Commercial Real Estate Finance

As I’ve said time and again, investors like stability. Those deploying capital into commercial real estate want assurance that their investments aren’t overexposed to uncertainties. This is why the U.S., economic doldrums not withstanding, remains a favorite for international investors. That prevailing caution is also why investors avoid entire parts of the world when considering potential property investments.

The economic potential of the Middle East is seldom discussed in the West. Obviously, its many opportunities are quickly overshadowed by more dramatic news.  The atrocities in Syria and political turbulence are grabbing all the headlines. But keep in mind the Arabian Peninsula is a huge place; we Westerners would be smart to view the region as more than simply a horrifying image on CNN.   

Take, for instance, Dubai. Home to man-made peninsulas, a vibrant culture, and a 163-story tribute to humanity’s hubris, Dubai represents pretty much the exact opposite of what many view as the Middle East. Flush with oil money, the United Arab Emirates has been working to hedge against its finite supply of petroleum by investing in tourism and other ventures, both domestically and abroad. The UAE, like fellow oil producer Norway, understands the importance of diversification. Like Norway, which invests heavily in foreign real estate through its Government Pension Fund, the UAE is focused on putting its temporary wealth to work. Which is smart, provided such diversification is performed wisely.

Dubai’s Istithmar World, the private equity side of the state-run Dubai World (DPWRF), opted to buy a boat.

Specifically, it purchased the famous ocean liner Queen Elizabeth II (affectionately known as QE2), which it plans to anchor in Dubai and convert to a 300-room hotel. Given the fact that this emirate is home to the world’s largest building, not to mention the world’s largest man-made peninsula shaped like a palm tree, the investment in QE2 isn’t especially surprising.

However, I would like to offer my own point of view: why not invest in a nice apartment building?

Considering the worldwide financial downturn, is luxury hospitality really the safest bet? Istithmar’s real estate portfolio already includes the Fontainebleau in Miami, the Mandarin Oriental in New York City, and the Atlantis water park in Dubai. I’m not concerned about their New York City investments (Istithmar also owns 450 Lexington Avenue), where demand and values remain far more buoyant, but I’m wary of any investment, at this point in time, in big-ticket hospitality properties outside of, say, the top five markets worldwide.

In fairness, the QE2 deal happened back in 2007, when $100 million for an old boat sort of made sense, I suppose. But since its 2003 inception, the investment arm of Dubai World has struggled to prove its competence in managing billions of dollars in UAE capital, defaulting on or selling assets at a loss. Istithmar has $286 million in outstanding debt, according to Bloomberg.

As one of the strongest economies in the region, Dubai’s investments are vital to the economic future of this region. While the UAE (and Saudi Arabia) could end up anchoring the region in the same way Germany’s economy is anchoring Europe, a few speculative investments too many could be disastrous. If advising Istithmar on real estate, I would suggest American multifamily. Or self-storage. Or healthcare properties.

But please, hold off on the water parks and cruise ships.

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