As oil prices fell, those in the industry hung onto research from Savills which looked back over 30 years of data to reach a conclusion that falling oil prices served as a reminder to Middle Eastern investors of the need to diversify investment away from non-renewable energy sources, leading to an increase in investment.
While data is always hard to pin down, from our own experience this would seem to have been correct, for as oil prices started falling in mid-2014 through to the end of 2015, we witnessed an increase in activity, rather than any fall.
But this analysis is too simplistic and implies that all international real estate investment is undertaken by sovereign wealth funds on behalf of those in control of the oilfields. The reality is that
while the sovereigns no doubt make big headline investments, a significant volume of investment is undertaken by ‘regular’ investors of various levels of wealth either directly for themselves or through property or portfolio level funds.
Such Middle Eastern investors are not direct beneficiaries of the fall or indeed rise in oil prices and are more influenced by asset allocation and diversification. Moving to Malaysia, the Shariah capital
of Southeast Asia, I would observe that falling oil prices did result in a fairly direct fall in real estate investment ability, if not the underlying appetite. The falling oil prices contributed to a falling currency, with the foreign currency restrictions severely limiting the ability of institutions to invest overseas, even if their desire remained undiminished.
However, the subsequent doubling of the oil price at the start of 2016 has only been accompanied by modest ringgit gains of 14% against the pound sterling and 3% against the US dollar. This probably says more about political influences both in Malaysia with a new prime minister and the UK with Brexit than it does anything else. Certainly, while there are suggestions of some relaxation, the foreign currency restrictions remain.
So, while there is no doubt that oil generated much of the original wealth that is now in Shariah compliant real estate, it is too simplistic to continue to predict appetite based on oil prices alone.
To reference a 1960s UK television gameshow, while appetite for real estate investment continues to rise, it is not a case of ‘double your money’ since the start of 2016. Ever the optimist, I see this as a positive, proving how real estate has become independent and an essential consideration in relatively bad times and now good.
This article was first published in Islamic Finance news dated the 24th October 2018.