For much of history, the Middle East has been a prominent centre of concentrated wealth and affluence, whether in oil, gold or empires. The rise of business moguls and regional growth in gross domestic product (GDP) in more recent times has kept alive its reputation for riches and prosperity.
The region has seen the rate of wealth accumulation accelerate in the past five years, with Saudi Arabia and the United Arab Emirates (UAE) now controlling almost three-quarters of the Gulf Cooperation Council’s (GCC) wealth.
The Gulf’s liquid wealth market doubled from $1.1 trillion to $2.2 trillion between 2010 and 2014, growing at an average rate of 17.5% per annum, says Daniel Diemers, partner with consultancy firm Strategy& in Dubai. At 41%, high-net-worth individuals (HNWIs) account for the largest share of the region’s wealth, followed by ultra-high-net-worth individuals (UHNWIs) with 34%. Wealth creation for HNWIs increased by 76% and UHNWIs by 94% over the past five years.
The consultancy estimates there are roughly 1.6 million wealthy households in the GCC, comprising 240,000 to 275,000 households with more than $1 million in assets. Across the Middle East as a whole, Knight Frank estimates around 7,000 ultra-high-net-worth individuals and forecasts this to rise to 9,500 by 2023.
**Rising prosperity**
Strategy&’s Diemers explains that the exponential rise in wealth is partly due to the global rebound in equities and to GCC-specific drivers, particularly the impact of high oil prices. In addition, increasing government spending on megaprojects, infrastructure, further economic diversification and job creation has helped to raise incomes for wealthy individuals and create a generation of newly affluent citizens.
He states that the rally in stock markets — global equities saw gains of 50% from 2009 to 2013 — accounts for roughly 40% of the $1.1 trillion increase in wealth. The other 60% gain is attributed to GDP growth in the GCC, which rose steadily at an average rate of 10% per annum, on the back of oil prices sustained at near-record levels through 2014.
Geopolitical events, such as the Arab Spring and its aftermath, have intensified the migration of new wealth to the region. “With deterioration in the security and economic situation in countries such as Egypt, Iraq, Libya, Syria and Tunisia, many wealthy households migrated to the more stable UAE, Kuwait and Qatar,” adds Diemers.
In addition, some capital is being reallocated to countries of origin, including the GCC, due to sluggish macroeconomic growth in developed markets and turmoil in the international financial services industry, such as operating failure scandals, regulatory fines, compliance issues and strategic retrenchments. “Many locals also repatriated funds in pursuit of more dynamic, tangible, local investment opportunities,” he says. “Many of these funds have been invested locally or regionally, mostly in real estate and equities.”
**Family set-up**
Long familiar, powerful and renowned across Europe and other parts of the world, the Middle East also has its own share of well-run and extremely sophisticated family offices — including Alsubeaei, Al Touq Group and Manafea Holdings in Riyadh, and the Future Group and Majid Al Futtaim Group in Dubai — which serve as strong role models.
The potential for a thriving family office market is high, given that family businesses — which form the basis of most family offices — control as much as 75% of private-sector economic activity in the GCC, alongside considerable and fast-growing wealth. However, the lack of a central register or official lists, and the fact that many families are discreet and avoid public attention, means the size of the market is difficult to judge. Nonetheless, it is understood that many more families could operate family offices than currently do so.
There are probably hundreds of family offices in the Gulf that have a formalised approach to investing, where a family pools its money and institutionalises the management of wealth, says Akber Khan, director of asset management at Al Rayan Investment in Doha, Qatar. He observes that the majority are in Saudi Arabia, with a dozen to 20 in Qatar. “Some have grown so large that families have combined their holdings and listed the companies,” he adds, citing examples such as Aamal, founded by Sheikh Faisal Bin Qassim Al Thani, and Kingdom Holding, led by Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud of Saudi Arabia, which effectively operates as a family office.
Although Khan describes Qatar as “having more money than you can imagine for 250,000 people”, he notes that the country has the least sophisticated governance structures for family offices relative to the rest of the region. A dearth of family offices is largely because wealth origination has been more recent and therefore less institutionally organised.
“Clearly there are rich families that invest, but not necessarily in the form of a formalised family office with professionals managing their money,” he says. “It could be that the accountant who has been with a family for 20 years becomes the manager — not because he is a professional, but because the family trusts him with their money.”
**Rising sophistication**
The Middle East has a predominance of single family offices (SFOs), which differs from Europe’s preference for a multi-family office model, explains Nick Tolchard, head of Invesco Middle East in Dubai. One notable development over the past 12 months has been an increased separation of corporate and personal duties within SFOs.
During the financial crisis, he notes, SFOs were more focused on investing in the core business than on broader asset management, as bank financing was harder to obtain and the family office became a proxy administrative office for the corporate structure.
