Property

Is The London Property Market Feeling The Heat Of Brexit?

Published in Forbes Middle East, 16 November 2017

The London property market has long been a favorite of Gulf investors, but does the Brexit vote and the instability of a minority government in Westminster make the city less attractive?

Political turmoil may be something Middle East investors are used to, but it is also something they like to avoid. That is one reason for the huge amounts of Gulf mon­ey that have been poured into property in cities like Paris and New York over recent years.

London too has benefited hugely due to this investment behaviour. From the Harrods depart­ment store to the Shard skyscraper and countless luxury apartments and homes, Middle East buyers have made their mark on the London property mar­ket. But the threat of the U.K. leaving the European Union (EU) in a ‘hard’ Brexit deal (or even no deal at all), coupled with a general election earlier this year which left Prime Minister Theresa May weakened and without an overall majority in parliament, is tar­nishing the U.K.’s image as a place of stability. Might all this force Middle East investors to look elsewhere when thinking about property in the future?

There have certainly been some signs that wealthy Gulf buyers are shying away from London, both in terms of commercial and residential prop­erties, although the picture is a mixed – not to say confusing – one.

One reason the market is so hard to read is there are several different issues at play. On the one hand, the unstable political climate has caused the value of sterling to plummet, making it cheaper to pick up assets in the U.K. For anyone using dollars – or cur­rencies pegged to the dollar, as most Gulf countries are – prices are effectively 18% lower than they were two years ago.

“The incentive for Middle Eastern purchasers has sharpened in recent months, mostly due to the favourable currency swing,” says Charles Penny, an associate at the London super prime team at Knight Frank, a real estate consultancy.

But prospective buyers need to weigh up cost savings against other negative developments be­fore deciding whether it makes sense to press ahead with a purchase. For example, the stamp duty tax on purchases has increased several times since 2012 and other new taxes have been introduced to cover properties held by corporate owners that had previ­ously avoided stamp duty. Those changes have ar­guably had a greater influence on prices than any nervousness caused by the febrile political atmo­sphere and, while there has not been a crash in pric­es across the city, there is evidence of a slowdown, particularly for new-build developments, many of which have tended to be sold in recent years to buy-to-let investors.

“We have seen a softening of prices in prime central London,” says Naomi Heaton, chief execu­tive of London Central Portfolio (LCP), a real es­tate investment firm. “That’s mainly been due to tax more than Brexit uncertainty.”

When it comes to weighing up these pros and cons, some market participants will have less dis­cretion than others over whether to buy or sell. A wealthy parent may want to acquire a property if a child is coming to London to study, for example, while marriages or divorces might also prompt sales or purchases. Those buying investment properties will have more hard-nosed calculations to make, but it is not an easy call for anyone.

The fall in the value of sterling “definitely does make a difference,” says Fionnuala Earley, residen­tial research director at estate agency Hamptons International. “It makes U.K. property relatively cheaper, but you’ve got to take into account the un­certainty we’re facing because of Brexit and whether that, in the judgement of a buyer, means the U.K. economy is going to go downhill and whether it will take house prices with it.”

All this helps to explain the slowdown in ac­tivity. Hamptons International says this year it has taken an average of 21 weeks to sell a home in London, compared to just seven weeks in 2014. And according to LCP’s analysis of transaction data, the number of deals across the main areas of prime cen­tral London – including neighbourhoods such as Kensington, Chelsea and Westminster – were down 21% in 2016 compared to the year before. Chelsea was hardest hit, with a 12.2% fall in average prices and a 28.5% fall in sales volumes. Price falls were also seen in Kensington (3.9%) and St James’s Park & Mayfair (2.5%).

There are similar trends at play in the commer­cial market, where concerns about the nature of any Brexit deal are even more pressing, as a bad deal could lead to a slump in demand for office space, particularly in the city where the finance industry is concentrated. Here too, Middle East investors ap­pear to be taking a back-seat. “None of the recent major transactions in either the city or the West End have involved Middle East buyers or sellers,” says Kiran Patel, chief investment officer of Savills Investment Management.

“We’re not really seeing that much appetite coming from the Middle East since Brexit,” he adds. “They’re either keeping their powder dry or [pur­suing] opportunities elsewhere. There are some Middle East family offices around, we just haven’t seen them in the market as much. They may be buying the odd small building here and there but they’re not featuring much at the moment.”

