s (ADIA) holdings in the Big Apple, which amount to USD 850 million. During 2014, ADIA also teamed up with Singapore’s sovereign wealth fund (GIC) to purchase The Time Warner Center for USD 1.3 billion. During 2015, the fund acquired the New York Edition hotel on Madison Avenue for USD 382 million, underscoring the importance of the city as a key property investment hub in North America for outbound funds from the GCC.
There are some clear reasons for the city’s attractiveness. Chief of these is of course the lower price points, particularly when compared to somewhere like London. At 50 UN Plaza in Manhattan for instance, 1 bedroom apartments start from USD 2,000 psf (~£ 1,365 psf), whereas prices in London’s Royal Borough of Kensington and Chelsea usually start from about £2,500 psf and are even higher in more core locations such as Mayfair, where values are often upwards of £4,000 psf.
Of course the fixed US dollar peg retained by all GCC member states, except Kuwait, has meant that the city’s attractiveness from this group has not waned, despite the current cooling of the New York housing market, where a record house building boom is underway. According to Corcoran Sunshine Marketing Group, 5,126 apartments in Manhattan are expected to be offered for sale this year, the highest level seen since 2007. 63% of these are expected to fall under the “luxury” category, putting them at USD 2,400 psf (~£ 1,682 psf), or higher.
Still, New York is also perceived to offer a more favourable tax regime for international buyers, especially when compared to somewhere like Singapore, where international buyers pay taxes that amount to approximately 15% of the property value.
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Singapore emerges as third most popular global property hotspotSingapore was named as the third most popular global investment hot spot by our HNWI investors, making it the most popular gateway in Asia.
The attractiveness of the city state is further substantiated by the United Nations Conference for Trade and Development’s (UNCTAD) World Investment Report 2015, which reported Singapore (USD 68 billion) as being the world’s fifth largest recipient of foreign direct investment last year. China topped the list, followed by Hong Kong, the USA and the UK.
International investors have traditionally contributed to demand for luxury real estate in Singapore. Due to the persistent demand from international buyers and investors, the Singaporean government intervened by introducing several cooling measures to better regulate the market. These have included an increase in ‘Additional Stamp Duty’ from 10% to 15%, a rise in ‘Seller Stamp Duty’ and an increase in Loan-To-Value ratios. The combination of these has impacted the real estate market, with price declines and falling demand.
Still, Singapore’s pro-business environment, political stability and high quality of life are among the most important factors in attracting GCC investment. A recent example of this has been the announcement by Qatari Diar, which intends to acquire Asia Square’s Tower 1 for SGN 3.4 billion (~£1.7 billion). Once the acquisition is finalised, it is expected to represent the largest ever single tower real estate transaction in the Asia Pacific region and the second largest worldwide.
In addition the country’s investment attractiveness is further substantiated by the Boston Consulting Group’s Global Wealth 2016 report, according to which Singapore is expected to become the second largest offshore financial centre, behind Switzerland, by 2020.
“Economic growth of the country and it is one of the top most business hubs in the world.” Bahrain investor, targeting Singapore
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Iran still not high on the agenda for GCC HNWIWhen the historic deal to lift trade sanctions on Iran was reached last July in Vienna, there was a strong expectation for the economies in the Gulf and, particularly that of the UAE, to benefit from the removal of over a decade of wide ranging restrictions on doing business with the Persian state.
Prior to the introduction of trade sanctions, Iran was the UAE’s biggest trading partner. Despite the sanctions, it has remained an important market for the emirates, emerging as the UAE’s fourth largest trading partner in 2014, which translates into AED 62.4 billion of cross border trade, up 8.3% on 2013, according to the latest figures from the Iranian government.
Both local and global businesses have in the past based Iranian operations in Dubai and although we are yet to see a notable uplift in specific Iranian business-linked occupier activity, we have seen some interest from these groups. Any impact is expected to be a slow burn as international trade activity with Iran is gradually ramped back up.
Our view remains unchanged and we see the landmark deal as a medium to long term catalyst for the UAE’s growth, which is expected to be centred on Dubai.
The rippling outward of business activity as global firms line up to service an economy that has been starved of investment for over a decade is not only likely to benefit other emirates in the UAE federation, but regional states as well.
