Gulf investors slow investment in UK property as investment opportunities grow in the Middle East

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According to research by DTZ, the international property consultants, Middle Eastern investors spent £460m on UK commercial property in 2004, compared with a record £920 in 2003. Middle Eastern investors accounted for just 3% of total overseas purchases of UK property in 2004. Middle Eastern investment in UK commercial property is now at its lowest proportion of total overseas investment since 2000.

According to Trowers & Hamlins, the slowdown in Middle Eastern investment in UK commercial property is the result of three key factors:

Falling value of the dollar

Falling initial yields from UK commercial property*
The desire to invest increasing amounts of available capital in property and equities, within the Gulf region itself
Falling value of the Dollar

Trowers & Hamlins says the relative strength of the Pound/Euro versus the dollar has pushed up the price of UK/European commercial property.

Nick Edmondes, Partner, Trowers & Hamlins, explains: 'Gulf currencies are pegged to the dollar and with the dollar weak against sterling the capital cost of UK assets has increased.'

UK property market - falling yields

Trowers & Hamlins says that yields on many classes of UK commercial property fell in 2004, cutting cash on cash returns.

Nick Edmondes comments: 'The UK property market performed well but Middle East investors have been put off by the fact that the higher capital values of UK commercial properties mean they are getting lower yields. Finding value for money has become difficult.'

Trowers & Hamlins advised Kuwait Finance House, the Middle East's largest investment bank, on establishing its £250m UK property fund in 2003 and its €400m European property fund in 2004.

'The expectation of stronger income returns from commercial property in the Eurozone has persuaded many Islamic Institutions to make most of their European acquisitions in 2004 outside the UK,' says Nick Edmondes.

Investment opportunities in the Gulf

According to Trowers & Hamlins, the strong growth of the Gulf economies, at a time when investment sentiment has turned away from traditional markets such as the USA, has created many more investment opportunities in the region than before. Middle Eastern investors have been enticed to keep a higher proportion of their money at home.

'Gulf investors lost confidence in US and UK equities but still looked to keep a lot of their money abroad, for example in UK property. With Gulf economies developing rapidly and with domestic land and equity values at an all time high, money is now being invested at home in the Gulf and generating high returns,' says Nick Edmondes.

One of the primary outlets for surplus capital in the Gulf is the fast growing capital market in each Gulf country. For example, Trowers & Hamlins recently advised Etihad Etisalat (Mobily), Saudi Arabia's second mobile telecoms company, on its hugely over-subscribed IPO, which was one of the highest participation per capita IPOs in history.

Trowers & Hamlins also just advised Oasis International Leasing, the Abu Dhabi-based big-ticket leasing company, on a rights issue, a capital-raising mechanism increasingly popular with Gulf companies, of US $218m (AED 800m).

Property in the Middle East has also performed strongly as an investment. Prince Alwalweed bin Talal al-Saud, widely acknowledged as saviour of Citigroup, recently reported that his average annual returns for his Saudi property investments were well over 100%. His $10bn Citigroup stake, for which he earned his reputation as an investor, has generated annual returns of around 30% per annum.

'Dubai is a property hotspot but Middle Eastern investors are not alone in funnelling cash into the Gulf's property market; many western investors are moving capital out of their home markets and buying property in the Gulf,' says Nick Edmondes.

Among the many schemes currently under construction in Dubai is The World, a series of manmade islands shaped like the Earth's continents, located 4 kilometres from the mainland. Each of the 250 to 300 islands will be sold to selected private developers and are expected to cost from US$ 6.85 million. Rents on some properties in Dubai have risen 41% since last year.