“Never before have I seen more money flowing from this part of the Middle East to the UK,” says Majed Al Khan, looking out over the vast, turquoise expanse of Bahrain’s bay from the 28th floor of his financial harbour district office. And the chief executive of investment bank GFH Financial Group’s property arm adds that this sudden spike in interest is far from business as usual.
“Bahrainis are normally very closed,” he says. “We are not outgoing and we don’t readily invest outside our local market. But since Brexit, we have been crazy about the UK. Everybody I know is buying there now. There is a lot of individual interest but it is corporate too. Lots of banks and institutions are now looking – including us. There is about to be a big rush.”
Nearly one year on since the UK people voted to leave the EU in June 2016, still no one really knows what Brexit will mean when it becomes a reality. For now, though, amid the concerns and uncertainty – just last week Goldman Sachs boss Lloyd Blankfein warned London could “stall” because of Brexit risks – it looks as though the separation is not putting off overseas investors. If anything, the opposite is true as they clamour to take advantage of the weaker pound.
Back in March, family-owned Saudi investment management company Sidra Capital announced plans to invest £1bn in prime central London. In the same month, Qatar revealed a £5bn UK play over the next three to five years targeting energy, healthcare, infrastructure and IT services.
But Al Khan warns that Bahraini investors are different from others in the Gulf – and not just because their relative inactivity in the UK market thus far makes them something of an unknown entity, compared with their Emirati cousins. He says that they think differently, they invest differently and they are looking for different assets.
Here he reveals what those assets are and explains why he thinks the influx of cash to the UK will be a significant but short-lived phenomenon.
Weaker pound
It should come as little surprise that the time-specific nature of the Bahraini interest in UK property comes down to the weaker pound and the attractive value proposition currently available. “If you looked at investment levels of other Gulf Cooperation Council states, our volume would most likely still be the smallest,” says Al Khan.
“Bahrainis are now fully aware of the great window of opportunity to invest in the UK while sterling is weak,” says Harry Goodson-Wickes, head of Bahrain for Cluttons. “There was little appetite 12 months ago.”
Al Khan says that the currency benefits are the main driver behind the interest. “We don’t feel that will stay for long as we believe the pound will gain power again. There is a window of opportunity and this is why the rush is happening.”
He adds that Bahraini investors looking for UK opportunities are most likely to play it as safe as possible and avoid trophy assets: “We know that the most volatile markets are those trophy assets. We will target more usable assets. Good, decent, well-located properties. Then there is student accommodation. That is always a very hot line of business that real estate investors, especially at the corporate level, have been looking at. And the stories that I’ve heard, or come across, were successful. I think countries other than Bahrain in the Gulf region focus on those trophies. If you divide the segments regionally here, and look at where the money goes, I think Qatari money goes most towards the trophy assets. Bahrain focuses on more growth potential, rather than trophy assets. We are not flippers. If the money leaves Bahrain, it’s there for the long term.”
Here he highlights what he considers to be the main difference between Bahraini investors and those from parts of the world beyond the Gulf region: “If UK real estate companies compare their experience [of investors from the Gulf] with Russian or Chinese investors, for example, [they will find the Russians and the Chinese] are more or less flippers. It’s very volatile.”
As for his own play, Al Kahn is still on the look-out: “We would look for bulk buyouts and try to down-sell in the region – basically benefiting from supply in the London market, and getting it at a certain level of discount. We aren’t set on a particular area of the city but we are more attracted to areas where we can expect more realistic pricing. We’re not talking about areas where you reach £3,000-£4,000 per square foot. We’re interested in areas which can be sold between £800 and £1,400. Our initial focus would be on residential.”
In terms of interest beyond the UK capital, Al Kahn says that London remains his target. But he adds that he can see the attraction of Manchester: “This has been a great area for Bahrainis,” he says. “A lot of money went to Manchester, that’s from personal experiences I have been hearing about in the market. And the reason for that comes down to the difference between the prices per square foot between Manchester and London, and having the connectivity from the area. We have a lot of flights arriving there directly. I think it’s the only place other than London that we fly to without a stop. And it’s a known city for the region – mainly because of the football clubs.”
Brexit opportunity
Just how significant the influx of Bahraini cash into UK real estate will be remains to be seen. But with big players such as GFH Financial Group setting out their stalls, the rush to make the most of the “window of opportunity” that the Brexit vote has left in its wake looks to be well and truly on.
Two-way traffic
Al Khan on opportunities for UK buyers and investors in Bahrain:
“Over the past few months we have seen interest from UK-based pension funds and contracting companies who are willing to go into partnership in developments in Bahrain – I think maybe because the returns they are getting in their home base are not meeting their expectations. And with Brexit I think they are looking more towards exploring new markets, other than Europe. These two elements contributed a lot to their initiatives. And Bahrain has always had a special relationship with the UK, compared with the other GCC countries.
“But there is work to be done. We need to give good experiences to whomever is investing with us, and that’s what brings others. So, I think the investors who saw the opportunity, and took the risk during the difficult times in Bahrain are the best ambassadors for the real estate market. They all made their money back, and they all made some profit. In other countries they are lucky if they got their initial investment back. We have the market rates today reaching peak even though we are in a semi global economic crisis. But I think we need to be creative on the projects that we launch. A UK investor will not be interested in a freehold apartment, but will, I believe, be interested in investing in a more comprehensive property that offers added value. This is where we think specialised properties will trigger those international investors. We need to offer more complex products for them, to meet their expectations and to meet their returns.”
Are UK/Middle East relations Brexit-proof?
Faisal Durrani, Cluttons’ head of research:
Commercial property investment volumes into the UK were initially curtailed by the uncertainty created in the aftermath of the EU referendum. Total commercial property investment volumes dipped to a little over £51bn at the end of 2016, from £71bn a year earlier, according to the latest figures from Property Data. Similarly, total investment volumes into London commercial real estate dipped by 36% to £20.7bn over the same period.
However, investors from the Middle East have retained their strong appetite for London commercial property and the drivers behind the continued appeal for London assets goes well beyond the links the UK has to the EU. Deep-rooted trading relationships between the Middle East and the UK, along with the safe haven appeal of London have helped to cement what is a well-trodden investment pathway. On a national basis, Middle East investors accounted for 6.6% of all commercial property investment last year, or about £3.4bn, with £2.1bn committed to London alone.
The substantial oil price correction that took place three years ago has forced the hand of many Gulf governments, with 5% VAT now in the final stages of discussion before its implementation next year – a sharp deviation from previous policies of fostering a tax-free haven. This maturing attitude has meant that overseas property investment is very high on the agenda for the region’s sovereign wealth and institutional funds. The lure of a 20-25% “discount” thanks to the strong US dollar (to which most Gulf states retain a fixed peg) has meant that UK assets are at their most appealing since at least before the Great Recession of 2008.
Bahrain and the UK share a particularly close history, dating back to 1616, when the East India Company was established in the Kingdom. When it comes to the island nation of Bahrain, the UK continues to draw in funds from the Kingdom at a significant rate. Tadhamoon Capital, for instance, spent £100m in 2013 on a Paul Street acquisition in central London, which consisted of student housing, retail and office space, taking its total UK investment portfolio to £240m. More recently, Bahrain-based Investcorp purchased a $160m industrial asset portfolio in Boston and Chicago, highlighting the importance being placed on income diversification by Gulf‑based funds.
Picture: Ali Alriffai
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