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A Gusher of Arab Investment

Global real estate investment by Arab investors will nearly double this year, to $22 billion, say analysts with commercial real estate services firm Jones Lang LaSalle. Arab investment in the U.S., however, may lag.

Through May of this year, Middle East investment in the U.S. totaled $1.8 billion, far less than the $4.8 billion spent in the first five months of 2007 and $8.2 billion spent for the year, according to New York-based research firm Real Capital Analytics (RCA). However, Robert White, RCA president, predicts a stronger finish in 2008.

Reservations about the U.S. market appear to be restraining purchases by oil-fueled investors, who are predominately sovereign funds and wealthy families.

“The last thing you want to do is buy in a market that is still going down,” explains Blair Hagkull, the Dubai-based managing director of the Middle East and North Africa for Jones Lang LaSalle.

Arab investors are finding opportunities in faster-growing emerging markets. Arcapita, a global private equity fund with investors from Bahrain and other wealthy Persian Gulf countries, is investing mainly in Eastern Europe and India.

“We keep saying to ourselves we're going to find a juicy land deal or a juicy collection of distressed condominium plays [in the U.S.], but we haven't found the magic bullet yet,” says MacLaine Kenan, an Atlanta-based executive director of Arcapita.

Political concerns

Concerns about American receptivity to Arabs and their money are still reportedly strong in the Persian Gulf. Memories are particularly fresh regarding the 2006 Dubai Ports World controversy. Congress opposed Dubai Ports World's $6.8 billion acquisition of P&O, a British ports management company, on national security grounds, and eventually forced Dubai Ports World's divestiture of P&O's U.S. port operations. Feelings about the handling of the deal are still strong and bitter, Hagkull says.

Arabs appear to be making low-profile investments through private equity firms, third parties, or minority purchases, according to White and Hagkull.

Still, Dubai World, which is owned by United Arab Emirates' Vice President and Premier Sheikh Mohammed Bin Rashid al-Maktoum, remains undeterred by the headlines in the media. It would be hard to find a higher-profile deal than the company's $2.7 billion investment last summer in MGM Mirage's CityCenter, a 76-acre casino and resort development slated to open in Las Vegas in 2009.

And there was nothing stealthy about the June announcement that the Abu Dhabi Investment Council intended to pay $800 million for a 75% interest in New York's Chrysler Building.

Ease of passage

Visa difficulties are compounding the problems. U.S. Treasury Secretary Henry Paulson visited the Gulf recently to reassure Arab investors that the U.S. welcomed their deals. But meanwhile, new visa rules made it harder for foreigners to visit the U.S. “If the head of a sovereign fund who is a Gulf national is looking to go the U.S. but can't get a visa, then obviously we're working at cross-purposes,” says Hagkull.

Discouraging Gulf investors could cost U.S. dealmakers. More than $1.5 trillion worth of projects have been built in the Arabian Gulf in the last decade, Hagkull says, an unprecedented construction boom that taught valuable lessons about large-scale development.

White of Real Capital Analytics predicts that Arab investment in the U.S. will grow later in 2008. But low-profile buying means “it's going to be tough to point a finger and say that's them behind it.”

Bennett Voyles is a veteran commercial real estate reporter and National Real Estate Investor's Paris correspondent. For questions or comments, e-mail [email protected].

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