Sun rises on property buyers

By F. Brinley Bruton
July-August 2006

Oil-price booms have generated interest in London real estate before, but this time around Arab investors are more sophisticated and expect to be treated likewise.  

Remember the stereotype? A fabulously wealthy Arab washes into London on a tsunami of oil money, easy pickings for savvy private bankers and estate agents. The sheikh, sultan or emir then hands over billions to his advisor, who invests the money in a City friend’s “sure thing” and proceeds to the golf club.

It is time to dispense with cherished fairytales such as these. A wave of Middle Eastern money is indeed splashing onto British shores, thanks in large part to historically high oil prices and a redirection of funds away from the US.

But not only does this oil boom make the last one look quaint – $60-plus per barrel versus $10 – London financiers are up against a sophisticated crowd buoyed by growing self-reliance and know-how. So while some wealthy Arabs may choose to invest in and through the UK, they don’t need the UK as much as it needs them.

“Because of the oil price a lot of banks just jumped on the bandwagon and they think they’re terribly smart,” says Sandy Shaw, who is in charge of the Middle East for Coutts, the private banking arm of the Royal Bank of Scotland. “Banks are going to have to get very, very smart about what they’re offering if they want to stay in the game, if they are going to keep that ultra-high-net-worth individual happy,” says Shaw, who has worked in the region for about 30 years.

What does money from the Middle East look like these days, anyway? There is a lot of it, to begin with. Take a recent Credit Suisse estimate that oil-related dollar flows to non-Gulf stocks and bonds rose between 2002 and 2005 by 337 percent, to $118 billion. In a recent report Al Rajhi bank put Saudi oil exports at $157 billion in 2005, and forecast $155 billion for 2006.

Rush to diversify.

Exactly how much ends up in the UK in the ongoing rush to diversify is a hard thing to pin down, but there are indications. For example, two of the ten biggest floats in London last year were registered in the Middle East: Telecom Egypt and Investcom from the UAE, according to the London Sunday Times.

The sources are varied, and include state-owned investment funds, private businesses and wealthy individuals safeguarding their children’s futures. Arabs invest in property, equities, hedge funds, commodities and derivatives, which sounds a lot like the Russians, Irish and everyone else who’s pouring money into London these days.

Experts are able to pick out some trends, however. Wealthy Arabs are partial to property, say insiders. “Estimates put the total stock of Saudi investment overseas at $900 billion,” says Sharon Wardle, the deputy director of Trade and Investment at the British Embassy in Riyadh. “Much of this investment is in portfolio investments, and in residential and commercial property, for which London is a much-favored destination,” she says.

Last year, Middle Eastern investors spent £1.3 billion in the British commercial property market, according to property agents DTZ. This is more than twice as much as in 2004 and about 11 percent of total foreign investment. The Abu Dhabi royal family alone stumped up almost £1 billion on key London property in 2005, including the landmark 33 Cavendish Square.

Property is convenient for several reasons. For one thing, property investments are easily made Shar’iah compliant. Also, as one British trade official in the region says of Kuwaiti investors, “they like an investment they can kick the tires on, physical assets rather than paper.” Kuwaitis are believed to own more than 20,000 properties, from office blocks to residential, in the UK. And London’s commercial property market has traditionally been a safe haven in choppy global seas, with its decade-long leases and the stable British economy.

Prince Buffett.

A prime example of Arab interest in property is the Savoy, the iconic British hotel where Sir Winston Churchill, prime minister during the Second World War, weathered many nights of German bombings. Now it belongs to Saudi Arabia’s Prince Alwaleed bin Talal Al Saud, the eighth-richest man in the world, according to Forbes. The nephew of the Saudi king is known as the Arabian Warren Buffett and has amassed a personal wealth of about $24 billion. Prince Alwaleed also seems to have courted publicity while he gathered prominent stakes in some of the world’s biggest companies, such as Citigroup, and is reportedly interested in improving relations between Christians and Muslims.

Most Arab investors in the UK maintain a lower profile. Mahdi Al Tajir, who was the UAE’s ambassador to the UK, owns the Park Tower Hotel in London and Highland Spring, a popular brand of bottled drinking water. According to Forbes, he owns a house in London and an 18,000-acre estate in Scotland’s county of Perthshire.

