Monday, June 13, 2005

Gulf Investors Lose Confidence in US, UK

Arab News - 13/06/2005
LONDON, 13 June 2005 — There are signs that Gulf investors are experiencing "investment fatigue" in the UK and European Union and are particularly slowing down their investment in commercial property and real estate. Indeed, a large proportion of this capital is coming home to markets in the Gulf Cooperation Council (GCC) states and in the MENA (Middle East & North Africa) countries.

In the UK, for instance, according to DTZ Research, the London-based international property consultants, investors from the Middle East invested only 460 million UK pounds in UK commercial property in 2004 — its lowest proportion of total overseas investment in the sector since 2000, and well down on the record 920m UK pounds invested in 2003. Not surprisingly, Middle East investors accounted for a mere 3 percent of the total overseas purchases of UK property in 2004.

"Gulf currencies," says Nick Edmondes, a partner at Trowers & Hamlins, " are pegged to the US dollar, and with the dollar weak against sterling, the capital cost of UK assets has increased. The UK property market performed well but Middle East investors have been put off by the fact that the higher capital values of UK commercial properties mean that they are getting lower yields. Finding value for money has become difficult."

As such, banks including Kuwait Finance House and Gulf Finance House, who were expecting stronger income returns from commercial property in the euro zone, have been persuaded to make most of their European acquisitions during 2004 outside the UK. With Gulf investors losing confidence in US and UK equities as an asset class, and with local land values and equity values increasing sharply, capital has inevitably returned to the Middle East region generating high returns, especially in real estate and equity investments.

Dubai is also another major property hotspot, with both locals and Western investors buying property in Dubai, whose latest residential-cum leisure realty development is the spectacular The World, a series of manmade islands shaped like the Earth's continents, and based four kilometers from the mainland.

Beneficiaries of this surplus money are the Gulf capital markets, and judging by the huge success of a spate of IPOs (initial public offerings) over the last year or so, including the IPO for Dubai-based Emaar Properties' Islamic mortgage finance company, Amlak Finance, which was oversubscribed 33 times; and the IPO for Etihad Etisalat, Saudi Arabia's second mobile telecoms operator.

This change in Gulf investor trend should be seen in the context of continued Gulf investment in markets such as the US and the euro zone to a lesser extent. HSBC Amanah, the global Islamic financial services division of the HSBC Group, for instance, has recently launched a second Shariah-compliant real estate investment product, HSBC Amanah Aqar Income Fund, which is aimed at investment in prime US leased real estate assets. HSBC Amanah launched its debut Global Properties Income Fund in November 2002.

Aqar Income Fund, which is a close-end fund, has a minimum subscription of $50,000. Early redemptions from the fund are not possible. The 5-year fund has a holding period of 5 years to 7 years, and according to HSBC Amanah "aims to provide a high return on investment as well as capital preservation."

HSBC has appointed Falcon Real Estate Investment Company Ltd. and NGP Capital Partners III, LLC as the Asset Managers - "to provide the highest quality global investment management to its clients." The investment adviser to the fund is HSBC Financial Services (Middle East) Limited.

The fund will concentrate principally on properties leased on a long-term basis to investment-grade tenants primarily in North America, who will provide the fund with regular monthly rental payments.

The Aqar Income Fund, which is aimed primarily at Gulf investors, is designed to generate a return after fees of around 7 percent to 8 percent per annum that will be payable in cash to its investors. Over the recommended 5-7 year holding period, the fund expects to generate annualized returns of 8 percent to 10 percent (after fees), inclusive of capital gains on properties.

According to HSBC Amanah's Navid Goraya, "The HSBC Amanah Aqar Income Fund is a unique investment opportunity for high net-worth individuals and institutions looking for a Shariah compliant product. It will provide a stable current income, risk management, lower volatility and the opportunity for capital appreciation. The demand for our first properties income fund was a clear indication that a further opportunity was needed by our clients."

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