The Middle East in Midtown
12 January 2016
The arrival of the New Year brings with it continued Global Economic and Political uncertainty and there are few signs that this will improve as we move through the year. What we can be more certain about, is that London will continue to provide the stable platform that investment funds need. Furthermore, volatility within the asset classes also plays into London’s hands as its commercial Real Estate market has a maturity that maintains its stability, despite current pricing, which is now at record levels. Put simply, less risk, costs.
A number of the current Global Economic and Political challenges emanate from the Middle East and these issues clearly have an influence on Central London Real Estate, when we consider the importance of Middle Eastern investors in our market. The result is not a singular outcome, but a complex web of implications for different parties.
Political instability will always generate capital outflows, however, the fall in oil prices has also been a factor. This fall, driven in part by strong production levels in Saudi Arabia, has undermined the total portfolio returns for the larger Middle Eastern investment houses and as a result, there has been a shift in focus to growing their Real Estate holdings to bolster returns.
What does this mean for our market?
Middle Eastern investors have been ever present in Central London for over 30 years, but with attention more focussed on the West End and the City rather than Midtown due to lack of familiarity / knowledge. Perception was that Midtown presented a higher risk option on account of its positioning within the Central London markets.
London’s Midtown is now a key target. IPD recorded Total Returns during 2015 which surpassed the West End and City at 11.3% y/y, meaning that this view can now be consigned to history. Recent activity corroborates this.
We have seen a year-on-year increase in Middle Eastern investor activity in Midtown. Over the last 12 months they accounted for approximately £600m of inward investment, with the purchase of the High Holborn Estate, WC1 (£135m), One Mabledon Place, WC1 (£72.5m), Holborn Gate, WC1 (U/O £140m), 100 New Bridge Street, EC4 (£146.5m), and 150 Holborn, WC1 (£80m). It is notable that a number of these transactions do not constitute stereotypical ‘trophy’ assets, long associated with Middle Eastern investors. This reinforces the growing importance and focus on investment returns instead, whereby they will move up the risk curve.
The end result is double-edged. Whilst we are seeing increased investment activity from the Middle East, the drop in oil prices is also having the effect of promoting trading where capital needs to be realised. It cuts against the long held view, that Middle Eastern Investors are long-term holders and never trade.