Middle East sovereign wealth funds set to reduce spending in overseas markets as oil prices plunge

Middle East Sovereign Wealth Funds are likely to cut down international spending next year as they tighten their belts to make up for falling oil prices.

According to new research from property broker JLL, Middle Eastern SWFs, known for buying large trophy buildings in London and other key European cities, signed deals to buy US$6.5 billion worth of property in the first nine months of this year – up from about $6bn recorded in the whole of last year and $7bn in 2013.

JLL predicted that the volume of investment from the Middle East funds set up to squirrel money away from country’s surpluses made from oil, would decline significantly next year as Gulf countries cut back spending because of the falling oil price.

Instead, it said that funds would spend more of their limited budgets on the domestic property market.

“While some SWFs will retain their existing mandate to invest globally, we expect more funds will be diverted into the local property market [through direct property purchases and via funds and external managers],” said Craig Plumb, the head of research at JLL’s Dubai office.

“This will provide an important source of additional capital for property 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 on emerging locations and alternative sectors of the real estate market in future years.”

However, JLL said that spending from Middle Eastern private investors in the United Kingdom and European property market was set to increase next year, making up some of the shortfall left by retreating SWFs as buyers look to North America, the UK and Germany to store their cash.

It calculated that investments into international property market from Middle Eastern private individuals stood at about $1.5bn in the first nine months of the year. Last year, it stood at $3bn. “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 property markets,” Mr Plumb said.

Oil prices fell drastically during the second half of last year and have continued to drift downwards this year.

This week, oil prices fell to $36.40 a barrel – only just above their level at the lowest point of the financial crash in December 2008.

Most economists expect prices to remain low for the next couple of years, with the IMF suggesting average prices would remain between $50 and $60 per barrel until 2020.

The news comes as Middle Eastern SWFs continue to sell down assets. Saudi Arabian Monetary Authority (Sama) has withdrawn $1.3bn from European equities this year, according to Nasdaq estimates.

And Qatar Investment Authority revealed in October that it was selling its 10 per cent stake, valued at $615 million, in the German construction company Hochtief, QIA’s third divestment in three months after it sold stakes in the French construction conglomerate Vinci and two London office buildings.

It is also reported to be in talks to sell the film studio Miramax.

Last month, it emerged that the Abu Dhabi sovereign wealth fund Abu Dhabi Investment Authority is considering closing its London office.


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