Given this backdrop, it was our expectation that there would be a strong appetite from our GCC HNWI respondents to target Iran for property investment. However, the vast majority of our sample do not plan to invest in Iranian property in 2016, with just 14% saying they either ‘definitely’ will, or are ‘considering’ it.
There is, never the less, some disparity across the regions, with a stronger interest from the Other GCC investors (Kuwait, Qatar and Saudi Arabia) and a relatively weak level of interest from Oman and Bahrain investors.
The overall lack of interest at this stage probably stems from a combination of political tensions between the Gulf and Iran, in addition to a lack of awareness of the Iranian property market, which we expect to gradually change over time.
Views on investing in Iran’s property market in 2016
Source: Cluttons, YouGov
Yes, definitely
Undecided, but considering
No
Don’t know
82%
5%6%
8%
14% Of respondents ‘definitely /
considering’ investing in Iranian property market
Yes definitely ConsideringUAE 6% 11%Oman 3% 3%Bahrain - 9%Other GCC 13% 7%
Investment consideration by region
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Snapshot on IranInterestingly, according to the Statistical Centre of Iran, the total value of all investment into urban real estate, including all project construction costs, stood at just over 750 trillion riyals (~£17.8 billion) during 2015. To give this context, a total of £62 billion was invested in UK commercial real estate just from international buyers and investors last year. It stands to reason that the figure is significantly lower in Iran given that sanctions have hampered foreign direct investment.
Tehran, the Iranian capital, accounted for the lion’s share of 35,000 construction permits issued last year, with over 90% of these for residential developments. Just 330 commercial construction permits were issued. Over two-thirds of the permits were for buildings greater than five storeys, while the rest were for buildings between one and four levels. With a core population of around 8.5 million, Tehran is Iran’s most populous city and therefore also home to the most significant development opportunities.
Away from the Iranian capital, some of the county’s southern islands, such as the port cities of Bandar Abbas and Qeshm, also present exciting opportunities, given the government’s wide ranging infrastructure programs designed to boost economic growth and competitiveness. The Gulf island of Qeshm for instance, has been earmarked as a free trade zone, with a new masterplan for the island’s airport being unveiled recently. The government has announced plans to build a new £532 million port on the island to help position it as one of the main shipping and transit hubs in the southern Gulf.
This includes upgrading existing facilities and developing supporting cargo and tourism infrastructure as the country moves to capitalise on the lucrative GCC tourist market, which may well help to pave the way for more substantial cross border investment.
On the investment front, the Iranian government has already announced that estimated investments of £140 billion are required over the next five years by its oil and gas industry alone, while the aviation sector requires just over £3.4 billion in immediate investments. The country’s aviation sector consists of 67 airports, with total passenger movements of 47 million. With estimates ranging from 300 to 500 new aircraft required by Iran’s carriers, there is a potential for the main international airport in Tehran (Iman Khomeni International) to emerge as a regional rival to Abu Dhabi, Dubai or Doha.
With the rise in aviation and infrastructure investment will come the need for complementary industries and therefore economic growth will follow. However, Iran is a sophisticated market that has weathered over a decade of sanctions, which may challenge the perceptions of many looking to target the Iranian market.
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UNDERSTANDING GCC HNWI INVESTMENT RATIONALEInvestment driversWe asked our sample questions about their investment rationale and divided these into financial drivers and other qualitative factors.
‘Capital value growth expectations’ was most commonly named among the top three financial drivers for global real estate investment. ‘Rental yields’ however, was reported as the most important primary financial driver by 22% of GCC HNWI investors, and by 27% of investors in Oman and Other GCC states (Kuwait, Qatar and Saudi Arabia).
‘Financial market performance’ and ‘Tax reasons’ also emerged as particularly important factors for UAE based HNWI respondents.
In the context of prime Central London, residential rental yields currently hover around 3.72%, with 20-year growth in capital values standing at 267%, underscoring why residential investment in London continues to be attractive for investors.
‘Infrastructure’ was named as the leading qualitative driver for real estate investment, particularly among Oman based HNWI investors. London’s connectivity with the Gulf clearly is an important factor in facilitating cross border travel and capital flows. There are currently 37 flights per day from the Gulf to London.
Infrastructure was followed by ‘being close to family and friends’, which is especially important for investors in Bahrain.
