Arab banks tighten lending for Gulf-UK property investors

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• Bank of England raised UK interest rate to 4.25% in March 
• Lenders increasingly selective as margins squeezed 
• GCC investors seeking higher returns in UK regions  

Middle East banks are reviewing lending criteria for GCC clients in the UK, responding to high interest rates and a trend towards investors diversifying portfolios to capture better yields. 

For several years – and especially since interest rates shot up in the past 12 months – yields in sectors traditionally popular with Gulf investors, such as prime London residential, have fallen, several Arab lenders told AGBI. 

This is prompting them to look outside the capital for high-income generating office, retail and industrial assets. They are also getting involved in UK real estate development, where risks are higher but so are returns.

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The trend is perpetuated by macroeconomic challenges affecting lending, the banks said. Lenders’ margins are under pressure from rising interest rates and loan-to-value (LTV) ratios are shrinking, requiring investors to stump up more cash or choose sectors requiring less leverage. 

Last month the Bank of England raised the base rate from 4 to 4.25 percent, its highest in 14 years. It wants to curb the UK’s soaring inflation rate, which now sits at 10.1 percent, well above the targeted 2 percent. 

“It’s challenging for Gulf investors to buy in their popular locations of London and the south-east where yields are lower, and make a decent return,” said Andy Thomson, head of real estate at Bank of London and the Middle East (BLME).

Its property balance sheet stands at around £1 billion including $725 million in loan facilities and £300 million in high-value (up to £70 million-plus) mortgages. 

From a lender's point of view, Thomson added, banks are now only willing to put in leverage of around 45 percent against an asset yielding 5 percent, compared to 70 percent against a yield of 7 percent. Average yields in the South East are below 5 percent; in northern cities they are between 6 and 8 percent. 

AGBI reported in March that Saudi investors were ramping up property strategies in cities such as Manchester and Newcastle.

Many GCC investors are still active in London prime property but this tends to be for personal residential needs or to acquire trophy assets. 

“We had quite a lot of exposure to high-value London mortgages and took the view that we would like to do more outside the capital to get better diversification in our book,” Thomson said.

BLME recently provided a £20 million facility to developer Beech Holdings, majority-owned by Saudi investor Lote Global, for a conversion of an office in Newcastle into 241 apartments. 

Upcoming deals include one for a Middle East client converting a retail park in Manchester into 2,000 apartments, and a high-net-worth individual from Qatar. 

Another company that has seen a shift in Arab lenders’ UK strategies is Mutual Finance, a broker that works with at least 10 Gulf banks. Most of the region’s lenders have a UK operation, including Abu Dhabi Islamic Bank and First Abu Dhabi Bank, both of which were unable to comment when approached by AGBI. 

“We are finding deals harder to do because more equity is required,” said Mutual’s director Scott McKinnon. “Margins are coming under pressure and banks are competing to do business.” 

Average LTV ratios have dropped from around 65 percent to 55 percent, or lower for central London loans, he added.

A decade ago, a £10 million equity cheque would have bought you a £90 million asset; today “you’d be lucky” to buy a £25 million one. “Equity isn’t going anywhere near as far as it used to,” said McKinnon.

In response, banks are raising minimum loan amounts because “it’s just as much work to do a £5m deal as it is to do a £50m one so they want to do fewer, bigger, deals". They are looking at locations with higher returns, and scrutinising buildings’ occupier and environmental credentials. 

Fuad Shakshir, head of structured real estate at Qatar Islamic Bank in London, said many UK-based lenders have historically shied away from regional property financing, viewing it as too risky. Arab banks are increasingly stepping into this gap in response to GCC clients’ demands. 

This view is echoed by Wasim Choudhury, CEO at Lote Global Investments.

“We had aggressive UK growth plans that we’ve had to slow down a little while we worked [to identify] banks comfortable lending on projects outside London. It has taken time, but we are there now,” he said.

Bahrain-headquartered Bank ABC, which has more than $36 billion of assets globally, is among the largest Arab lenders with operations in the UK. Around 90 percent of its $1 billion property loan portfolio is in London and the south-east, according to Keith Leach, head of real estate. 

“From a risk perspective, we are confident in the opportunities and reasonably optimistic about growth,” he said.

“However, we have for some years seen investors from the Gulf becoming increasingly sophisticated and looking at different asset classes in different regions.”