Sovereign wealth funds have gobbled up London real estate. Now Brexit threatens their investment.
Gulf Arab investors, some of the biggest buyers of British real estate, are holding back from new deals because they fear a property price slump if Britain leaves the European Union, according to legal and investment sources.
Sovereign and private investors from Qatar, Saudi Arabia, Kuwait and the United Arab Emirates have been prolific buyers of British assets in the past decade, snapping up billions of dollars worth of property, mostly in London.
“Sovereign wealth funds are concerned that Brexit is taking its toll on the property market in London,” said a London-based lawyer who works with some of the largest Gulf funds. He declined to be named, citing the confidential nature of his work.
“The situation will further deteriorate if there’s a Brexit vote.”
The value of residential property in upmarket areas popular among Gulf investors – including Chelsea, South Kensington and Knightsbridge – fell between 3.5 and 7.5% on the year in May, according to estate agent Knight Frank.
Gulf family businesses and private investors are heavily involved in London real estate.
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Investors from the UAE accounted for more than 20% of buy-to-let property sales in the UK in 2015, said Amit Seth, the Middle East and North Africa head of international residential developments at London-focused real estate agency Chestertons.
“At the moment it seems clear people are little bit more skeptical on making an investment today because of Brexit,” said Seth, who is based in Dubai, referring to private Gulf investors in residential real estate.
He said investors were still researching opportunities and discussing them with his company, but not finalizing deals.
While the precise impact on Gulf investments is unclear, overall flows of foreign capital into commercial real estate in Britain stopped in the first three months of 2016, Bank of England Governor Mark Carney said in April. Business investment in the country also fell in early 2016, statistics showed this week.
Gulf investors also have broader worries about their investments in other sectors and how a possible Brexit in a June 23 EU referendum could affect the British economy, the sources said.
A YouGov poll for the Times newspaper showed an even split between “Remain” and “Leave” voters on Wednesday.
There is no suggestion long-term investors from the Gulf will exit assets en masse if Britain votes out, but many are worried about the impact on portfolios and wider economic effects, a senior Gulf government official said.
“Of course we are worried about what will come next if the British decide to leave the EU,” the official said. “We think that there will be a negative impact on our investments in the UK because the selling (prices) will go down and the banks in England will face some difficulties.”
Asked to comment on Gulf investor concerns, Tobias Ellwood, a British Foreign Office minister, said the EU referendum was a significant event that had been discussed as part of regular bi-lateral engagements covering a wide variety of areas.
“But (it) has not been raised in any form in relation to impact on investment opportunities, which go from strength to strength,” he told Reuters in Qatar’s capital Doha on May 21.
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Sheik Hamad Bin Jassim Bin Jaber al-Thani, a former Qatari prime minister and investment chief who oversaw much of the Gulf state’s UK acquisitions, has spoken out against a “leave” vote.
“In the Middle East we all want to see a strong Europe, and believe that economic integration is key to making it stronger. In fact, we believe the UK should not only be part of the EU but should lead it,” he told Reuters, describing the City of London as the “financial capital of the world.”
Qatar is one of the most high-profile investors in London, owning landmarks such as the Shard skyscraper, Harrods department store and Olympic Village, as well as luxury hotels. It also leads a consortium that bought the owner of the Canary Wharf financial district last year.
While the Qatar Investment Authority (QIA) wealth fund has been diversifying its portfolio away from Europe towards more investments in the United States and Asia in the last couple of years, it is still heavily invested in Britain and holds stakes in Barclays, Royal Dutch Shell and Sainsbury’s .
If Britain votes to leave “then you are going to see a big hit to investments,” said a senior Qatari banker who does business with sovereign and private investors.
He said investors were still working on deals without finalizing them until the picture becomes clear. “They are watching to see what happens, but people are continuing to work on new things as they take months to get done.”
The QIA has $256 billion of assets under management globally, according to the Sovereign Wealth Fund Institute (SWFI). It has at least $7 billion directly invested in equities traded on the London Stock Exchange, in which it also holds a 10.3% stake, according to Thomson Reuters data.
Sheik Hamad said in April that Qatar’s total investments in Britain were around 30 billion pounds ($44 billion), according to comments in a Financial Times interview.
Kuwait Investment Authority, which has $592 billion in assets under management according to SWFI, is also a major investor though its London-based Kuwait Investment Office. In 2013 it said the fund had more than doubled its investment in Britain over the previous 10 years to more than $24 billion.
Like Qatar, Kuwait owns London landmarks such as the More One riverside development which houses the headquarters of the mayor, as well as buildings in Canary Wharf. It has focused on infrastructure investments through its Wren House Infrastructure Management arm set up in 2013.
Uncertainties about the legal and regulatory framework that would result from a Brexit is a worry for any large investor in Britain, said Fabio Scacciavillani, chief economist at Oman Investment Fund, which SWFI says has $6 billion under management.
“If the region’s sovereign wealth funds have invested in UK assets they would be rightfully concerned for their long-term returns outlook,” he said, adding most would put their decisions on hold until after the vote.
“Brexit implies a long and potentially thorny period of adjustment as the UK will need to negotiate trade relationships.”
A report published by Britain’s Treasury in April predicted foreign direct investment into the country would be between 10 and 26% lower after fifteen years if it left the EU, compared to where it would be if it stayed in.
All Gulf Arab countries are concerned about the prospect of an “out” vote, said a Saudi businessman who meets regularly with senior Gulf officials. He said the British government had been informed unofficially at several levels about the concerns. An exit would affect investments, he added.