Dirhams for Dollars: Diversifying Gulf State Investors Flock to U.S. Markets

Flush With Revenue From Oil Prices Approaching $100/Barrel, Mideast Governments and Monarchies are Buying U.S. Office, Industrial, Apartment and Hotel Assets

Oil reserves don’t last forever, and Persian Gulf nations are looking to the future, scouring the U.S. and other global markets for investments to diversify their portfolios. At the same time, U.S. commercial real estate has become an increasingly brighter blip on the investment radar for Dubai, Qatar and other Mideast governments as the declining value of the dollar and a smaller pool of potential buyers thinned out by the credit crunch makes U.S. real estate investment more attractive.

The nations, most of them friendly toward the United States, recently have stepped up their infusions of oil wealth into Western private equity funds and investment banks hard hit by the credit meltdown. They haven’t yet plunged fully into direct investments into U.S. real estate assets but, like other foreign buyers interested in taking advantage of the weak U.S. dollar, they’re active in the market through limited partnerships and joint ventures.

“We’ve started to get calls from Mideastern investors as well as European investors who want to buy in core U.S. markets because of the credit crunch,” Steven Collins, managing director, International Capital Markets, for Jones Lang LaSalle in Washington, D.C., told CoStar Advisor. “They’re flush with cash and they’re willing to accept more risk than U.S. institutional buyers.”

A number of developments from the last few news cycles have underscored the growing role of Persian Gulf oil wealth:

  • Maguire Properties Inc. (NYSE: MPG) is lining up financing from the Qatar Investment Authority, a $60 billion sovereign wealth fund run by the oil-rich Persian Gulf emirate, and a Century City, CA investment bank to orchestrate a potential management buyout of the troubled Southern California office REIT, according to media reports. Maguire, burdened by a heavy debt load and pressured by dissident shareholders, announced last week that it is exploring the sale of the company. President/CEO Rob Maguire said the buyout would allow him to keep local control of the Santa Monica, CA-based company.
  • Three Mideast investment groups — an affiliate of Abu Dhabi investment firm Mubadala Development Co., Olayan Group of Saudi Arabia, and an unnamed third party, reportedly a Mideast sovereign fund – are teaming up with Goldman Sachs and computer icon Michael Dell to provide a $1.4 billion cash infusion for Related Cos., one of the largest U.S. commercial developers.
  • Irvine, CA-based developer Bixby Land Co. formed a joint venture with the real estate division of Investcorp, an international firm financed by capital largely sourced from Persian Gulf countries, to acquire office and R&D properties in the Silicon Valley. Investcorp opened an investment office in Los Angeles over the summer and also partnered with New York investment firm Broadway Partners recently to buy Investcorp’s U.S. headquarters at 280 Park Avenue, a 1.2-million-square-foot complex in midtown Manhattan, for $1.28 billion from Istithmar, a Dubai-based investment firm, according to CoStar Group information.

    Emirates ‘Awash in Money’
    The Qatar Investment Authority and other United Arab Emirates entities are combing the financial industries in Japan, the U.S. and Europe for investment opportunities in institutions that have been hit hard by the subprime credit crisis. Last month, the Abu Dhabi’s sovereign investment fund said it would invest $7.5 billion in the largest U.S. bank, Citigroup, to help offset mortgage losses. Dubai-owned DIFC Investments recently announced it was interested in investing in U.S. real estate, oil and gas and telecom companies.

    Increasingly, these nations are bypassing global financial institutions to make direct investments in U.S. real estate assets.

    Qatar’s potential investment in Maguire, one of Southern California’s largest office landlords, is among the first visible signs that Persian Gulf capital is seeping into the Los Angeles real estate market, said Jack Kyser, senior vice president and chief economist with the Los Angeles County Economic Development Corp.

    “These countries are literally awash in money, and they’re looking to see what they should do with it,” Kyser said. “There’s a familiarity with major markets, especially in Southern California. We’re an international business center and people will go where they have an understanding of the basics.”

