Saudi Arabia is on the brink of an unparalleled upsurge in its overseas investment activity and real estate is set to be a major beneficiary.

The ascension of Mohammed bin Salman to crown prince last year has brought about some relative domestic liberalisation and a dramatic plan for the diversifica  tion of the country’s wealth.

These two factors will likely kick-start hundreds of billions of dollars of overseas investment over the next few years.

The country’s international profile is set to be accentuated further once the giant IPO of state oil company Aramco comes to fruition.

Visits to western countries by Salman, including his trip to the UK in March to hold trade discussions, have been paramount as he has taken steps to enhance Saudi Arabia’s image.

In November last year he sensationally detained more than 200 princes, officials and businessmen at the Ritz-Carlton in Riyadh for corruption and enforced $100bn of payments back to the state (see box, below).

The move was met with mixed reaction; praise from some quarters for cleaning up the country, while for others it has caused concern over the power and inclination of the state to seize wealth from individuals.

There can be no getting away from the fact that Saudi is a country with a culture that many struggle to relate to. It still has the death penalty for adultery, sodomy or if a Muslim renounces Islam.

But Salman has started to address some major domestic issues, having legalised cinemas and allowing women to attend football matches and drive – all moves that have not gone unnoticed.

“During our last trip to Saudi Arabia, and specifically Jeddah, we were quite impressed by the changes that are happening,” says Karl Abawatt, founding partner of GG Capital and the former head of real estate at Olayan.

“I think we will see more businesses being started domestically as a result and the economy will become more dynamic and there will be more capital flowing in.”

Embracing change

Supporters of crown Mohammed bin Salman gather outside Downing Street

Positive changes aside, working alongside Saudi investors is still not straightforward. Traditionally well-orientated with property investment domestically, they commonly require a clear commitment to visiting the region regularly, considerable skin in the game and, for public institutions, scale of opportunity.

Paramount for any professional looking to work with Saudi investors is an understanding of Vision 2030. The crown prince’s investment masterplan is detailed in the document which underpins the mindset of all publically related investors and, to a large extent, private ones as well.

The plan is driven first and foremost by a desire to diversify the country’s wealth away from oil with the underlying fear that the resource may one day be obsolete, and also away from a region plagued by war (Yemen to the south and Syria to the north).

Investments must be linked to the broader good and development of the kingdom, over and above financial return.

Most practically, Vision 2030 includes a detailed series of strategic objectives and specific targets the country is aiming to achieve for each of its ministries and key performance indicators and targets to judge itself by. The more of these that can be accentuated as a result of prospective investments, the more they are likely to be considered appealing.

This has been illustrated by three recent eye-wateringly large investments made by Public Investment Fund of Saudi Arabia (PIF), the $230bn sovereign wealth fund which has up until recently held almost exclusively domestic assets.

Unique approach

In February it made its first overseas real estate investment as part of a €4.4bn (£3.8bn) consortium that bought a 55% stake in Accor’s real estate portfolio, giving it exposure to expertise in the tourism sector that can be put to work back home.

Similarly, last year it invested $45bn (£32bn) into SoftBank’s tech fund and a minimum of $20bn, with a potential to double up, into Blackstone’s infrastructure fund.   

A source close to PIF said: “What is going on here is unique to the country and fund managers and advisers need to take a unique approach. Given public organisations have so much capital and are looking for long-term partners, they are oversupplied with options.

“How will you differentiate yourself to show you can do something different, help the country’s transition take place as well as provide the mandatory commercial returns?”

As well as PIF, the other major publically owned real estate investors of note are Hassana Investment Company and Saudi Aramco.

What is going on here is unique to the country and fund managers and advisers need to take a unique approach.

Hassana is the investment management arm of public sector pension fund General Organization of Social Insurance. Aramco is one of the world’s largest companies and holds the country’s oil and gas interests. Its pension fund is a major investor in property.

Both tend to invest indirectly through fund managers, although it is possible they will move to direct acquisitions as they look to diversify further. 

The future of $2tn Aramco is fundamentally intertwined with that of PIF. Aramco is planning a listing of 5% of the company worth $100bn with the UK and New York both vying for the float, alongside a dual domestic listing, in what is set to be the largest IPO in history.

The scale and complexity mean the IPO may not occur until 2019 but when it does, PIF will be metamorphosised as it will receive the majority of the proceeds.

PIF currently has only a very small property team led by head of global real estate and infrastructure, Brien Amin, and Khalid Kreidie from its investment division, although it is starting to staff up.

Due to PIF’s scale, which is already enormous, and current limited bandwidth, it is likely that it will not look at deals where it can invest less than $1bn.

In practice, this means that many real estate professionals will be unable to do deals with PIF and other publically backed companies with similar requirements.

However, the private wealth and investment potential in Saudi is vast and the country also has an emerging REIT regime.

