A UK recession may spook Arab investors – or present an opening

Creative Commons

The economic outlook for the UK has grown progressively bleaker over recent months.

After contracting 0.1 percent in March, Britain’s economy shrank by a further 0.3 percent in April, marking the first back-to-back declines since the onset of the global pandemic in March 2020.

Last week the pound plunged to its lowest level against the dollar since the Covid-induced crash in March 2020, falling below $1.20 as markets reacted to a growing divergence between the Bank of England (BoE) and Federal Reserve rate-hiking cycles.

• From chocolate to solar power, the UK-GCC trade deal is a winner
• Trade commissioner: UK and GCC have endless opportunities
• UK-Gulf deal will be ‘tough nut to crack,’ says top Johnson ally

Experts have also voiced uncertainty over how fast the BoE can tighten monetary policy this year to tame inflation without further throttling the economy.

Against this backdrop, AGBI spoke to industry analysts about how a weakened economic outlook could impact Gulf investment into the UK.

“A global recession and tighter liquidity globally may make some investors cautious or make them wait for better valuations, especially in interest rate sensitive areas,” Rachel Ziemba, founder of geo-economic advisory firm Ziemba Insights, said.

“Investors, including those from the GCC, may prefer infrastructure and other government supported areas, where the UK government is committed and has skin in the game.

“Ultimately, the attractiveness will depend on the terms of investment and long-term trajectory, not just the short-term recession.”

Ziemba added that with many assets under pressure, Gulf long-term investors may look for opportunities in the sectors they are already focused on, such as renewable energy and those that facilitate technology transfer abroad.

In September the UAE announced it would invest £10 billion ($13.8 billion) in priority sectors in the UK.

The investment built on an earlier £800 million commitment to the life sciences sector announced by Abu Dhabi’s sovereign wealth fund Mubadala in March.

Under the Partnership for the Future bilateral framework, the UAE is set to invest in Britain’s technology, infrastructure and energy transition, as well as joint pledges on climate action.

UK inflation hit a high of 9.1 percent year-on-year in May – a 40-year record peak, according to estimates from the UK’s Office for National Statistics.

Meanwhile, new analysis from the Organisation for Economic Cooperation and Development (OECD) shows that the UK economy will record zero growth in 2023, making it the worst-performing economy of any nation in the developed world apart from Russia. 

By comparison, the US will grow by 1.6 percent and the EU by 1.2 percent.

Fintech and greentech could save the day

But other industry commentators chimed with Ziemba’s view that the Gulf will continue to regard sectors in which it has a vested interest as attractive.

“Some UAE investors may see opportunities in the challenges, and coupled with the long history of amiable relations there may be those who could see value in doubling down on investment,” Mohammed Baharoon, director general at b’huth, a Dubai public policy research centre, said. 

“The areas of logistics, financial services and fintech may continue to be the most relevant areas of investment.”

“I anticipate biotech, clean tech and general life sciences will dominate investment from the GCC to the UK,” added Dr Najat Benchiba-Savenius, founder and director of Gazelle Advisory Group, an independent advisory firm to royal Arab families.

“GCC investment in brand Great Britain is not set to taper off any time soon.

“Particularly with the UK re-igniting bilateral trade talks to enable a fostering of its first GCC-UK Free Trade Agreement (FTA), which could cement the geographies for future economic ties.”

FTA negotiations between the UK and GCC kicked off in Riyadh on Wednesday and are expected to culminate in a trade deal that would add at least £1.6 billion a year to the UK economy.

Total trade between the two countries stood at £33.1 billion in 2021, while there were around 600 GCC-owned businesses in the UK in 2019, supporting over 25,000 jobs.

Mena oil-exporting countries, and in particular the GCC economies, are currently enjoying a windfall of petrodollar liquidity due to surging oil and gas prices and many believe they will be looking to invest large sums of this overseas as part of growing efforts to diversify their economies.

“While we believe that GCC governments will channel part of the energy price windfall to develop further their domestic economies by leveraging on growth-generating investment projects, they will also use part of it to invest strategically overseas,” said Jamil Naayem, principal economist for the Middle East at S&P Global Market Intelligence.

“They are likely to make revenue-generating foreign investments mostly through their large sovereign wealth funds, notably in advanced economies such as the UK.

“While it is true that Britain, pretty much like other European peers, faces dimmer growth prospects amid the spillovers of the Russia-Ukraine war, the appreciation of the USD (to which most Gulf currencies are pegged) against the GBP might increase the attractiveness of the UK to some Gulf investors.”

UK real estate, long viewed as a safe haven for Arab investors, looks set to be one of the main beneficiaries of the shift in the exchange rate which has led the British pound to depreciate by 10 percent over recent months.

According to a research note published on Wednesday by Knight Frank, there has been a noticeable surge in UK property interest from Gulf-based real estate buyers following the news regarding the low GBP to USD rate levels.

The note highlights how the weakened pound has only heightened Middle East investor interest into the UK as they look to take advantage of the low rates, and further increasing the perfect storm which has driven activity to record highs in the prime London property market as demand in the capital continues to recover from the depths of the pandemic.

“The attractive pound sterling is a key driver for Gulf buyers with USD pegged currencies,” Henry Faun, a partner in the private office of Knight Frank’s Middle East office said.

“The 10 percent depreciation in the currency would effectively offset the equivalent of all, or a significant part, of the closing costs associated with buying a UK property.”

Faun said Middle East real estate investors will also not be deterred by the UK’s plummeting buy-to-let yields, which have hit a record low of 4.38 percent as interest rates bite, fuelling fears that property investors will sell up.

“Many Middle Eastern owners of property in the UK occupy the property themselves or for their wider family,” he said.

“These clients would not be affected by the compression of rental yields.

“Should our clients look for the highest yielding real estate opportunities, they often look closer to home in the Gulf for high-yielding returns.

“Their portfolios of UK residential real estate are focused on longer-term capital growth.” 

Knight Frank’s note also highlights how the number of new prospective buyers registering in London in May ranked as the third highest figure in a decade, also coinciding with the number of new sales instructions in the capital that month being the sixth highest figure in 10 years.

Looking at the longer term trajectory, Knight Frank forecasts that prices in prime central London will outperform most other UK markets over the next five years, with international buyers, of which the Middle Eastern region will form a large proportion, continuing to return to buy property in the capital in large numbers.

With the increasingly weakened British pound, fixed assets are seen as discounted, helping to buoy the sector.

SHUAA Capital, one of the leading asset management and investment banking platforms in the Gulf, on Wednesday announced that its subsidiary Northacre has joined forces with the St Regis hotel located at No 1 Palace Street, adjacent to Buckingham Palace, to develop a new residential property.

Scheduled for completion later this year, the St Regis Residences comprises 72 apartments ranging from one to five bedrooms along with penthouses which are available for purchase immediately.