Simon Burgess, Head of Alternative Investments, and Lynda O'Mahoney, Business Development Director, examine the major role Jersey will play in enabling GCC investment in UK commercial property post-Brexit and Covid-19.
For decades, investors in the Middle East, most notably from Gulf Cooperation Council (GCC) countries, have invested in UK real estate because of the stability of the market and its consistent returns. And it's a market that has grown over time, both in terms of investment volumes, types of property and geographic scope.
During 2019, Middle Eastern investors deployed £1.5bn into the UK market and for the first time, UK regions, such as Birmingham, Glasgow and Liverpool, received more investment combined, than central London.
The types of assets acquired have been broad – from offices, retail and logistics through to student accommodation, senior living, leisure and of course the residential rental sector. All of this demonstrates the demand for diverse opportunities that the UK real estate market has to offer.
But then came 2020 and the world changed. The Covid-19 pandemic had a dramatic and sudden impact on Middle Eastern investment into the UK – in the second quarter (Q2) only £32 million was invested in commercial real estate, the lowest figure since Q3 2010.
While this initial impact is totally understandable, the downturn was relatively short lived with figures for the whole of 2021 estimated at around £1.4bn – only six percent down on the previous year. The question that naturally follows is: just where will the market go from here?
Ocorian's Jersey-based real estate team continues to see this demand in the establishment of property holding vehicles and the provision of directors on the boards. Jersey has always played a significant role in facilitating GCC real estate investments into the UK. So, as a leading participant in real estate investing for Middle Eastern clients, we have taken the opportunity to outline Ocorian's house view on the market going forward, not only post-pandemic, but also in the wake of Brexit, as well as examining why Jersey is strongly positioned to support GCC investors.
Strong appetite for UK real estate
There is no doubt that Brexit has created a measure of broader economic uncertainty, while Covid has created much more direct financial stress. Despite this, there remains an ongoing appetite among Middle Eastern investors for strong performing assets, especially in UK real estate.
Indeed, in some instances, the pandemic has resulted in assets coming to market early, offering investors with capital the opportunity to take advantage by acquiring attractively priced investments.
There have, however, been winners and losers. Retail, for instance, is a particularly challenging investment choice right now. With high streets already struggling to compete with the internet before the pandemic; lockdowns and the failure of a number of large retailers have made the sector even more challenging.
On the other hand, commercial real estate linked to technology or logistics are the winners. Meanwhile, prime office space, particularly in central London, has stood up better than, perhaps, might be expected, especially in the light of the move to remote working and multinationals claiming they are going to reduce their physical footprint.
And the picture for office space looks relatively optimistic. According to Knight Frank, London's office investment market will attract £46bn in capital this year – noting that £3.9bn of that 'dry powder' is from the Middle East. One key reason for this is that UK assets have a good track record of providing strong returns, which remain attractive compared to other investment choices, even during challenging times.
The need for strong foundations
Despite this positive note, however, nothing is certain. In order to capitalise on any opportunities that arise, GCC investors are likely to want to move quickly. But they will also need to do so in a way that provides them with the most certainty possible, ensuring that all due diligence and regulatory requirements are met. This will involve structuring through a jurisdiction that has a robust framework in place and partnering with an organisation that has a proven track record in managing alternative investments.
When it comes to real estate, that choice of jurisdiction will often come down to nothing more complicated than familiarity and proximity. For some European property, Luxembourg is often seen as a natural fit; while for the US, Cayman is often a jurisdiction of choice. For the UK, however, it is the Channel Islands that are the go-to, with Jersey having a considerable history in working with GCC investors and specialising in real estate as an asset class.
Broadly speaking, funds legislation and company law in Jersey has been especially written with international investors in mind. The jurisdiction offers an award-winning, respected, well-governed and regulated platform and is recognised globally for its expertise in real estate – having a critical mass of fund administrators with deep knowledge of the asset class.
More specifically when it comes to GCC investors, Jersey is signatory to multilateral global information exchange protocols that countries in the Middle East are party to. So, there can be clear, transparent and open relationships within the bounds of these agreements.
In recent decades, Jersey has worked particularly hard to ensure that its flexible product range remains attractive to GCC investors. With capabilities and expertise in Islamic finance, Jersey is able to support Islamic finance products, and for Jersey SPVs to work with a range of Sharia-compliant Islamic capital market transactions.
Working with the right partner
Jersey's robust offering notwithstanding, GCC clients have exacting standards and expect their fiduciary partners to have all the requisite asset expertise and to be able to offer a full suite of appropriate and relevant services. This is where Ocorian's strengths come in to play.
The Ocorian team in Jersey are specialists in launching Sharia-compliant investment platforms and this experience enables us to be efficient in both establishment of the fund or platform and also the day-to-day administration. This, however, is just one facet of our extensive fund administration expertise.
In the case of real estate investment, we employ chartered surveyors to act as directors on boards. This brings a depth of professional expertise to the board that gives investors trust and confidence that their directors can represent their interests in the right way. More recently, having appropriately qualified directors ensures compliance with substance rules too, which have been rolled out in many countries.
For clients and investors who want it, we also offer for our surveyors to visit our clients' property and report back. This is helpful for clients who live a long distance away or are restricted in their travel, which has been very much the case during the pandemic.
We also appreciate that clients who establish structures in Jersey may, at some point in the future, wish to establish structures in other leading fund jurisdictions, such as Cayman, BVI or Luxembourg. Thanks to our global network of offices and professionals, this is something that we can assist with.
While the UK real estate landscape seems to be shifting, it is clear that Middle Eastern investors still see it as a strong asset class and capital will continue to be committed to projects of various size and types. Jersey (and providers such as Ocorian) will undoubtedly have a role to play in making sure this happens effectively and successfully.
GCC investors are a significantly important part of Ocorian's client base, which is why we have demonstrated our commitment to the region, by establishing a presence in DIFC.
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