Brexit could hurt Middle East investors in London real estate

What happens if the UK Brexits
What happens if the UK Brexits

Wealthy Middle East investors are watching Britain's EU referendum with a mixture of fear and greed.

In the days of $100 a barrel oil, Gulf sovereign wealth funds and family-owned trading groups went on a shopping spree, snapping up trophy assets in the U.K.

They bought some of London's biggest landmarks, and bailed out one of the country's top banks.

But the 2014-2015 collapse in oil prices, tighter regulation of U.K. real estate markets, and the risk that voters could back a British exit (Brexit) from the EU has led to a significant cooling of interest in recent months.

"Gulf investors obviously have less of the free cash to splash around," said Alan Robertson, CEO of the Middle East and North Africa for property consultancy JLL.

Related: Why you should care about the Brexit vote

The London skyline is filled with buildings now under the ownership of Gulf funds. Qatar alone owns the Shard skyscraper, Harrods department store, the former U.S. Embassy and the Canary Wharf financial district.

"The Qataris must be questioning how much they have on the table there," said one senior Middle East banking executive, who declined to be named.

All told, Middle East investors control nine of the largest 50 development sites in London, representing 20% of the current real estate investment pipeline, according to JLL.

Related: Who owns London's landmarks?

Most forecasters say Britain's economy would suffer if the country leaves the EU. Uncertainty over the result of Thursday's vote has contributed to a 20% drop in London commercial property deals so far this year.

And a vote for Brexit could prompt Middle East investors to switch their attention to other markets.

"Gulf investors for example are likely to look outside of Europe altogether," said Robertson, saying that mature markets in North America and Asia Pacific deserve a second look.

Related: Brexit fears are hitting London real estate

Christof Ruhl, global head of research for the Abu Dhabi Investment Authority, said the recent cooling in commercial and prime residential real estate reflected U.K. moves to hike property taxes, change the status of expatriate buyers, and crack down on offshore companies.

Britain is a net borrower from the rest of the world -- it needs foreign investment to fund its economy -- and the Middle East is likely to remain an important source of cash.

Brexit voters: Why I want to leave the EU

But it could prove harder to attract Gulf money if Brexit happens, given the tax rises and tougher rules.

Those moves reflect "inconsistent behavior, thinking short term not long term," said a senior Gulf executive.

Still, there may be some bargain hunters out there.

Finance executives say Gulf institutional and private clients are dividing into two distinct camps: those who want to reduce their exposure in case Brexit happens; and others who are getting ready to double down if the British pound loses 15% or more against the dollar.

"At the right price, these guys would swoop in," said the regional banking executive.

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