Wealth control

Theresa May and members of the government meet with crown prince Mohammad bin Salman and delegates from Saudi Arabia at a UK-Saudi Arabia Strategic Partnership Council

“Saudi is one of the most difficult markets to get access into in the Gulf, partly because visa restrictions require someone to sponsor you,” says Alex Price, chief executive of Palmer Capital, which manages mandates for Riyadh-based Sedco Capital.

“Dubai, Abu Dhabi, Bahrain and Kuwait are relatively easy places to get in and out of and have a relatively large intuitional investor base.

“In Saudi there are a few very big government or sovereign-style institutions but there are also a large number extremely rich merchant families. These families sometimes operate through Dubai-based multifamily offices, sometimes transact direct via UK agents but also very often don’t leave the region and have all their investments domestically.”

Private wealth comes through a variety of channels but local and regional, banks and family offices control a large amount of the market. The wealth divisions of major investment banks such as Citi, UBS and HSBC are also major players. Some of the ultra-rich also have large enough portfolios to have their own offices.

In order to win the trust of investors it can take a large number of visits, tangible co-investment and an ability to show certainty over an investment into a pipeline or a particular deal rather than just an opportunity that meets with their investment criteria but is subject to open-market bidding.

“A lot of operators and brokers go to investors and ask whether they will back a bid with them on a deal but the chances are you won’t win the deal and you end up firing a blank. And if you fire two blanks, generally, you are out,” says Nick Judd, head of investment and co-founder of 90 North.

“When we approach investors we approach them with a live transaction we have secured, done a lot of due diligence, make clear the co-investment we are making, put it in place a Shariah-compliant structure and ask if they would like to partner with us.”

Historically, many private investors are major landowners in the country but their portfolios are largely not income-producing and there is limited scope to buy such institutional assets domestically. They are therefore often keen to sell their land in order to acquire income-producing investments overseas.

In Saudi there are a few very big government or sovereign-style institutions but there are also a large number extremely rich merchant families. These families sometimes operate through Dubai-based multifamily offices, sometimes transact direct via UK agents but also very often don’t leave the region and have all their investments domestically.

Driven by cash-on-cash returns, they often use Shariah-compliant, debt-like structures to enhance returns (with different investors varying as to how strictly they interpret these restrictions) to buy core to core-plus but not super-prime assets.

“It’s a misconception they are all trophy hunters”, says Fadi Moussalli, head of international capital group, MENA at JLL.

“The flavour of the month is anything that is long and single-let and easy to manage with visibility over cash flow that looks like a bond issued by the tenant,” he adds, highlighting the £54m purchase of an Amazon warehouse in Dunfermline last year by Dubai-based Rasmala and Kuwait-based KAMCO that was backed by Saudi capital.

Diversifying interests

As with the country’s publically owned institutions, private investors are also driven by a desire to diversify interests away from oil and Saudi’s economy. But an extra incentive for some has also been the detainment of those held at the Ritz-Carlton as they take cautionary measures to put some of their wealth further away from the reach of the state.

“If you are ultra-high net-worth individual in Saudi Arabia then the events in the Ritz-Carlton are certainly very intimidating, even if you are not involved in the purge,” adds Moussalli.

“There is increased motivation for private investors, plus the war in Yemen, and they want to avoid putting all their eggs in one basket. They are looking to markets where there is visibility and transparency, even if it means lower returns than they are used to in the likes of the UK, US, Germany and the Netherlands.”

Saudi remains a tough and complex place to raise capital and attract bidders from but over the next two years it is possible investors from the kingdom may undertake more eye-catching deals in the real estate sector than those from any other country.

The fund managers, advisers and investors that have been making trips to Riyadh and Jeddah could soon see their efforts pay gigantic dividends.    

The Ritz-Carlton purge

In November, the crown prince conducted an anti-corruption probe that resulted in more than 200 princes, businessmen and officials being held in the Ritz-Carlton in Riyadh for two months. The country claims the purge saw more than $100bn passed back into the hands of the state.

Those held own a vast array of property assets across the globe and each detainee had individual settlements with the state, the details of which have not been disclosed.

Prince Al-Waleed bin Talal who owns stakes in trophy hotels including The Savoy in London

EG spoke to several sources involved with ultra-high net-worth Saudi investors and their sentiment broadly indicated that due to the extreme affluence of the individuals, it seemed unlikely that they would be under pressure to sell assets in order to pay back cash to the state.

The detainees most notably included Prince Al-Waleed bin Talal who, through his Kingdom Holding Company, owns stakes in trophy hotels including The Savoy in London, The Plaza Hotel in New York and the Four Seasons Hotel George V in Paris. 

Also detained were princes Mishaal, Faisal, Turki and Miteb bin Abdullah.

Prince Abdul Aziz bin Fahd, a joint owner of the Salesforce Tower, EC2, had been reported as being shot dead having resisted arrest but was later confirmed as “alive and well” by the government. He was omitted to hospital with rumours having circulated he suffered a stroke or a heart attack.