Big buys, from Dubai

Nov.November 02, 2007 12:25 PM

Some speculate all roads lead to the Prince.

The Prince is Sheik Mohammed bin Rashid Al Maktoum, ruler of Dubai. The roads include deals done by Istithmar, a company said to be his investment arm, and other purchases by Persian Gulf entities.

Last month, Istithmar, which means “investment” in Arabic, appeared to be on a buying spree. In early June the group closed on its purchase of 280 Park Avenue, the 1.2-million-square-foot Midtown office property where tenants include Deutsche Bank, the National Football League and AG Edwards, for $1.2 billion.

Also, last month Istithmar completed a deal for the former Knickerbocker Hotel at 1466 Broadway for $300 million. The company plans to convert the building, which is currently used as offices, back to a hotel to take advantage of the hot lodging market.

Those moves follow earlier deals. This past spring, Istithmar signed a contract to buy a 99-year leasehold on 450 Lexington Avenue, the 32-story office tower built over the eight-story Grand Central Post Office, for $600 million. The cost was only $105 million less than Istithmar’s purchase of 230 Park Avenue last year. Known as the Helmsley Building, the 34-story office building is located between 45th and 46th streets, just north of Grand Central Terminal.

In the first six months of 2006, Middle East investors have bought more than $3.45 billion in New York City real estate, compared to $2.2 billion for all of 2005, and $1.9 billion in 2004, according to Dan Fasulo of research firm Real Capital Analytics.

Total financial investment from this section of the world was small, however, compared to 2004 investments by Brits who bought $252 billion, Japanese ($177 billion), Dutch ($167 billion) and Germans ($163 billion).

The Middle East data includes purchases by Gulf Cooperation Council countries — the oil-producing countries of the Middle East, which include Dubai and Bahrain — and non-Gulf Cooperation Council countries such as Egypt, Jordan and Israel.

Contrary to popular assumption, the money most Dubai companies are using does not come directly from oil sales, said Isam Salah, head of the Islamic finance practice at King and Spalding, a New York law firm that specializes in Middle East investments.

“Dubai’s wealth is built on being a corporate and financial sector,” he said. “They also represent the leading edge in terms of innovation, openness, and forward thinking.”

Just last September, another entity, the Dubai Investment Group, bought the Essex House Hotel for $440 million. Now renamed Hotel Essex Jumeirah, the hotel represents another jewel in the company’s multi-million dollar global hotel and resort business.

The money isn’t only coming to America. In June of last year, DIG announced that they were creating a $5 billion dollar portfolio of European real estate and financial securities. That added to their previous purchase of 21,000 apartments in the U.S. Sun Belt for $1 billion.

Some industry experts say DIG is a combined investment arm of the Dubai government and a group of cash-rich investors from across the GCC countries. Meanwhile Arcapita, an investment firm based in Bahrain, has been developing assisted living and condominium projects mostly in other areas of the U.S.

Though lawmakers and the public fussed over the possible sale of U.S. ports to a Dubai firm last year, big real estate buys have basically fallen under the radar of the media and the U.S. government.

All the investments originated from companies that call the Middle East home reflect the growing need for cash-rich investors to put money in a safe place practically guaranteeing earnings, say industry insiders.

According to the United Nations, Bahrain is the fastest-growing economy in the Arab world, benefiting mostly from an international freeport zone and global warehousing, with petroleum production and processing accounting for only 30 percent of their GDP.

The newfound emphasis on real estate by companies based in Dubai and Bahrain comes at a time when the level for overall foreign investment in New York property and development has resembled “an absolute flood,” said Peter Hauspurg, chairman and CEO of Eastern Consolidated.

“The weakness of the dollar is making it more attractive for foreign investors to come here, in addition to all the other myriad reasons to invest in New York,” said Bob Knakal, chairman of Massey Knakal Realty Services.

The currencies of both Dubai and Bahrain float with the dollar.

Istithmar’s global investment strategy may be key to their purchase of 1466 Broadway, the former Knickerbocker Hotel, which once housed George M. Cohan and Enrico Caruso. Istithmar’s joint venture with Giorgio Armani for global hotels indicates an interest in worldwide hospitality marketing and branding. Back at home, the company’s Palm Jumeirah development in Dubai, a resort in the shape of a giant palm tree, will include entertainment and shopping areas. That project plus other planned developments are estimated to cost $240 billion.

The types of properties and developments these firms are looking for may have been predictable for awhile, with the profile of a prince’s taste — and a realist’s recognition that new, glass-enclosed prime, Class A real estate properties tend to hold their value.

Yoav Oelsner of Cushman & Wakefield, instrumental in selling the Plaza Hotel to Israeli investors, noted that many Middle East investors tend to favor trophy buildings, “anything on Park Avenue, Fifth Avenue or Madison Avenue.”

But Istithmar’s purchase of 1466 Broadway threw some for a loop. “One would have assumed based upon the track record that they would have purchased something different,” said Woody Heller, executive managing director and group head at commercial brokerage Studley.

Heller was also surprised by the 3.75 cap rate for 280 Park Avenue, which he said marks a record among foreign purchases of New York real estate.

“That is incredibly low,” said Stephen Coyle, a chief investment strategist at Citigroup. “Most trophy properties have been going at 5.25 percent,” he said, adding that some investors may be expecting rental rates to gain over the next couple of years.

The deal makes sense if Istithmar converts the office spaces back to a hotel and adds retail space: Premiere retail space could go for as much as $1,000 per square foot, compared to $450 to $600 per square foot for office space, said Coyle.

To some, the deals with Middle Eastern entities are welcome, to others troubling.

Rep. Duncan Hunter (R.-CA), chairman of the U.S. Armed Services Committee who recently introduced legislation that would direct the administration to develop a common definition for “national security critical infrastructure,” said “real estate holdings could be a part of that discussion.”

Outside of the known ownership of Istithmar by Sheik Al Maktoum, the other investors in the company and their country of origin are not identified publicly. A similar case is that of Investcorp, a Bahrain-based firm started in 1982 by Iraqi businessman Nemir Kirdar. Investcorp represents several Bahraini investors, the company Web site says, but their identities aren’t revealed.

Investcorp owns the department store Saks Fifth Avenue, among other large commercial properties. In 2005 and 2006 Investcorp bought three major properties in the New York region for a combined total of $167 million, among them 250 West 39th Street, a 197,000-square-foot garment district building whose tenants include designer Anna Sui.

The company did not respond to requests for an interview. Still, business is booming, and a major factor driving the market in New York is the lack of available buildings, said Hauspurg.

With too much money chasing too few buildings, “you need to sign the same day or somebody is eating your lunch,” he said.

Investors conform buys to Islamic law

Arcapita differs somewhat from its fellow Mid-East investors because its investments are Shari’ah compliant, meaning they conform to Islamic law. They cannot buy anything that has to do with alcohol, tobacco, pornography, pork, weapons or gambling; hotels are usually shunned because they serve alcohol. Also, Shari’ah compliant entities cannot borrow or lend money. When financing large purchases or developments, this can be tricky, leading to the development of specialist financing practices like at law firm King and Spalding, and Citigroup. For example, leasing arrangements that end in a purchase are compliant, said lawyer Isam Salah.

Not all GCC country investors are Shari’ah compliant, said Salah.

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