EXCLUSIVE: Need for currency diversification pushes Middle Eastern SWFs to Europe

Capital inflows into European real estate from sovereign wealth funds (SWFs) in the Middle East will continue to grow strongly in the coming years due to a need for diversification which favours investment in assets that are not US dollar denominated.

That is one of the key conclusions of a new report on capital flows in and out of the Middle East by CBRE due to be published today (Monday). The key findings of the report were presented last week at PropertyEU's Investment Briefing on the region by Iryna Pylypchuk, associate director EMEA Research at CBRE. The event was held at CBRE's London office.

In the coming years, Pylypchuk expects that Europe will remain a clear favourite for Middle Eastern capital flows, with an allocation of around 80% of the total invested outside the home region. Over the next decade, the spending pot from the Middle East is expected to total around $180 bn.

The UK is expected to see a significant share of allocated capital targeting core plus and value-add investments, but continental Europe is expected to see three times the level of direct investment by Middle Eastern investors than was the case in the previous 10 years, Pylypchuk predicted.

Between 2007 and end-2013, Middle Eastern investors injected $45 bn (€33.2 bn) into direct real estate outside their home market, with Europe capturing the bulk of that figure. In 2013 alone, close to 90% of the total Middle Eastern capital flows outside the home region were destined for Europe, the report found.

Moreover, the capital inflows into Europe from the region are rising rapidly: of the $45 bn channelled into global real estate between 2007-2013, almost half – or $20.2 bn – was invested during the last two years. In 2013, capital inflows accelerated further, surging 79% year-on-year to $13 bn.

CBRE claims that the changing investment strategies of the region’s SWFs are the key driver of the strong increase. Until 2012, the majority of the Middle Eastern capital flows into the commercial real estate sector was driven by high net worth individuals (HNWI) and property companies/developers – at $3.8 bn per year on average over the period 2007-2013. Their impact on the global real estate scene has remained fairly steady over time, the report said.

By contrast, capital outflows from the region's oil-rich SWFs are expected to increase significantly. The Middle East is home to some of the world’s largest SWFs and, according to the Sovereign Wealth Fund Institute, accounts for 35% of global SWFs AUM. All the Middle Eastern SWFs are commodity-based funds, with their capital originating from oil export, as well as gas and mineral revenue. This is in contrast to those from the Asia Pacific region, where almost all SWFs are non-commodity funds.

Significantly, almost half the countries in the Middle Eastern region have currencies that are pegged to the US dollar, all of the region’s SWFs are commodity-based (and are therefore US dollar-based) and the majority of private wealth is also dependent on US dollar-based sources. This serves as a major push factor towards Europe, and in particular the UK and eurozone, Pylypchuk said.

At present, London commands the bulk of the Middle Eastern capital inflows, accounting for 44% between 2012-2013, followed by Paris (15%), Milan (4%), Lyon (3%), Düsseldorf (1%), Barcelona (1%) and Berlin (1%). However, the balance between the UK and continental Europe will change, she predicted.

See also our PropertyTV webcast with Iryna Pylypchuk at the following link: PropertyEU Investment Briefing on the Middle East and click on the link below to read the report.