Gulf investors head outside London to fill up on UK property

Creative Commons/Hilverd Reker

The Midlands and Northern England are looking ever more appealing to commercial real estate investors from the GCC, according to a new report

GCC investors’ appetite for UK property continues to grow, new research has found, driven in part by the surging appeal of regions outside of London.

A report from Bank of London and the Middle East (BLME) has revealed that pandemic restrictions have had little impact on investment from Gulf countries into the UK. Middle Eastern investors are expected to spend $1.5 billion this year on UK commercial property, it said. 

BLME’s study, based on interviews with experts from real estate services companies that hold more than £60 billion ($72.3 billion) of assets under management, cited three key reasons: the UK’s unique cultural characteristics, its regulatory and legal framework and growth outside of London.

With interest rate rises set to affect UK-based investors, there is likely to be plenty of opportunity for international investors, the bank pointed out. 

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It added that the sectors that suffered during the pandemic look set for a bounceback, with prime City of London office yields now at 3.75 percent. The same sector in the regions is offering even higher returns of 4.75 percent.

“It’s clear that in a global economy defined by inflationary pressures, supply-chain disruption and interest rate rises, investors continue to view UK property as a ‘safe haven’ for their capital,” said Anna Barratt, director of real estate finance at BLME.

“Many of the affluent Gulf-based investors we work with continue to choose London for stability and wealth preservation,” she added.

Investors are now also looking towards the North and Midlands, Barratt said.

“The [UK government’s] levelling up agenda, improving regional infrastructure, and increasing cultural and transport links between the regions and the Gulf have all contributed to driving interest among GCC investors. And as regional investments now offer the prospect of stronger returns, this is an appetite which we expect to increase.”

London has long been a hotspot for international investment. In 2019, 42.4 percent of foreign direct investment into the UK was channelled into London.

However, the UK’s regions now present an opportunity for higher cash-on-cash returns. By 2024, house prices in the Northeast are forecast to rise by 21.5 percent. Investment returns in Salford, Manchester have risen to a record high of 32.3 percent this year, inclusive of rental income and capital appreciation. 

Raney Aburdene, head of investor relations and business development at Capital Trust, said: “Because London is so in-demand – so desired – more and more investors are looking outside of it. London has become quite saturated. It’s very hard to get strong returns there nowadays.”

Political factors such as regional devolution, London’s pandemic property flight and the potential for strong return on investment make the regions a compelling prospect for GCC investors.

James Procter, real estate finance director at BLME, said: “Confidence in investing regionally will continue to grow as more investors share success stories on yield and capital preservation. In the next few years, we may see even more regional diversification.” 

The BLME research also highlighted the role of pandemic-induced changes to working practices. No longer required to commute to central London offices, some residents are considering moves to less expensive cities. 

In reality, the pandemic accelerated a pre-existing pattern – investment into the UK becoming more evenly distributed between the regions and the capital. 

HSBC moved its retail arm from London to Birmingham at the start of 2018 and the Magic Circle law firm Freshfields moved to a 40,000 sq ft property in Manchester in 2015, while Salford is home to MediaCityUK, a quayside campus whose tenants include the BBC and other media organisations.

The RICS UK Commercial Property Market Survey for Q1 2022 showed that, for the first time since 2017, the investment enquiries indicators were positive across all three traditional property sectors – office, industrial and retail. 

The office sector accounts for 24 percent of all Middle Eastern investment in UK property and a number of recent blockbuster deals have underlined its appeal to the GCC. These include UAE firm Oryx Real Estate Partners spending £100 million to acquire 3 Bunhill Row, a freehold office in the City of London.

“Offices are returning to pre-pandemic levels of popularity among investors,” said Tareq Hisham Hawasli, co-founder of asset manager Darin Partners.

BLME now has £300 million of Sharia’a compliant facilities and said it was receiving enquiries on a daily basis from existing and new clients in GCC countries. 

Half the specialists interviewed for its research said that because of the pandemic, there had also been more activity around industrial or logistical assets such as warehouses and “essential” retail assets such as supermarkets and pharmacies. 

Other individuals questioned for the report identified British cultural exports as a significant draw for GCC investors, with the English language said to give the UK a “strong advantage” over other European markets.

“GCC investors have an emotional attachment to the UK, and especially London. They are buying into a place where they may have studied, where part of their upbringing and many family holidays took place, and where they aspire to send their own children for further education,” said Naseer Aka, managing partner at Lanesbrook Real Estate. 

“Other than tourism, the UK has two key pulls – its educational and medical facilities and these will always maintain their internationally recognised status,” he added.

The UK is a “proven” market” with a degree of comfort around the legal framework and ownership rights, Aka said.

However, there are potential downsides for Gulf investors, according to BLME, chiefly Britain’s potential slide into a recession, plus spiking inflation and interest rates. 

Prices are rising at their fastest rate for 40 years and in June, the Bank of England increased interest rates to 1.25 percent, the highest level in 13 years, driving up financing and mortgage costs.