“Often, SFOs have a general practitioner who looks after a number of affairs,” he says. “Now there is a splitting of responsibility between the parts of the family office that focus on corporate affairs and those that focus on investment affairs. This reflects greater sophistication among business owners and will be key for family offices that want to develop a separate investment focus and strategy.”
Al Rayan’s Khan believes that investors with very significant capital require dedicated and professional investment teams. It is beneficial for families to have an investment process with principles and guidelines for efficient wealth management, as well as to monitor and manage returns.
“It is clearly possible to make money without that structure, but adhering to processes offers consistency in decision-making,” he says.
Wasatah Capital this year onboarded a Saudi family office client and took over management of part of its local public equities mandate, says Husain Thaker, the firm’s Riyadh-based senior fund manager. He explains that internal teams had been undertaking too many tasks in-house, leading to poor investment outcomes. “They outsourced part of their local investment book to us because they needed professional help,” he says. “Generally, family offices undertake asset allocation and risk management rather than hunting for investment opportunities.”
Anecdotal evidence suggests the Saudi family office market has more than doubled in the past five years, he adds, and is expected to continue growing alongside rising national wealth. “Family offices have accumulated wealth from many different business operations and are looking to manage that excess capital via a separate, professionally run investment platform,” he says.
**Regulatory support**
Unlike most jurisdictions globally, the region has several countries with regulations specifically designed for single family offices. Local expertise and legal frameworks now exist in the Dubai International Financial Centre, Dubai Multi Commodities Centre and the Qatar Financial Centre, with similar structures expected in the newly established Abu Dhabi Global Market.
These centres have enacted regulations to support the development of SFOs and multi-family offices and to professionalise wealth management. Qatar introduced dedicated SFO regulations in 2012, Dubai passed similar legislation a year earlier, and the DMCC launched a new licence structure for SFOs in February this year.
These regulations are designed to streamline procedures for establishing family offices and promote their healthy growth and associated services in the Middle East. Importantly, the centres have developed world-class legal, regulatory and tax environments for local and foreign firms.
Tolchard notes that financial centres provide invaluable access to insights and thought leadership from global investment firms. However, while supporting robust regulation to protect investors, he believes there is a limit to the number of effective competing financial centres that can serve the entire Gulf.
**Real estate in vogue**
Many family offices target returns of around 15% per annum, which Tolchard notes aligns with return expectations from business operations. Over the past 12 to 18 months, he observes family offices taking on more risk and building broader portfolios to maximise returns.
“Investors are favouring equity structures, and alternatives have really picked up over the past year or two,” he says.
“Families are comfortable with real assets and are investing in real estate or infrastructure on a local or global level.”
Property remains a mainstay for family offices and HNWIs, with around one-fifth of portfolios allocated to real estate in the Middle East. Saudi family offices place greater emphasis on yield than on specific commercial or residential opportunities, with retail assets currently in favour due to strong domestic demand.
Tolchard also notes rising interest in private equity, driven by the potential for higher returns and greater management control. He sees this as reflecting improved sentiment towards risk and confidence in the market cycle.
“Investment horizons have lengthened, partly due to market conditions and partly because more opportunities emerge from staying invested long term,” he says.
According to Invesco’s Middle East Asset Management Study, more than half of family office respondents expect leverage to increase in future. Tolchard believes this will lead to greater use of structured products and mutual funds, although he cautions against excessive leverage.
**Home bias**
Equities, real estate and direct investments remain the most popular strategies for Qatari family offices, which exhibit a strong home bias, though parts of Europe — particularly UK real estate — are also targeted, says Khan.
He observes that family offices often begin with direct investments and move towards fund structures as sophistication increases. “As risk management and diversification become more important, they will adopt a wider asset and geographic mix,” he says.
Saudi family offices established in recent years prefer investing close to home in familiar asset classes, such as local equities, real estate, private equity and increasingly fixed income.
“Family offices have retrenched from the wider region due to geopolitical risks,” says Thaker. “They are comfortable with local markets and understand which sectors are performing well.”
Fixed income, including sukuk, is also attracting interest as some family offices anticipate higher equity risk. “Previously, fixed income barely featured in family office portfolios, but it is now becoming more common,” he adds.
**Oil effect**
The non-oil economy has grown at mid- to high-single-digit rates across much of the Gulf over the past five to ten years, supporting overall growth and boosting the wealth of HNWIs and family offices, says Khan.
Government spending has further improved economic fortunes through investment in human capital — such as schools, hospitals, housing and universities — and physical infrastructure, including roads, ports, power generation and water systems.
Regardless of oil exposure, countries with large or growing populations or strong service industries are expected to continue prospering. Many family offices have exposure to construction, and while lower oil prices may temper activity, significant development is expected to continue.
“A lot of family office wealth is derived from the construction sector, which is supported by government spending commitments,” he says. “Don’t be fixated on low oil prices — the outlook for most family offices in the region remains extremely bright.”
