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Recent purchases in the UK and elsewhere have put paid to the notion that money from the Gulf has run out. Luke McLeod-Roberts looks at the latest developments in Middle Eastern investment
With Qatari Diar’s recent purchase of the Candy Brothers’ interest in Chelsea Barracks and its acquisition of the US Embassy building at Grosvenor Square, an Omani investor buying up Hammerson’s interest in Allen & Overy’s headquarters, as well as Addleshaw Goddard’s London building going to an unnamed Middle East investor, it appears that Middle East sovereign wealth funds and private individuals have never been more interested in outbound investment.
According to data provided by DTZ Research, Middle East investment accounted for 16 per cent of all foreign investment in the UK commercial property market during the 2009 calendar year. Added to private equity and corporate investment in the UK, Singapore, the US and continental Europe, and this suggests that Gulf money has far from dried up.
In fact, Nick Edmondes, a partner at Trowers & Hamlins, thinks the trend towards this level of investment in the UK is increasing.
“It’s quite clear it’s significantly up on last year, both from our personal experience and the enquiries we’re receiving,” he says.
Edmondes cites the fall in the value of the pound vis-à-vis the dollar, cultural links and changes to the law allowing Islamic-compliant funds to avoid onerous taxation as being among the reasons attracting Middle East clients here.
Safe as houses
And while the Gulf crisis has increased the pressure on Abu Dhabi, Kuwaiti, Saudi and Qatari investors to put their money closer to home rather than abroad, he believes that the UK property market in particular is seen as a relatively safe location.
“All of the UK pension funds have invested heavily in commercial property,” comments Edmondes. “The underlying legal structure of the commercial property market - 10- to 25-year leases, upwards-only rent reviews and an infrastructure of surveyors and valuers - points towards there being a strong and deep market. Institutions constantly underpin the market by buying and selling. [Middle East investors] know that it’s not going to drop away as Dubai did.”
Herbert Smith London-based property partner Simon Price, who together with Dubai-based finance partner Nadim Khan advised Al Salam Bank in relation to its acquisition and subsequent exit from Addleshaw Goddard’s building at Milton Gate, thinks that this level of activity is only set to increase in the coming two years.
“In 2008-09 there was stagnation. Unless people were desperate to sell they wouldn’t bring anything onto the market. In 2010 however there has been a sudden combination of confidence in the market and foreign money waiting for opportunity to maximise value,” he says. “The whole supply and demand of office space will go haywire in 2011-12 because the number of new buildings coming onto the market is so few. Planners are dusting off the planning applications and I think there’s going to be a lot more unwinding of bad debt. There’ll be a new glut of bank-led sales of distressed assets.”
To a greater and lesser extent, both Trowers and Herbert Smith have had a presence in the Middle East for some time, which has been crucial to their winning mandates on UK-bound work. But what about the relative newcomers? Berwin Leighton Paisner (BLP) opened up an office in Abu Dhabi last year focused on both the domestic market, particularly the hotels and hospitality sector, and investment into the UK. This is part of a wider regional strategy encompassing alliance relationships forged by Middle East and North Africa region manager Zina Haj-Hasan. Early signs indicate that the firm is already reaping the benefits.
BLP recently acted for the Libyan Investment Authority on its first UK purchase, the Lebanese group M1 on a multi-let office building and Qatari Diar on its buyout of the Candy Brothers’ interest in Chelsea Barracks, reflecting what BLP partner Robert Bindless refers to as a “range of risk appetites. The Libyans have been quite conservative: the 14 Cornwall Scheme is a toe-in-the-water deal, while M1 is more of an opportunity investor and Qatari Diar is a developer at heart.”
Past and presence
But while BLP trumpets the value of its Middle East on-the-ground presence, Trowers’ Edmondes points out that such offices may even deter some clients from giving you work.
“Long-term relationships are important. A number of our largest clients date back to the 1970s. [But] if you’re acting for an ultra-high-net-worth individual doing deals overseas, they may not want you to have an office on the ground because they won’t necessarily want people knowing their business,” he argues. “There are firms that have historically done very well with Middle East investors who don’t have a presence there. Farrer [& Co] is an example. It works for the Qatari royal family but it doesn’t have an office [in Qatar]. The way we deal with [such work] is to have people here in London who keep their lines of communication bilateral and don’t talk to the overseas resident managing partner unless it’s clear that the client wants it.”
But despite the fact that Middle East investors made up a significant chunk of foreign investment in the UK commercial real estate market, it is important to remember that it accounted for less than £1.5bn of the transacted real estate sector last year.
As Bindless states: “There’s no doubt that BLP is excited and it’s a very important part of our strategy to help overseas investors - we’ve tailored products specifically to them. [Middle East investors] are here and they’re here to stay. Where they do something they do it properly. But the role shouldn’t be overstated in comparison to the existing market.”
Middle East money: Recent deals
Berwin Leighton Paisner partner Chris Adams advised the Libyan Investment Authority on the £120m purchase of IVG’s 14 Cornwall Scheme.
Berwin Leighton Paisner partners Robert Bindless and Robert MacGregor advised Qatari Diar on its purchase of the Candy Brothers’ interest in Chelsea Barracks.
DLA Piper partners Bruce Mullins and Catherine Usher advised Omani special purpose vehicle Funderbunk Europe 2 on the acquisition of Allen & Overy’s headquarters at One Bishops Square.
Herbert Smith partners Nadim Khan and Simon Price advised Al Salam Bank on its joint purchase and subsequent exit from Addleshaw Goddard’s headquarters at Milton Gate from UBS Asset Management. Dewey & LeBoeuf counsel Nicholas Shepherd advised an unnamed Middle East investor on the purchase
of Milton Gate.
Herbert Smith partner Don Rowlands and Lovells partner Francis Giacon advised Qatari Diar Real Estate Investment Company on the acquisition of the US Embassy building in Grosvenor Square.
Trowers & Hamlins partner Michael Pattinson advised the Abu Dhabi National Exhibition Company on the acquisition of the ExCel exhibition centre in London’s Docklands.