WSJ.com - Mideast Investors Pile Into European Properties

WSJ.com - Mideast Investors Pile Into European Properties

By SARA SEDDON KILBINGER
SPECIAL TO THE WALL STREET JOURNAL
August 31, 2005

Thanks to soaring oil prices, which have risen still further this week in the wake of Hurricane Katrina, Middle Eastern investors have been pumping more money into commercial real-estate in markets like the U.K., Spain and Italy, in a move to strengthen their European real-estate holdings.

In London's prestigious West End, Middle Eastern investors have accounted for £1.14 billion ($2.05 billion) of deals so far this year, including some in progress, up from £182.7 million last year, according to advisory firm Jones Lang LaSalle.

"There's no doubt that oil prices are driving investment," said Tim Weale, a partner in the capital markets group at advisory firm Cushman & Wakefield Healey & Baker in London, who advises Middle Eastern investors interested in real estate in London and the rest of Europe.

Two of the major investors to watch in London are the Abu Dhabi Investment Authority, which controls the investments of the Abu Dhabi government, and Sheik Khalifa bin Zayed Al Nahyan, the president and ruler of Abu Dhabi. The Abu Dhabi Investment Authority in London declined to comment. Sheik Khalifa couldn't be reached for comment.

Earlier this month, an Abu Dhabi investment group that includes Sheik Khalifa's family bought three office properties in the West End for a total of £426.4 million, according to people familiar with the deals. The group was advised by Lancer Property Asset Management Ltd. The yields on all three buildings are less than 5%, say people familiar with the deals, suggesting that falling yields aren't necessarily a barrier to investment in a city where prime real-estate assets are still much sought after.

"Despite a fall in yields -- office yields can be less than 5% now, compared with around 7% a couple of years ago -- the U.K. is still a very attractive market for Middle Eastern investors. They understand it; it's transparent. They feel at home here," said Andrew Yeandle, a partner in West End investment at real-estate consultants Strutt & Parker in London.

However, because the U.S. dollar has strengthened against the pound and many Gulf currencies are linked to the dollar, some investors are choosing to focus more on investment opportunities in their home markets, Mr. Weale said.

Nevertheless, Mr. Weale said the fact that Middle Eastern investment into London real estate has increased this year suggests investment levels are returning to normal, following a drop in investment in 2004, when U.K. interest rates were higher.

Middle Eastern investors often borrow money in the U.K. to leverage the deals, so they are affected by U.K. rates.

The best year for Middle Eastern investment in London was in 2003, says Mr. Weale, when Middle East money accounted for £1 billion, or about 20% of investment into commercial real estate. The reason is that interest rates were low, facilitating positive arbitrage between borrowing costs and returns.

• Questions or comments? Write to us at realestate@wsj.com.