Qatar’s Empire State Building investment is rare move for foreign fund

Sovereign wealth fund bought 9.9-percent stake in REIT for $622M

From left: the Empire State Building and Abdullah bin Mohammed Al Thani
From left: the Empire State Building and Abdullah bin Mohammed Al Thani

The Qatar Investment Authority’s acquisition of a 9.9-percent stake in Empire State Realty Trust, announced Wednesday, is an unusual move for a sovereign wealth fund. But it offers several advantages, analysts say.

“It is relatively rare to see [sovereign wealth funds] buy a stock position,” said John Guinee, an analyst at Stifel. Far more often, they buy direct stakes in buildings.

When Norway’s sovereign wealth fund Norges Bank Investment Management invested with publicly traded Boston Properties last year, for example, it didn’t buy its stocks. Instead, it bought a 45-percent joint venture interest in the Citigroup Center at 601 Lexington Avenue for $725 million. In 2013, it had bought a 45-percent stake in Boston Properties’ 7 Times Square for $684 million.

Buying direct stakes in buildings, as opposed to REIT shares, has the advantage of not being subject to stock-market fluctuations and more stable in the short run. So why would QIA choose to buy ESRT’s stocks?

One possible answer is diversification. QIA’s $622 million investment earned it a small stake in 14 office and six retail properties in the New York area, including the Empire State Building. “You’re not going to be able to get that much diversity buying direct stakes in office buildings with that amount,” said Alexander Goldfarb, an analyst at Sandler O’Neill.

QIA may also simply be bullish on ESRT’s stock. The REIT has been a darling among investors for some time. While fellow New York-centric office REITs Vornado Realty Trust and SL Green Realty trade at discounts to the net asset values of their underlying real estate holdings (implying investors may be less bullish on their future value), ESRT’s shares sold at a 2-percent premium over net asset values, according to Guinee.

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“Most people look at Empire State Realty Trust and say they have better internal growth than any other office REIT,” Guinee said. In other words: the REIT has the potential to increase rental income by continuing to renovate its existing properties. This is especially attractive in the current stage of the market cycle, where property prices are high and profitable acquisitions tough to come by.

By buying newly issued shares through a deal with ESRT at a fixed price of $21, rather than simply buying them on the stock market, QIA likely got them at a slight discount, Guinee added. Even after what effectively amounted to a dilution, ESRT’s share price rose following the announcement – to $20.74 by market close Thursday from $20.52 Wednesday.

QIA isn’t the first sovereign wealth fund to buy a major stake in a U.S. REIT. In June, for example, Norges bought a stake in Kilroy Realty.

For QIA, the investment marks another increase in its New York real estate footprint. Over the past two years, the fund has bought $3.78 billion worth of Manhattan properties, according to Real Capital Analytics – not counting the ESRT investment.

In 2008, QIA partnered with Boston Properties and Kuwait’s sovereign wealth fund to buy the GM Building for $2.8 billion. Five years later it sold its stake to Soho China and M. Safra & Co., the New York-based investment firm of the Safra family. In March 2014, a QIA subsidiary picked up the InterContinental Barclay hotel at 111 East 48th Street for $300 million.

In October 2015 QIA made its biggest splash yet, buying a 44-percent stake in Brookfield’s 7-million-square-foot development Manhattan West. Once complete, the developers expect the project to be worth $8.6 billion.

When QIA opened its first New York office in September, it announced it would spend $35 billion on U.S. investments by 2020. “With boots on the ground, our presence in New York will anchor our interest in the region,” QIA’s CEO Sheikh Abdullah bin Mohamed Al Thani said in a statement at the time. “It is the perfect location to help strengthen our existing relationships and promote new partnerships as we continue to expand geographically, diversify our assets and seek long-term growth.”