Weaker oil prices to hit capital flows into GCC property

Fiscal restructuring is already evident in the form of budgetary cuts among GCC countries, including the UAE.

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, said JLL 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 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 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 or removal of subsidies. Such developments could also have implications for 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 over the next 12 months. While governments continue to spend on development and infrastructure projects, the level of this spending will be curtailed over the medium term as spending needs are realigned with the reality of lower oil revenues."
Global purchases
GCC investors have been active on the global real estate stage for many years. Since 2007, GCC investors have purchased a total of over $45 billion of real estate globally. In reality, this figure underestimates their exposure to real estate as it only includes direct commercial real estate purchases and excludes both residential projects and company acquisitions.
While many of the high profile purchases were made by sovereign wealth funds (SWFs), there has been growing interest from private investors over the past two years and this trend is expected to continue further.
Despite lower oil prices, JLL's data shows that Middle East SWFs remained active purchasers of global real estate during 2015.
A total of 38 deals worth $6.5 billion were transacted over the nine 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 lower oil prices that will cause sovereigns to reconsider their strategies.
Plumb added: "While some SWFs will retain their existing mandate to invest globally, we expect more funds will be diverted into local real estate. 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."
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 overseas real estate markets. We expect North America and the United Kingdom to remain the largest recipients of Middle East private capital, with Germany also becoming a preferred location."
- business@khaleejtimes.com