    Dubai Speculators Invest Locally
    The growing stream of Mideastern capital into the West will probably not turn into a flood soon, for one main reason: Emirate speculators need not go further than Dubai itself to double or triple their investments. Since the mid 1990s, Sheik Mohammed bin Rashid Al Maktoum, the ruler of Dubai and prime minister of the United Arab Emirates, has overseen the construction of a Manhattan in the desert. His projects include the Palm Islands, a series of artificial islands of residential and commercial development to be built over 10-15 years that constitute the largest land reclamation project in the world. Other projects include the luxury Burj al-Arab hotel and the $4 billion, 164-floor Burj Dubai, which is expected to be the tallest man-made structure in the world when completed late next year.

    “If anything, our competition for Dubai money is Dubai,” said Rand Sperry, co-founder of Sperry Van Ness International, who met with Dubai leaders last month to discuss investment in the U.S. and explore opening a brokerage office in the rapidly growing emirate. “They are focused on building Dubai, on bringing our [U.S.] money to them.”

    Many who have invested in Dubai office, residential and retail have doubled or tripled their stakes before the buildings reached occupancy, Sperry said.

    “They’re selling off the blueprint,” he said. “The focus is so much on building their infrastructure and building their projects, they don’t realize the opportunity in the U.S. at the moment.”

    Based on figures released by the National Association of Realtors this week, some buyers are realizing the opportunity. So far this year, foreign investors have purchased $12.5 billion in U.S. office properties, with buyers from the Middle East and Germany accounting for half that volume, according to the NAR’s Commercial Real Estate Outlook.

    The global shopping spree for real estate and financial institutions poses challenges for some observers, especially major U.S. rating agencies who are concerned about how they are going to vet the credit of the Gulf nations because of the lack of transparency in the financial affairs of governments and monarchies such as Dubai and Qatar. Sure, these governments appear to have virtually unlimited cash reserves, but it’s difficult to know exactly what’s on their balance sheets.

    Ports Debacle Sparks Marketing, PR Campaign
    Moreover, both Mideast and U.S. investors are still wary following the doomed agreement last year by Dubai Ports World to take over operations at six major U.S. shipping ports. The plan set off a political firestorm in Congress, leading to a vote by the House Appropriations Committee to kill the pact. Critics on both sides of the aisle condemned the arrangement as a potential security threat.

    The ports controversy was a setback to U.S. investment by Gulf nations who were shocked and angered by the donnybrook. However, investors from the emirates have regrouped, hiring American legal, lobbying and public relations firms in Washington, D.C. to help navigate U.S. markets and regulations — and to counter what the Arabs believe are public misperceptions about the UAE in the wake of the 9/11 terrorist attacks.

    Meanwhile, investment in deals across all product categories has resumed. In other transactions this year:

  • Dubai-based Emaar Properties and Los Angeles-based John Laing Homes Luxury Division partnered up to purchase the site of the future Club View luxury condominium tower at 10250 Wilshire Blvd. in Los Angeles from Fifield Cos. for $95.8 million.
  • Dubai-based Istithmar acquired Barney’s New York, the luxury department store chain, for $942.3 million. Barney’s recently celebrated the opening of a new 60,000-square-foot store in downtown San Francisco’s Union Square.
  • In September, Dubai World announced that it signed definitive agreements to form a long-term strategy to invest about $5 billion in MGM Mirage, including a $2.7 billion stake in the landmark CityCenter development in Las Vegas, and up to $2.4 billion in purchases of MGM Mirage common stock. The companies will enter into a 50/50 joint venture in CityCenter and Dubai World will acquire a significant minority equity position in MGM Mirage.

    The weak U.S. dollar has attracted foreign investment into the U.S. gaming industry, propping up Las Vegas real estate values, according to Fitch Ratings, which expects Dubai will increase its stake in MGM Mirage and that the inflow of foreign investment will continue through 2008.

    JLL’s Collins, for one, agrees.

    “The emirates have so much money, it’s frightening.”

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