Middle Eastern Commercial Real Estate Investors Shift Focus
The big sovereign wealth funds are not so much interested in conventional properties, but more niche assets and secondary markets
By Patrick Sisson April 10, 2023 7:00 amreprints
In today’s market, visions of Middle Eastern buyers acquiring multibillion-dollar Manhattan high-rises and trophy assets in other coastal cities may be a bit of a mirage.
Even the uber-wealthy sovereign wealth funds from that part of the world have become more measured during a period of rising interest rates and economic uncertainty, pausing some activities, focusing on different sectors and secondary markets, and generally trying to wait out the malaise in the market.
“People are sitting on their hands, and dry powder is the ultimate prime asset,” said Ron Dickerman, president and founder of Madison International Realty. “They’re playing defense.”
Forget the recent investment formula of skyscrapers, premier sports teams and ambitious startups. More recently, this Mideast strain of cross-border capital is investing in alternative real estate such as cold storage, Sun Belt student housing and the red-hot industrial outdoor storage market, a fancy name for truck yards and lots for shipping containers. The core property asset groups previously favored by the Saudi Arabia Public Investment Fund (PIF), currently managing $600 billion, or the Kuwait Investment Authority, which oversees $768 billion in assets, just aren’t on the market right now.
“They’re licking their wounds on existing portfolio investments,” Dickerman added. “I don’t think anyone is backing up the truck. If they’re doing anything, it’s distressed strategies at the margin, trying to position themselves to take advantage of the markets.”
The fortunes of sovereign wealth funds (SWFs) have improved, as oil prices climbed throughout 2022 and, despite a drop in recent months, hover above the pre-pandemic price. The region’s 10 largest SWFs manage roughly $4 trillion, more than the GDP of France, and invested $89 billion total last year, double the amount in 2021, so global financial players are aggressively courting their support and investment.
But their real estate investments haven’t been as high flying. This is partially because they’re seeking diversification. In property terms, that means betting that secondary asset classes may have more room for appreciation over time. Recent challenges amid changing leadership haven’t helped. The KIA was thrown into turmoil when a top London investor was sacked, for instance, and Saudi Arabia’s aggressive Vision 2030 plan seeks to pivot the kingdom toward a more diverse, less oil-dependent economic future.
This sector shift in real estate investment, which has been happening for years, follows a multiyear decline in overall spending on U.S. property, and a general cooling off in the market.
Foreign investment in commercial real estate plummeted from $62 billion in 2021 to $23 billion in 2022, said Riaz Cassum, executive managing director in the Boston office of JLL (JLL) Capital Markets for the Americas. In 2018, foreign buyers invested $83 billion, a staggering 18 percent of total U.S. real estate transactions. The decline in Middle Eastern investment was similarly stark; last year, funds and individual buyers only purchased 212 properties worth $3.3 billion, a 45 percent annual drop.
According to data from MSCI, foreign real estate investors actually sold more U.S. property in 2022 ($46.9 billion) than they bought ($34.8 billion). Many corners of the globe, especially Europe and Latin America, face the twin pressures of rising interest rates and declining values in their own currencies, straining their abilities to invest internationally. For buyers from the Middle East, working in petrodollars, currency rate shifts don’t present as much of a challenge as uncertainty about where and when to invest.
“What we’re hearing generally from the offshore investors is that they’re watching what’s going on in the U.S. right now and trying to make strategic decisions, but are not necessarily acquisitive,” said Darcy Stacom, chair and head of NYC capital markets at CBRE.
Despite the difficulties and funding drop-off, the United States remains the favored destination of global buyers due to its stability and long-term returns. Just not right now. A survey by the Association of Foreign Investors in Real Estate (AFIRE) last year found that while four out of five investors felt increased interest rates were worse than they expected, the majority were still on track to make significant allocations to the U.S. Last fall, the $829 billion Abu Dhabi Investment Authority said it would increase its U.S. real estate allocation from 45 percent to 60 percent, noting that “the outlook for real estate investment remains attractive.”
And with the price of oil and energy remaining high due to recent supply decreases and geopolitical tensions around the war in Ukraine — $50 a barrel is the rough break-even price for funds in the region to cover their domestic social spending obligations — sovereign wealth funds from the Middle East have significant cash reserves ready to deploy when there are more signs of predictability in the market.
Still, Middle Eastern real estate investors tend to get press coverage above and beyond their actual share of U.S. real estate purchases. Canadians are actually the largest foreign buyers of U.S. properties — though MSCI tracked a 48 percent year-over-year decline in investment from our neighbors to the north in 2022.
The sovereign wealth funds of Saudi Arabia, Dubai, Kuwait and others have historically tended to be more flashy. But their strategy has shifted, said JLL’s Cassum. Today, the sovereign funds are banking on funds and platforms, becoming more vertically integrated and benefiting from partnerships with investors with more domestic experience and expertise. It’s less risky than buying individual assets, with defined holding periods and returns, and represents a more strategic, programmatic strategy by the SWFs.
“We’re an active, not a passive, long-term investor,” Waleed Al Mokarrab Al Muhairi, deputy chief executive officer of Mubadala, a United Arab Emirates SWF, told Bloomberg in January. “That means we have control of when to invest, when to monetize and, through board representation, when to be a voice for change.”
Last August, Landmark Properties announced a $2 billion joint venture with the Abu Dhabi Investment Authority (ADIA) focused on build-to-core student housing. That arrangement began with a development project, said Cassum, and once ADIA felt comfortable, they decided to create a more systemic deal that allows them to deploy capital on a consistent basis.
“I think if you talk to the sovereigns, it’s not just that they’re buying into a platform, so they own a piece of the company,” said Madison International’s Dickerman. “It’s that they want to be able to have a proprietary source of acquisition pipeline that can drive their capital deployment.”
There’s also a “barbell” strategy in markets, said Cassum, with sovereigns adding more secondary markets like Austin and Nashville to larger existing markets like New York and D.C. “While they should be awash in oil money, they’re not spending it here in New York,” said Stacom.
Middle Eastern investors also benefit from another advantage, one that’s unalterable: They’re not from China. In recent years, the Committee on Foreign Investment in the United States (CFIUS), which reviews national security implications of foreign investment, has been given broader powers to push back against Chinese property purchases near sensitive military installations. Meanwhile, a coalition in Congress has pushed to restrict Chinese purchases of U.S. farmland, while local and state leaders have expressed their displeasure with such acquisitions and see them as potentially dangerous.
“We don’t want to have holdings by hostile nations,” Florida Gov. Ron DeSantis said during a press conference earlier this year on Everglades restoration. “And so if you look at the Chinese Communist Party, they’ve been very active throughout the Western Hemisphere in gobbling up land and investing in different things.”
With so many industries seeking support from the Mideast’s SWFs, it’s likely more investment may pour into the industries of the future, which might translate into increased investment in data centers and life sciences real estate — and, as far as the funds and their leaders are concerned, their own domestic industries. Saudi Arabia’s PIF recently invested $900 million in the luxury Aman global hotel group, which has expansions planned in the United States and Saudi Arabia. Part of the reasoning for the deal, said Cassum, is to promote investment in Saudi hotels and tourism. That’s another long-term return fund managers are chasing.
“They have so much capital, they can focus on investing and bringing expertise to their country,” he said. “It validates what they’re doing, and helps further diversify their capital.”