Middle East investors are not uniquely affected by these issues. Indeed, European buyers are likely to see Brexit as a more serious concern, as trade flows between the U.K. and the rest of the EU are far more substantial than they are with the Gulf. In ad­dition, Brexit may end EU citizens’ right to live and work in the U.K. without a visa that could potentially dampen demand for real estate from this section. According to Hamptons, the proportion of EU buy­ers has been falling for a year: in the second quarter of 2016, EU citizens accounted for a third of buyers in prime central London but by the first quarter of this year they made up just 8% of buyers. Indeed, they have now fallen below Middle East buyers, who were the largest group of overseas investors in prime central London, accounting for 10% of all purchases in Q1, albeit it in a slower market.

Overall, it looks like international investors as a whole are in retreat. Data from estate agency Countrywide released in mid-July shows the pro­portion of overseas-based landlords across Great Britain is now at a record low of 5%, compared to 12% in 2010. London has seen the largest fall with 11% of rented homes now owned by an overseas landlord, down from 26% in 2010. In prime central London, overseas-based landlords owned 31% of all rented homes in 2010, a figure which has fallen to 23% this year. The number of European-based landlords in London has been gradually falling over time and now stands at 28%, ranking them behind Asia-based landlords at 33% but ahead of North Americans (10%) and Middle East landlords (9%).

Despite all this there are some things that have long been – and continue to be – in London’s favor. The city remains a big draw for Gulf buyers who know the landscape and enjoy visiting. And de­spite the uncommonly tumultuous politics of the U.K. in recent years, observers say London contin­ues to be seen as a safe haven, particularly at a time when there is so much turmoil within the Middle East itself.

“London is always one of those global cities that carries with it a cachet that some others do not,” says Earley. “The London prime market has always performed well against other sorts of assets and the Middle East [investors] in general have al­ways favored buying in London, so it would be odd if they didn’t continue to do that. It doesn’t look like they’re scared of what’s happening at the mo­ment, they may just be a little bit wary of where capital values might go.”

Investors target London property market with Shariah-compliant funds

Published on Salaam Gateway, 14 November 2015

Interest in Shariah-compliant investment in the UK property market is showing signs of strong growth, with several hundred million pounds of investment potentially on the way into the market over the next year.

Among those currently raising money for investment is London Central Portfolio (LCP), which has been running an investor roadshow in Southeast Asia in recent weeks, holding meetings with local banks around the region. It is seeking to raise £100 million by the end of March for its London Central Apartments III fund, which will invest in the private rented sector in the UK capital.

Naomi Heaton, CEO of LCP, says the combination of a Shariah-compliant fund and the reputation of the London property market is proving to be a compelling one. “We’ve spoken to a wide variety of banks in Malaysia, Singapore and Hong Kong. A lot of them will come on board,” she says.

In the coming weeks, Heaton is due to travel to the Gulf region to talk to potential investors there. One Qatari bank, Masraf al Rayan, has already signed up as an investor.

‘STRONG DEMAND’

London property has been a popular option for international investors for many years, including those from the Middle East and Southeast Asia. However, the growth of Shariah-compliant investment vehicles is providing a new route to the market and adding to the dynamism in the sector.

“We have seen strong demand for cash-generative Shariah-compliant real estate investments for a number of years,” says Chris Coombs, head of product development at Gatehouse Bank, a boutique finance house in Kuwait that has invested heavily in the UK real estate market. “Investor demand for real estate developments structured in accordance with Shariah has increased. We have made a big push into the residential private rented sector in the UK.”

As Coombs notes, from an Islamic finance perspective, the fact that property investment involves a physical asset makes it a more straightforward option than many others. “Relative to other alternative investments, real estate is a natural fit with Shariah, provided that care is taken with respect to the uses of the assets,” he says.

EXPANDING INVESTOR BASE

The market is not just being tapped by high net-worth individuals and institutional investors. The House Crowd launched in March 2012 and styles itself as the UK’s first Shariah-compliant, crowd-funding property platform. With a minimum investment of £1,000, it is more accessible than many of the larger funds. In comparison, the minimum subscription for private investors in the new LCP fund is £25,000.

Frazer Fearnhead, CEO of The House Crowd, says it has financed the purchase of more than 150 properties to date, usually holding them for between three and five years. The company has ambitious plans for the year ahead.

“In the next financial year we anticipate raising £100 million’, he says. ‘Over the course of the next few years, we intend to grow significantly beyond that and be in a situation where we are managing several hundred million pounds worth of property.

