Just as Middle East and Far East investors are viewing the London market more cautiously, the lifting of sanctions on Iran is opening up another source of investment. But how significant will Iranian cash become?
Blink and you could miss it, but just next to the QEII Centre in the heart of Westminster sits an empty building. That might not seem remarkable in itself, but this particular property has been empty for 10 years in one of the most desirable locations in the capital.
The reason? It is owned by an Iranian-backed entity and was formerly occupied by a leading high-street bank. When international condemnation of Iran’s nuclear programme resulted in punitive sanctions in 2006, the bank decided to get out altogether. The building has been a no-go leasing zone ever since.
However, that all might be about to change. With the lifting of sanctions on Iran nearly three weeks ago, there are opportunities for both Iranians and their erstwhile business partners in the UK to set up new and profitable relationships.
So is another wall of money about to hit the capital just as other emerging economies are getting nervous?
They are wasting no time in taking advantage of what could be a narrow window of opportunity. “We’ve seen some initial enquiries that have come in via our Dubai office,” says Elaine Dobson, head of residential at Taylor Wessing, which has a number of existing British-Iranian clients. “I expect to see quite a lot of interest, whether that happens today, tomorrow or in a month will be interesting to see.”
There are several reasons wealthy Iranians might want to get their money out of the country. For a start, there is no telling when sanctions might be imposed again. Just a week after the lifting of the sanctions was announced, controversy over missile tests resulted in some limited sanctions being reintroduced.
So, a diplomatic incident on either side has the potential to place the country in quarantine once more. “The sanctions may be lifted today, but if the Iranian government makes any mistakes in the next six to 12 months they could be reintroduced,” says Durrani. “So I think there is a slight nervousness and that might well drive some initial anxiety-based investments.”
Iranians don’t just need to worry about their own government’s actions or Western sentiment - there is also the highly volatile climate across the wider Middle East to contend with.
A majority Shia country, Iran is flanked by the Sunni Kingdom of Saudi Arabia across the Persian Gulf to its south. Historically hostile, the relationship between the two countries has deteriorated rapidly since the Saudi decision at the start of the year to execute a prominent Shia cleric. And then there is Islamic State, the Sunni extremist group currently causing bloody mayhem just across Iran’s border with Iraq.
The situation could drive a huge amount of money our way - Jeremy Grey, James Andrew International
It is little wonder that many Iranians are keen to move their money as far away as possible. “The situation with Saudi and Iran is likely to drive a huge amount of money our way as rich people in the Middle East decide to relocate their money into somewhere very safe just in case,” says Jeremy Grey, a director at James Andrew International.
London property is particularly compelling for Iranians for reasons cultural and historical, as well as economic and opportunistic.
“First off, Iranian people are very property-focused people,” says Babak Emamian, a British-Iranian financial adviser and chairman of the British Iranian Business Association (BIBA). “The first thing they invest in is property. It’s either property or gold - that’s the historical picture.”
Then there is the opportunity to create an international bolthole. Back in the days of the Shah, who was toppled in the 1979 revolution, the fashion for wealthy Iranians was to maintain a London pad, as well as a property on the coast in the south of France. While the perks in terms of residency have changed, there’s an expectation that history will repeat itself.
Investing in expensive property no longer provides a direct route to residency (the rules changed in October 2014), but an Iranian multimillionaire need invest only upwards of £2m in other government-approved securities to begin going down the path to gaining a passport. Considering what’s at stake, the additional cost of a property or two for a high-net-worth individual (HNWI) is negligible - especially if it also acts as an investment vehicle.
“There was a trend of wealthy Iranians having a home in London and I expect that will return,” says Jennet Siebrits, head of residential research at CBRE. “For all the reasons that people from Asia and the Middle East like buying property in London, I think we will see high-net-worth Iranians coming to London.”
Bruce Ritchie, chief executive and founder of Residential Land, agrees. “Iranians used to buy the finest buildings in London,” he says. “If Iran isn’t controlling the amount of money exiting the country then I would be astonished if we didn’t see an exodus of more money than we have seen.”
However, he adds: “A lot of the guys who have got money have had it outside the country anyway because that’s the way they’ve had to run their businesses for a long time.”
