Lower Oil Prices To Reduce Capital Flows Into Real Estate in 2016

Tuesday 15 December 2015
Craig Plumb, Head of Research JLL MENA

Dubai - MENA Herald: JLL, the world's leading real estate investment and advisory firm, highlighted the impact of lower oil price on capital flows into real estate, in a recent study. Lower oil prices are leading to a fiscal restructuring across GCC’s hydrocarbon economies, which involves both reduced government spending and increased government revenue through taxation.  This scenario will have various implications for real estate investment both in the region and globally.

Fiscal restructuring is already evident in the form of budgetary cuts among GCC countries including the UAE. As governments become more cautious about their finances, there is a likelihood of cuts in infrastructure spending.. While many of the already announced projects are likely to proceed, they may be scaled back or rescheduled over an extended timeframe, with future projects being curtailed. This will inevitably have a knock on effect on local real estate markets. On the other side of the fiscal balance, GCC governments are also seeking to raise additional revenue through sales tax, land/housing tax and reduction/removal of subsidies. Such developments could also have implications for various real estate stakeholders.

Craig Plumb, Head of Research JLL MENA, said “While we remain positive on the long term outlook for real estate markets across the region, there is little doubt that the rebalancing of the fiscal position will result in headwinds and challenges over the next 12 months. While governments continue to spend on development and infrastructure projects, the level of this spending will inevitably be curtailed over the medium term as spending needs are realigned with the reality of lower oil revenues.

GCC investors have been active on the global real estate stage for many years. Since 2007, GCC investors have purchased a total of over USD45 billion of real estate globally. In reality this figure under estimates their exposure to real estate, as it only includes direct commercial real estate purchases and excludes both residential projects and also company acquisitions. While many of the high profile purchases have been made by government controlled Sovereign Wealth Funds, there has been growing interest from private investors over the past 2 years and this trend is expected to continue further.

Despite lower oil prices, JLL’s data shows that Middle East SWF’s remained active purchasers of global real estate during 2015. A total of 38 deals worth USD 6.5 billion were transacted over the 9 months to September 2015. While the number of overseas transactions has declined from the 74 deals seen in 2013, the value of investment has remained high and is likely to exceed that experienced in 2014. The volume of investment is expected to decline in 2016 as we enter a prolonged period of lower oil prices that will cause sovereigns to reconsider their objectives and strategies.

Craig Plumb added, “While some SWF’s will retain their existing mandate to invest globally, we expect more funds will be diverted into local real estate (through direct real estate purchases and via funds and external managers). This will provide an important source of additional capital for real estate markets across the Middle East. Some funds will continue to focus on trophy hotel and commercial buildings but more attention is likely to be focused upon emerging locations and alternative sectors of the real estate market in future years.”

Some of the decline in SWF offshore investment is likely to be offset by private investors from the Middle East who are becoming more active purchasers of overseas property. Craig Plumb concluded, “The prevailing geopolitical and security tensions across the Middle East are expected to result in an increased flight of private capital as wealthy Middle East investors seek opportunities in more stable and secure overseas real estate markets.  JLL expects North America and the United Kingdom to remain the largest recipients of Middle East private capital, with Germany also becoming a preferred location’.

Within the Middle East, levels of real estate investment have declined in 2015.  Data from the Dubai Land Department (DLD) shows the number of real estate sales has declined by around 26% in the year to September 2015 compared to the same period last year.  . The pattern of investment has also changed, with the fall in the number of residential sales being partly offset by an increase in the value of land sales. Lower oil prices and the stronger US dollar have combined to reduce the inflow of capital into Dubai’s real estate market over the past 18 months.

Data from the  Ministry of Justice reveals a 9% reduction in the value of real estate transactions in Saudi Arabia in the year to September 2015, compared to the same period last year, with total sales declining from SAR316 million to SAR 290 million.   Commenting on this trend Jamil Ghaznawi (head of JLL in Saudi Arabia) noted that

“The availability of more completed income producing commercial properties and further opportunities to tap into growing alternative sectors such as education and healthcare will be key to attracting private wealth to remain within the region.”

“The implementation of the white land tax is also likely to generate additional sales of land within urban areas in Saudi Arabia in 2016.  Some owners will dispose of sites to those developers able to commence construction, to avoid the imposition of this new tax”.

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