Not all of this will come from people concerned about whether the fund meets the requirements of the Muslim faith. As with other areas of the Islamic economy, being Shariah-compliant means that funds can appeal to investors in the Islamic world but also to people beyond it.

“We want our funds to be globally available,” says Heaton. “They’re just as attractive to conventional investors as Islamic investors because the model of targeting the private rental sector in central London is one that appeals to everyone globally. And the cost of funds and the cost of structuring it in an Islamic way is no greater than doing it in a conventional way.”

London property dispute draws in Kuwaiti sheikhas and UAE real estate giant

Published in Gulf States News, 12 November 2015

A complex legal dispute over a property deal in central London could be heading to mediation or a future trial.

Another complex dispute over property involving wellheeled Gulfis has come to the High Court of Justice in London, where Sheikha Hind Bint Salim Hamud Al- Jaber Al-Sabah and two other claimants are pursuing a legal action involving six defendants, including the Kuwaiti royal’s sister Sheikha Salem Hamud Al-Jaber Al-Sabah and Iraqi- Emirati businessman Hussain Sajwani, chairman of UAE-based developer Damac Properties.

The sheikhas’ father was Sheikh Salim Hamud Al-Sabah, described in court documents as a high-ranking professional soldier who was head of the Emiri Guard for 25 years. A grandson of Emir Sheikh Jaber I (who ruled from 1915 to 1917), Sheikh Salim died on 10 June 2003 without leaving a will; he left 15 heirs, including the two sisters. His estate included two adjoining flats, numbers 61 and 62, at 3-8 Porchester Gate, on the north side of Hyde Park in central London. The two flats had been converted into a single property and were registered in the names of two Gibraltar companies, Rosork Holdings and Fairlann Trading.

In June 2009, the combined property was bought for a documented price of £1.9m ($2.9m today) by British Virgin Islands-incorporated Gulf Heritage Properties Company Ltd, controlled by Sajwani. The transaction was arranged by agent Tareq Al Baho, a Kuwaiti national. At the centre of the disputeare Sheikha Hind’s claims that the property was undervalued at £1.9m and that a ‘bribe’ was paid to secure the property at a below-market rate. She contends that the property’s true value is £2.5m-3m.

In the particulars of a claim submitted to the High Court in July, Sheikha Hind said that, on top of the £1.9m, further payment of “not less than £600,000” was paid by or on behalf of Sajwani to Al Baho or Andrew Pinnell, a solicitor appointed under a power of attorney in 2008 to represent 12 of the 15 heirs and Sheikh Salim’s estate. The £600,000 figure is based in part on a claim that Al Baho told Foxtons estate agency that the property had been sold for £2.5m – in other words £0.6m above the £1.9m figure. The property had been marketed through Foxtons for a time, although the sale was agreed separately.

Two other claimants in the proceedings, property agents Asad Meerza and Mohsen Mehra, claim they are owed a £300,000 commission from Al Baho and Sheikha Salem for their role in introducing Sajwani to Al Baho.

In their defence, Sajwani and Gulf Heritage say they paid £2.2m, comprising £1.9m for the property and an agent’s fee of £300,000; these sums were paid to the benefit of Rosork Holdings and Fairlann Trading. The £300,000 was paid via two bankers drafts made out in UAE dirhams. Gulf Heritage and Sajwani say no payment was made to anyone other than the two vendor companies and deny that the £300,000 constituted a ‘bribe’. They also deny that a sum of “not less than £600,000” was paid in connection with the property purchase.

In a further twist, Sheikha Hind claims that Al Baho obtained the £300,000 by lodging the two bankers drafts in accounts held by two ‘clone companies’ that he had set up in the UK and which had identical names to the two Gibraltar companies, Rosork Holdings Ltd and Fairlann Trading Ltd.

In a two-day hearing in the High Court’s chancery division, Justice Peter Smith noted that Al Baho had not served a defence nor filed any evidence. On 3 November, he made judgements that Sheikha Hind could claim a number of interim payments from Al Baho and BC Penthouse Ltd, a company wholly- or partly-owned by Al Baho, for the benefit of the estate.

According to the defence, substantial sums have been spent on the Porchester Gate property since the transaction went through, including £1.89m to renovate and extend it. The property is used by Sajwani as his personal residence when in London.

A lawyer for the three claimants, Matthew Jenkins at Hughmans Solicitors, told GSN that mediation efforts have been proposed and are due to take place before Christmas. If they do not go ahead, or prove unsuccessful, the matter is expected to proceed to trial in early 2017. A spokesman at FTI for Sajwani declined to comment on the proceedings. Lawyer Richard Barca at Wilson Barca, for Al Baho, Pinnell and Sheikha Salem, did not respond to a request for comment.