For UAE investors, ‘security’ is the most important qualitative driver.
‘Entertainment attractions’ were markedly more important to Other GCC HNWI (Kuwait, Qatar and Saudi Arabia) investors than the rest of our sample.
Property useWe also surveyed our sample of HNWI on the final intended use of their international real estate investments in their top city of choice. Using potential real estate investments as a second residence for themselves, or their family, was the most commonly envisaged end use. A third of respondents from the UAE and 30% of those we surveyed in Other GCC states stated this as the most expected use of their investment. This was closely followed by investing purely for capital gains, which was cited by 25% of our respondents.
Decision makingRather surprisingly, nearly half of GCC investors (49%) said they will follow the recommendations of family and friends when selecting a target property investment location. This is perhaps reflective of the family-run business culture that is prevalent in the Middle East.
A large proportion of investors either intend to, or have travelled to, potential investment locations (42%); however the proportion is much lower among UAE investors (26%).
Interestingly, attending local real estate road shows (12%) ranked very low in importance for influencing the decision making process.
When it comes to the actual decision making, the majority of HNWI investors (56%) claim that they will make the decision on where to invest in property on their own, while three in ten said it would be a joint family decision. In Bahrain, four in ten said the decision would be made jointly with family.
Amongst the Other GCC states (Kuwait, Qatar and Saudi Arabia), 63% said they would decide on their own, while just 23% said they would consult with their families.
Stocks dominate alternative asset class preferencesAway from property, our GCC investors report stock market shares as their most active investment asset class (22%). Funds (13%) followed in second place.
Interestingly, currency investments are more popular in Oman compared to other places, as is venture capital in Bahrain and art in our Other GCC country grouping (Kuwait, Qatar and Saudi Arabia).
Nearly half of GCC investors said they will follow the recommendations of family and friends when selecting a target property investment location.
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Capital value growth
60%Rental yields
44%Financial market performance
40%
Second residence for myself / my family
26%I’m investing for capital gains
25%Let / rented out to tenants
22%
Infrastructure
47%Close to family and friends
41%Security
38%
The recommendations of family or friends
49%Engage a local agent
46%Travel to the location
42%
Stock market shares
40%Bonds
36%Funds
30%
I decide on my own
56%It will be a joint family decision
30%I seek the advice of investment advisors
12%
Main qualitative property investment drivers
Factors influencing decision making
Alternative asset class investment preferences
Level of investment advice sought
Main financial property investment drivers
Intended use of international property investment
Most important Second most important Third most important
Source: Cluttons, YouGov
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“I am simply sentimental about Paris. Paris will always be Paris and I look forward to spending more time there in the future.” Saudi Arabia investor, targeting Paris
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2017 PROPERTY INVESTMENT TARGETSParisienne allureAlong with London, Paris was named as the most probable investment destination for GCC HNWI in 2017, outside the Middle East. Although it was named as a key target for next year, it has continued to attract funds from the Middle East, particularly at an institutional level. For example, The Qatar Investment Authority (QIA) acquired a luxury retail complex on Paris’ exclusive Champs-Elysées boulevard for USD 623 million in 2012. Another notable acquisition includes the landmark Peninsula Hotel, which was bought by Qatari Diar for USD 460 million in 2008. This has since been transferred to Katara Hospitality, which sits under the umbrella of QIA.
It is also important to note that Qatar, being one of the major investors in France, benefits from a special tax treaty for state owned entities, which will no doubt fuel further institutional investment into France from this Gulf country.
Toronto beckonsAccording to the findings of our survey, Toronto was ranked joint third for possible investment locations in 2017 by our GCC investors, making it the only North American city being considered as a target next year. Its attractiveness in part stems from its perceived quality of life, which is reflected in the city’s fourth place global ranking according to the Economist Intelligence Unit’s Global Liveability Ranking index for 2015.
Like the way in which London’s higher education institutions attract education-linked property investments, Canadian universities are also attracting a rising number of students from the Gulf (with the exception of 2015), which may support further investment from the GCC.
Improved air connectivity and immigration from the Middle East and South Asia, amounting to circa 30% of the total number of migrants in 2014 (Government of Canada), is likely behind the rising profile of Toronto amongst Gulf based HNWI.
