ANALYSIS / Business

Rescue Me

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LOS ANGELES – In the 1980s there was considerable angst among American real estate experts that Japanese investors were elbowing out competitors by buying up prime properties from Los Angeles to New York.

What seemed like a savvy move 20 years ago came around and bit the Japanese on the backside by the end of the ’90s when their economy tanked. Perhaps the biggest blunder occurred when the Mitsubishi Estate Company purchased most of the investment holdings in Rockefeller Center in New York for an estimated US $1.4 billion (AED5.1 billion).
 
Mitsubishi bought a historic icon but thanks to dwindling renters it never became the cash cow the company had envisioned.

Japanese investors shrank back from such ostentatious real estate deals and only now have made tentative steps to again pursue US properties.

But Japan’s loss is Dubai’s gain as Arab investors are looking to Western nations to invest their wealth. They learned lessons from the Japanese and found that selected equity partnerships in key land holdings and construction projects can return handsome profits. Surprisingly, there is little hand-wringing among American politicians and real estate competitors over foreign investment of American construction projects and real estate acquisition.

The reason? American companies need Arab cash to kick-start projects. A case in point is the $3 billion Grand Avenue project, now simply named The Grand, in downtown Los Angeles, a city with a long history of failed urban revitalisation and piecemeal building that left the civic centre with zero character and identity.

Buoyed by the unexpected success of the Frank Gehry-designed Walt Disney Concert Hall, which was completed in 2003, the city and county of Los Angeles began considering a project that would complement the hall, if not exceed it, by creating a vibrant downtown. The project is situated over a total of 36,421m2, plus a 64,750m2 park, on three city blocks that will include up to 2600 residential units, retail and restaurants and the five-star Mandarin Oriental Hotel, with luxury residences to anchor it.

The Related Companies’ California division under President Bill Witte brought back Gehry, who is currently charged with designing the new Guggenheim Museum in Abu Dhabi, and then sought the Dubai-based Istithmar World as an equity partner. Istithmar provided $100 million, and just recently three Korean insurance companies, under the umbrella of the Honua Group, announced an additional investment of $100 million in the project. 

Related now owns 10% of The Grand. Istitmar and Honua own 45% each.

The partnership is hardly unique, but demonstrates a growing pattern of US-based developers seeking Dubai money to get projects on the boards.

As a rule, Istithmar World has been tightlipped about its US projects, but it announced recently that it is opening a New York City office to expand its investment opportunities in the United States. With Istithmar officials meeting monthly with Related Companies project managers on The Grand Avenue project, and presumably on other US developments, it is not surprising that it would want offices closer to the action.

In a statement, HE Sultan bin Sulayem, chairman of Dubai World, says, “Opening an office in New York is a natural evolution of our growing presence in the Americas and demonstrates our commitment and enthusiasm for the region. We already have a solid asset base in the US and
Canada.”

In sharp contrast to the Japanese investors of the 1980s, Istithmar takes a longer view, Witte tells Construction Week in a recent interview. He notes that Japan created their own real estate companies and were active participants looking for relatively quick profits. Istithmar’s approach is completely different.

“They come to the table as a sovereign fund,” Witte says. “They look at the longer term view.”

Istithmar is somewhat of a passive investor identifying and investing “major assets in major developments,” he says.

Passive or not, Istithmar has global ambitions to earn significant returns for its investors with a keen eye towards weighing risks. Its most noteworthy acquisitions are buying the high-end Barneys New York for an estimated $825 million in June 2007 and the UK-based Inchcape Shipping Services for $285 million in June 2006. Istithmar also bought for $100 million the luxury ocean liner Queen Elizabeth 2 from Britain’s Cunard Line. The ship comes to Dubai this month to be a floating luxury hotel at Palm Jumeirah.