Dubai Adjusts to a Cooler Real Estate Market

Published in Bloomberg Businessweek, 5 October 2015

The real estate sector is accepting that lower prices may be here to stay

Almost all the main indicators are pointing in the wrong direction for Dubai’s property market these days. Over the past year the sale price of apartments has dropped by an average of 9 per cent and for villas by 5 per cent, according to Jones Lang LaSalle (JLL), a real estate agency. Prices are expected to continue their fall for the rest of this year. Rental values for villas have also been declining, albeit at a slower rate of 2 per cent, while apartment rents have shown a small rise of 1 per cent.

Many working in the real estate sector and beyond are questioning whether this represents the start of a sharp downturn or simply the usual market ebb and flow. Zainab Mohammed, CEO of property management and marketing at wasl Asset Management Group, says that Dubai’s property sector is in a much fitter state than it was prior to the property crash in 2008. “We are witnessing a correction,” he says. “However, the current situation is healthy. Dubai’s real estate market has matured and should be viewed in the overall context of the economic cycle.”

The downward pressure on real estate prices is likely to continue. Investment in Dubai property from foreign markets–particularly Russia and Europe–has slowed due to currency pressures. The slump in the price of oil is hurting demand from within the region also. The slowdown has “dented confidence and applied downward pressure on transaction levels and prices,” says Diaa Noufal, associate partner at real estate agency Knight Frank. “This has led to speculation that prices may soften further over the remainder of 2015 leading some buyers to adopt a watch and wait attitude.”

This is happening in the wake of tighter regulations introduced in late 2013, including a mortgage cap and an increase in transaction fees. These are having a bigger impact than low oil prices, according to Steven Morgan, CEO of Cluttons Middle East, a real estate agency. “What we’re seeing in the market is a general slowdown, which is natural as a result of the legislation and the supply coming on,” he says. “There is a possibility that if oil prices continue to be low there could be an impact on population growth and therefore house prices. You hear that oil companies are starting to downsize and aren’t recruiting, but we’ve yet to see that come through in the market.”

What has been seen is a fall in the volume and value of sales. The Dubai Land Department says the number of unit sales fell from 20,309 in the first half of 2014 to 16,107 in the first half of this year. The value of those sales dropped from 31.9 million dirhams ($8.7 million) to 25.3 million dirhams.

Some property firms are adjusting their strategies to take account of the slower market. Dana Salbak, research manager at JLL, says developers are being more realistic in terms of the scale and timing of their project launches, and some schemes have been delayed. “We see the residential market as subdued, with sale prices softening and rents stabilising as a result of the negative investor sentiment, but also because Dubai had become too expensive,” she says. “Both the government and developers have realised that.”

With many buyers unable to access the higher end of the market, affordable housing–a traditionally underserved area of the market–is seeing increased demand. “Developers are now catering more to middle-income earners who are increasingly putting down their roots in the region,” says Mohammed. “The character of the market has changed [to] one where property is being purchased primarily as a home and not just an investment.”

The shift is seeing some developers look for growth in new markets. Damac Properties, which specialises in high-end developments, is paying more attention to places like China, to supplement its usual markets in the rest of the GCC, India, Pakistan and the UK. “We explore and experiment with new markets all the time,” says CFO Adil Taqi.

Further help from foreign shores could come in the form of the easing of economic sanctions on Iran following its signing of a nuclear accord with world powers in July. Dubai has strong trade links with Iran and is likely to be the first port of call for Iranians looking to buy overseas. The emirate is also an ideal location for international companies looking to access the Iranian market to establish or expand operations. “I think Iran will be as important as any other country of its size and proximity,” says Taqi. “If and when it opens up in the short-term you might see some surge because of the pent-up demand, but that demand will be met very quickly.”

Further falls in the oil price and an injection of new properties onto the market could offset such a boost. JLL estimates an extra 19,000 residential units will be available next year. “There will be a strong level of supply in the market over the next 12 months, which will undoubtedly have an effect on transaction levels and possible further softening of prices,” says Noufal.

The downturn is still a long way from comparison with Dubai’s 2008 property crash. Lenders have not been spooked in the way they were then, according to Morgan from Cluttons Middle East. “In 2008 and 2009 the banks stopped lending,” he says. “That’s not happening now. There is a lot of competition, banks are liquid and they’re still keen to lend.”