There is also the oil price situation to consider. Brent crude dipped below $28 (£20) a barrel on the news of the Iranian sanctions being lifted. The slump could have differing consequences depending on whether you’re talking about quasi-state-backed investors - a big chunk of the economy - or private individuals.
At an institutional level, the expectation in London among people who know the Middle East well is that the price of oil will have a dampening effect on investment in the UK, at least at first. Additional oil revenues would probably be needed to prop up public spending and invest in infrastructure improvements before funds are put to use elsewhere.
“They’re going to release another one million barrels a day on to the market on top of the current oversupply,” says Grey. “I just see the oil price going down further and that means there will be less money to invest and they will probably invest at home before they go out to invest it for the future.”
But the low price that Iran can currently demand for its most prominent export will also act as a catalyst for entrepreneurs whose primary business has little to do with hydrocarbons to invest abroad.
These are people who have grown successful domestic businesses, largely based on consumer wealth, which in Iran is in turn based on oil revenues. Tumbling oil prices, for them, also means a diminishing domestic market. The result? It’s time to embrace globalisation.
“They need to establish their businesses in London and make them globalised,” says Emamian. “If they were in Iran before, they were making good money from consumers because of the oil revenue. But now because of the oil prices the Iranian economy isn’t big enough for them.”
So the appeal is obvious, but how many people and how much cash are we talking about? Sanctions or no sanctions, with a GDP of around $870bn Iran’s economy is huge, second only to Turkey in the Middle East. There are 65 individuals in Iran with wealth of more than $100m, as well as 32,000 people classified as HNWI.
Many of those people will be content to invest domestically or in the wider Middle East. But Emamian estimates around 50 Iranians with £100m or more to invest - collectively upwards of £5bn - are actively pursuing investment in the UK. Many more multimillionaires from Iran - maybe around 1,000 - are also looking seriously at the UK, he thinks. “It’s not a huge number of people, but it’s good money.”
At a time when international interest in the high-end residential market is faltering, you can assume that developers and agents alike will be brushing up on their Farsi.
The initial assump
tion is that Iranians would most naturally plough their money into property in the United Arab Emirates, most likely Dubai. After all, the trading links between Iran and the Emirates go back hundreds of years and prior to 2006 Iran was one of the biggest inward investors into its neighbour.
But while Dubai may well benefit from the lifting of sanctions on Iran, wealthy Iranians are looking further afield and to London in particular. In September last year Faisal Durrani, head of research at Cluttons, attended Cityscape Global, the biggest real estate expo in the Middle East. His company maintains a large office in the region and had been anticipating a major influx of Iranian money into the Dubai market. What he actually found surprised him.
“We had high-net-worth Iranian individuals who came up and said they were interested in making overseas investments as soon as the sanctions were lifted,” recalls Durrani. “I asked: ‘Where in Dubai are you looking?’ They said they were looking at Dubai but their top international city of choice is London.”
Even with the lifting of sanctions, doing business with Iranian individuals and companies is still fraught with difficulties. Firms will obviously have to ensure they apply appropriate due diligence according to current anti-money laundering regulations and ensure they do not fall foul of the Bribery Act 2010 - no mean feat. But when it comes to Iran there are additional complexities that have to be considered:
Most US sanctions remain in place, making transactions made in dollars far more challenging than those made in euros or sterling. The US is removing only a limited number of companies and individuals from its “specially designated nationals” register, meaning that US individuals, companies and institutions cannot play any part in a transaction also involving a prescribed entity.
The lifting of sanctions does not extend to companies under the ownership or control of the IRGC. Sounds simple enough, but the IRGC is both a branch of the Iranian armed forces and the third-wealthiest business organisation in Iran. Estimates vary, but observers reckon that the IRGC controls somewhere between 10% and 33% of the entire Iranian economy, with interests in everything from oil and gas to engineering and construction.
An additional issue is that many business entities in Iran are structured as ‘bonyads’: ostensibly charitable organisations with quasi-governmental, tax-free status, but which often operate as commercial conglomerates. Establishing the beneficial owners of a bonyad is notoriously difficult.