Britain looks to the Gulf as recession looms

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• From Aston Martin to London homes, Arab investments in UK surge
• Weakened pound creates corporate and property bargains 

At the height of a long hot summer of discontent, the decision by PIF, Saudi Arabia’s sovereign wealth fund, to take a stake in Aston Martin came as welcome relief to British industry. 

As inflation soars and recession looms in the UK, it is hoped the £78 million pledge not only signals a turnaround for the debt-laden car maker, but may signal more such Gulf investments to come.

A weakened pound has acted like catnip on cash-rich foreign investors, creating bargains both in the corporate world and areas such as real estate. 

• Talks under way to forge UK-GCC trade deal
• Northacre sees ‘pent-up demand’ for London from GCC investors
• PIF’s Aston Martin deal will put Saudi’s auto industry in fast lane

With the global economy in a febrile state, Gulf individuals and funds alike have been attracted by the steady gains and apparent stability offered by the UK property market. 

Average house prices reached record levels in June, with annual returns hitting a peak of 12.8 percent the previous month.

“Middle East investors have a long track record here, although we are still seeing strong interest from Hong Kong and Asia too,” says Tom Bill of property consultancy Knight Frank, which has reported a surge in investments from Gulf-based high-net-worth families this year. 

“It is not just about brief returns. There is a compelling long-term economic argument.”  

From second homes to household names, Arab investors are treading a familiar trail. Aston Martin joins a list of quintessentially British brands that have become partially or wholly owned by Gulf stakeholders in recent years. 

These range from London landmarks such as Harrods and the Ritz and Savoy hotels, to corporate behemoths such as BP, and familiar retailers such as Sainsburys. Meanwhile, supercar maker McLaren is already majority-owned by Bahrain’s sovereign wealth fund.

In the wake of Brexit, the UK hopes to reinforce these overseas ties. Last year, Abu Dhabi’s state fund Mubadala agreed to a £10 billion investment partnership with the UK that will focus on technology, infrastructure and clean energy, building on an existing £800m commitment to life sciences.

The British government is also in talks to secure a regional free trade agreement with the GCC that it hopes will boost the UK economy by £1.6bn, mostly through tariff-free exports of manufactured goods, agricultural produce and services to the bloc.

As in the global energy crisis of the 1970s, the UK and the Gulf states find themselves on opposite sides of the wheel of fortune. 

In Britain, soaring prices, labour shortages, supply disruptions and political inertia due to a leadership crisis are battering an economy already weakened by the pandemic and the unique set of problems posed by the withdrawal from the European Union in 2020. 

In contrast, the oil and gas producers of the Gulf are riding high. 

Both high-net-worth individuals and the region’s vast sovereign wealth funds, which hold some $2 trillion in assets, are looking to park their money in comparatively safe havens abroad, while indulging in a spot of speculative investing. 

Financiers in the region say institutional investors have increased their allocation to overseas funds by 30 to 50 per cent.

London, sometimes referred to as the ‘eighth emirate’ of the UAE, offers opportunities for both. 

The capital’s property market has long attracted Middle East buyers, whether from previous middle-class diasporas from Lebanon, Egypt and Iran, or more recently from Gulf buyers interested in more substantial real estate deals.

With inflation at a 40-year high and interest rates at their steepest in 13 years, average annual growth in UK house prices has coasted above 8 per cent this year, according to the Office for National Statistics. 

Performance is variable, with London seen as a dependable, but less dynamic market than the regions. 

Economic uncertainty and high stamp duties have created a “two tier” market, in which Arab investors have focused on owner-occupied homes in the wealthier south east, while seeking higher capital and rental yields further north, according to a July report by the Bank of London and the Middle East (BLME). 

Just as London acts as a beachhead for foreign investment in the wider UK, so too home buyers tend to act as the vanguard for institutional investors, says Knight Frank’s Bill. 

“Middle East investors are by now very familiar with the UK market, certainly London. But increasingly, they are drawn to big cities such as Manchester and Birmingham.” 

Cumulative capital growth of 20.5 per cent in the northeast is predicted by real estate company Savills over the next five years, compared with 12.6 per cent in London. 

Last year, blue-chip behemoth Goldman Sachs opened new offices in Birmingham, the country’s second largest city, suggesting government talk about “levelling up” local economies is not entirely empty rhetoric. 

“You certainly see higher yields outside the capital, but there is a compelling economic argument as well,” says Bill. 

“There is likely to be strong growth as the regions catch up with London in the next few years. 

“Coming out of the pandemic, too, industries that are going to do well, such as logistics and life sciences, are often concentrated in areas such as the Midlands, which in turn reinforces the property market. The two work together.”

Securing foreign direct investment from the likes of Mubadala and its cousins in the Gulf will be important. FDI provides significant value for local economies. 

As of 2018, while just four per cent of local business units in the UK were foreign-owned, they accounted for nearly 40 per cent of national business turnover and employed 4.9m people, according to the Department for International Trade. 

With the Bank of England forecasting recession, how secure are Arab investments in the UK in the longer term? 

“Despite the eye-watering inflation, I don’t really see huge risks on the horizon,” says Bill. 

Compared with the financial crash of 2008, “the banking system in the UK is in much better shape. In terms of housing, you might see growth easing off in the single digits, but there is still a fundamental supply shortage keeping prices buoyant. 

“Probably the main risk is political, as government policy remains an unknown quantity for now.”