More stable UK should lure Gulf commercial property investors

Alamy/Robert Evans

A mixture of long-term and short-term factors have dampened Gulf investment in UK commercial real estate over the past 10 years. However, with the Bank of England now cutting rates and investor sentiment improving, the scene is set for a once-in-a-decade realignment. 

For Gulf investors, we are predicting investment in UK commercial property will hit $4 billion annually, given a growing consensus that market conditions will continue to improve.

The Bank of England’s cut in the benchmark base rate is welcome. Rates had increased from 0.1 percent in December 2021 to 5.25 percent in August 2023, as high inflation continued to bite. 

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With the Bank of England having been successful in meeting its 2 percent inflation target, the market had expected a cut in rates, and this duly happened in July 2024. 

• UK commercial property bargains lure Gulf buyers

• London’s suburban real estate moves Middle East investors

• Saudi property investors pursue growth in UK regions

Despite new data in July showing 2.2 percent inflation, forward-looking three-year and five-year fixed rates are being sold as low as 3.8 percent, and could yet trend lower. Many banks had already started slashing interest rates on their finance products in anticipation of the rate cut.

The rate cut is good news for Gulf investors, who can benefit from lower rates in the UK. The Bank of London and The Middle East has recorded a significant uplift in inquiries from real estate investors seeking finance in anticipation of the rate cut.

More stability

The cut also comes as UK political stability improves. The Labour Party achieved a landslide victory in the general election last month. The new government has committed to legislation that will enable 1.5 million new homes to be built in the next five years, directly boosting share prices for UK housebuilders.

This move highlights the severe undersupply of UK residential accommodation and the failure of previous governments to meet their own self-imposed housing targets.

It is also noteworthy that the new government has said it will prioritise finalising the UK-GCC free trade agreement. This is a clear indication that the UK recognises the importance of the region for its economy. 

Our research finds that GCC investors are increasingly aware of the opportunity to achieve attractive returns from developing and investing in residential and living sector assets.

This is particularly true of larger-scale schemes, where economies of scale can be achieved including private rental schemes, co-living (an emerging and increasingly popular asset class of accommodation for young professionals) and purpose-built student accommodation.

We predict this interest will continue to grow as the government passes legislation to drive an increase in the supply of homes. 

Students and green homes

GCC investors are often familiar with the UK’s best universities, having family members that attended them. Purpose-built student housing is a high-performing sector, because of a shortage of such accommodation, very high occupancy levels and low levels of tenant default. 

In addition, at the best universities the start of each academic year provides an influx of new student tenants.

Another very strong focus for investment is buying older commercial buildings and adding value to existing assets by improving or refurbishing them. For example, we are seeing more investors converting under-utilised office space into residential or living sector assets. 

Some under-invested commercial buildings with low Energy Performance Certificate (EPC) ratings have had price falls in the past few years, meaning many of these assets are primed for new investment. 

This trend reflects another opportunity for investors, given the policy direction is for the EPC ratings of buildings to be “C” or better by 2030.

Improving a building’s EPC rating can require significant upfront capital to retrofit better insulation, windows and other installations that make up a building’s environmental footprint. But there has been a growing recognition of the fact that these projects can command a “green premium”. 

To realise this broad potential for investor returns, we are seeing GCC investors increasingly enter joint venture arrangements with UK advisory firms that benefit from local market knowledge and expertise.

Investor capital had been subdued since the pandemic. However, we are starting to see a strong realignment of market factors. Political stability and falling interest rates are welcome news, and we expect a number of the new government’s stated priorities will drive opportunity for investors. 

We expect that the next 12 months will see renewed investment momentum across UK commercial and residential property sectors.

Rashid Khan-Gandapur is director, real estate finance, the Bank of London and The Middle East