Middle Eastern investors lose trillions, affect sovereign wealth funds

By Michael Stoler | February 03, 2009 04:15PM

Sovereign wealth funds that have been able to invest in securities as well as real estate in North America have lost trillions of dollars due to the global economic crisis.

“The global financial meltdown has cost countries in the Middle East $2.5 trillion over the past four months and led to a 60 percent drop in development projects in the region being put off or scrapped,” the Kuwaiti Foreign Minister Sheikh Mohammed Sabah Al Salem, who also serves as the acting oil minister, has said. “The stark reality is that with oil prices having tumbled 75 percent from a July high as the global economy sank into recession, budgets are severely strained.”

The loss of the $2.5 trillion does not include the decrease in market value incurred by the sovereign wealth funds, many of which have invested heavily in commercial real estate in North America.

A report by the Council of Foreign Relations estimates that a fund held by Abu Dhabi, the largest sheikdom in the United Arab Emirates, lost $125 billion. Abu Dhabi has invested significant funds in real estate in North America through direct purchases as well as real estate investment funds.

Many Gulf-based sovereign wealth funds have invested billions of dollars in financial institutions as well as lost billions of dollars.

The Kuwait Investment Authority — a government body that manages and administers local and overseas investments for the state of Kuwait —  last January paid $3 billion for a stake in Citigroup and invested $2 billion in Merrill Lynch. The Abu Dhabi Investment Authority purchased a 4.9 percent stake in Citigroup for $7.5 billion in November 2007.

Approximately 50 sovereign wealth funds are located throughout the world, in 35 countries, with approximately 10 to 15 percent of their assets invested in real estate. The richest funds include Abu Dhabi Investment Authority ($875 billion), the Government of Singapore Investment Corporation ($330 billion) and Norway’s Government Pension Fund Global ($322 billion) as well as the world’s largest fund, Singapore’s Temasek fund.

With values of commercial real estate declining, industry leaders feel that sovereign wealth fund investments may have been severely impacted.

In December 2007, the Related Companies announced that it received about $1 billion in debt financing from three Middle Eastern investors: an affiliate of Abu Dhabi’s Mubadala Development Company, the Saudi Arabian royal family-owned Olayan Group, and an unidentified sovereign wealth fund.

Last summer, the Abu Dhabi Investment Council purchased a 90 percent stake in the landmark Chrysler Building for $800 million. In June, a joint venture of Boston Properties (which purchased a 60 percent interest); a partnership including Goldman Sachs and U.S. Real Estate Opportunities I L.P.; and a Dubai-based sovereign wealth fund Meraas Capital, purchased the General Motors Building at 767 Fifth Avenue for $2.8 billion. The joint venture also purchased three other office buildings — 540 Madison Avenue, 125 West 55th Street and 140 East 45th Street — for a purchase price of $1.1 billion.

Due to the limited number of recent sales and the lack of financing, a number of industry leaders believe that the values of these properties may have dropped by at least 15 to 20 percent.

Only time will tell if these investments made by Middle East and foreign investors in North America will realize increased values in the future.