The challenges and pitfalls for GCC investors in the UK real estate market

Despite the concerns around Brexit, the impending UK elections and the wider Euro Zone political position, the weight of Gulf Cooperation Council (“GCC”) capital trying to access the UK market shows no signs of slowing. Given the weaker pound and the increased sophistication of investors’ appetite has in fact strengthened for UK real estate since the referendum vote last summer.

Historically GCC capital has been focussed on long term wealth preservations investments in London. This position has not changed with 2016 showing £1.8bn of GCC capital being invested into London accounting for c.15% of total London transactions (source Ed Bradley, CBRE). However the key shift over the past few years has been the increased drive for long dated, progressive income returns, typically leveraged, that will produce a c.7% net cash-on-cash. To achieve this investors have filtered to the regional markets and now dominate the buyer pool for suitable medium to long let assets. In a recent Thames Valley office acquisition by a Palmer Capital client all the other c.6 bidders were GCC backed and this is not an uncommon position. They are filing the gap left by domestic institutions for sub annuity grade product but where returns are insufficient for propcos / private equity.

With seemingly unrelenting demand from GCC investors and UK domestic demand generally down, there are a number of challenges facing GCC investors from identifying and appraising suitable assets, to securing competitive lending terms (often sharia compliant) and most importantly ensuring they are able to transact.

The solution to these challenges in a highly competitive market is to work with an investment manager who can make all the difference between success and failure – both in terms of securing an asset and implementing the business plan. We have seen numerous GCC investors viewing assets but being unable to underwrite a bid. Similarly investors are frequently unable to secure the most competitive debt terms due to a lack of a UK sponsor alongside them and crucially often overlooked at bid stage. Vendors often are preferring to sell to a party with an existing stronger UK track record irrespective of availability of capital and intent to invest. Yes there are increased fees for an investor using this approach but with the right investment manager this could result in a total saving and should certainly enhance the investment program / investor returns.

Whilst GCC investors need to be very selective in choosing a suitable manager equally a manager needs to be discerning in deciding which investor groups to work with. Reputations take years to develop but can quickly vanish. Ensuring the investor and manager have a clear working understanding from the outset together with a thorough and proper process is fundamental.

At Palmer Capital we have chosen to work with two complementary GCC capital partners as this has enabled us to develop deep trusted relationships, understand in depth the investor’s requirements and as the investment programmes have developed and evolved has created a strong alignment of interest. Over the past 12 months this has resulted in a number of successful acquisitions with investor appetite to secure a further £300m assets in 2017. We anticipate continuing demand from the rest of the GCC investors who will likely dominate this segment of the market in 2017.