Student population in Canada by selected nationality
Country of citizenship 2013 2014 2015
Saudi Arabia 13,846 13,421 11,719
Kuwait 168 191 231
United Arab Emirates 151 112 95
Bahrain 90 77 63
Qatar 40 32 32
India 34,692 38,017 48,914
Iran 5,155 4,601 4,535
Pakistan 4,018 4,005 4,059
United Kingdom 3,334 3,253 3,252
Source: Government of Canada, Immigration and citizenship, International students with a valid permit on December 31st by country of citizenship (2015 ranking)
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CONCLUSION
Final thoughts on GCC HNWI global property investmentLondon has, perhaps unsurprisingly, emerged as the most preferred global investment destination for our HNWI sample from the Gulf. However it’s important to note that there was a great variation in top target locations named in our survey, with New York following closely on the heels of London.
The British capital has long been a magnet for property investors from the Middle East, driven by a range of reasons, from the cosmopolitan lifestyle London offers, to the high quality of education.
Financial drivers include the capital value growth history that the city has been able to deliver, despite tough headwinds to local and global economic growth. It’s clear that the city’s position as a global investment safe haven remains intact and in times of global economic turbulence, we have seen investors turn to the British capital’s bricks and mortar.
Still, the currency advantage through the current weakness of sterling is something that is likely to be of particular interest to our survey sample. For now, 79% of our GCC HNWI indicated that they are expecting to spend at least USD 1 million on an individual property in their top target location during 2016, with 18% claiming that they would be looking to invest at least USD 1.5 million in an international property asset in their prime target city.
The oil price collapse has of course aided the appeal of top tier global investment hubs such as London, New York and Singapore, with the appetite to invest in home markets in the Gulf diminished amongst our sample when compared to previous editions of our survey.
Still, Dubai has predictably emerged as the Middle East’s leading investment magnet for our HNWI sample, with over a quarter (27%) of our sample naming the emirate in their top three Middle East investment destinations. It is clear from the league table of target cities that the UAE is a stand out property investment target for GCC-based HNWI.
This is in part due to the political stability offered by the emirates, in addition to the wide variety of investment options available to GCC investors, not just in Dubai, but across the UAE.
In fact, when we asked our sample which locations they were considering as a possible property investment target during 2017, Dubai edged out London for consideration.
Doha and Paris (at 3% each) followed closely behind. Almost two-thirds (64%) of investors however, claimed not to be thinking about any particular locations beyond 2016. Of those that are, a mix of both regional and global investment locations are mentioned.
Other GCC investors (Kuwait, Qatar and Saudi Arabia) are more likely to have locations in mind for 2017 and beyond, perhaps reflecting
a stronger need to diversify their investment portfolios beyond the region, as outlined above. For this group, London was front of mind, alongside locations such as Dubai, Doha, Paris and Toronto.
As we work our way through 2016, the way in which the oil price story plays out will have a significant impact on the volume of capital outflows from the Middle East. Going forward, it is clear that global safe havens play a critical role in soaking up ‘refugee’ capital, or nervous funds and London’s position in that respect still appears relatively intact, regardless of how the short term global economic story plays out.
Bahrain Oman UAE Other GCC
Individual property valued under USD 500k 6% 7% 3% 13%
Individual property valued at USD 500k or more 6% 7% 12% 10%
Individual property valued at USD 750k or more 9% 7% 6% 10%
Individual property valued at USD 1m or more 67% 73% 54% 50%
Individual property valued at USD 1.5m or more 15% 7% 17% 13%
Individual property valued at USD 2m or more - - 11% 7%
Individual property valued at USD 3m or more - - - 3%
None of the above - - 3% 3%
Source: Cluttons, YouGov
GCC HNWI spending budgets for 2016
7%
9%
8%
61%
13%
4%
1%
2%
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© Cluttons LLP 2016. This publication is the sole property of Cluttons LLP and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.
For further details contact
Cluttons
Faisal DurraniHead of research +44 (0) 20 7647 [email protected]
Kseniya Savelyeva Residential research analyst+44 (0) 20 7647 [email protected]
Zoe FarrellCommercial research analyst +44 (0) 20 7647 [email protected]
YouGov
Caroline McGarrResearch manager +44 (0) 20 7012 [email protected]
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