The reason for this sort of reticence compared to newer arrivals to the super-rich class, like the Russians who are often fixtures in gossip columns, may be that wealthy Arabs have essentially been there, done that. “If you take the fabulous wealth-spend cycle, the majority of the wealth in the Middle East, they came into the money at the point in the cycle in the Seventies and Eighties. At that point, buying a fixed asset, either commercial or residential, was a first-state in assurance of your wealth and establishment of your credentials. They have done that now,” says Sebastian Dovey, managing partner at Scorpio Partnership, a wealth management consultancy in London.

“They have seen their property values mature and in fact they have seen it as an asset class. The [Central and Eastern European] community has only just gotten into this fabulous part of the wealth cycle and want to buy not as an asset class but as a sort of pure possession point and hence are buying more of the glam spots,” he adds. In other words, wealthy Arabs have a lot to spend and less to prove.

Closing the deal is not always straightforward, however. Earlier this year Dubai port operator DP World was stopped in its tracks as it took over London’s Peninsular & Oriental Steam Navigation, which it bought for $6.85 billion. DP World, owned by Dubai’s Sheikh Mohammed bin Rashid Al Maktoum, offered to restructure the deal to assuage security fears in the US over an Arab company controlling many of that country’s ports.

The sale of Doncasters Group, a British manufacturer that makes precision parts for American military tanks and aircraft, to Dubai International Capital for $1.24 billion, also sparked controversy. George W. Bush, the US president, eventually gave the deal the go-ahead.

Looking elsewhere.

While many transactions seem to be proceeding satisfactorily – no strategic interests were involved with the $1.5 billion purchase of worldwide wax museum franchise Tussauds Group, also by Dubai International Capital, for example – the furore surrounding P&O and Doncasters underlines a reason given for a shift of money away from the US. “It is quite clear from speaking to Arab clients that they have found America a less comfortable place to invest since September 11,” says Nick Edmondes, a partner at London law firm Trowers & Hamlins, which has been working in the Middle East for more than 40 years. His firm grew substantially by acting for Arab investors in the UK in 2002 and 2003, in large part because of this sentiment, he says.

“They didn’t like the very intrusive way they would be questioned or treated as potential terrorists. They didn’t find they got that treatment when they came through Heathrow Airport. These little things all added up to them thinking, ‘All right, here is a good opportunity for us to start looking at alternative markets,’” he says. Additional explanations for the redirection of funds could include a desire to diversify their portfolios, given the slide of the dollar against other currencies, Edmondes says.

Others who have worked in the financial industry echo his comments. “I have seen clients make investments in the United Kingdom over the United States because of perceived anti-Muslim feeling,” says one private banker who asked to remain anonymous. “There is a fear throughout the Middle East of potentially having funds frozen. The Dubai Ports deal fueled this.” The US government froze the assets of individuals, companies and charities in the wake of September 11, in what it said was a move to cut funding to terrorist groups.

The private banker says that 10 to 15 years ago he felt that the US’s gravitational pull was too great for British financial services firms to overpower. Instead of studying in the UK, like many of his older clients did, young people were going to university in the US, which tended to bias their investment decisions in that direction later, he says.

“The thing we are seeing is Arabs not wanting their children to come to the United States to have their children educated here. That, I think, is going to be the most significant thing going forward, because Arabs sending their children to the United States lays the foundation for those children later investing here,” he says. “I’m not saying they are totally avoiding the United States now, but a lot of people are going to the United Kingdom for their education,” he added.

911 hangover.

That is not to say that Middle Eastern investment in the US has come to a halt, because it emphatically has not. High-profile deals continue: Dubai Holding’s luxury hospitality group Jumeirah recently bought Essex House hotel on Manhattan’s Central Park; Dubai investment firm Istithmar acquired New York’s Helmsley Building. And last month the Dubai real estate giant Emaar agreed to buy John Laing Homes, the second-largest privately held homebuilder in the US for $1.05 billion in cash.

Nevertheless, the combination of a swell of investment money and the September 11 hangover provides an opportunity to British financial services firms. Though banks have been sitting up and taking notice of the money to be made in this sector, a few factors are working against them, say insiders. One is the growing inclination among Arabs to reinvest in the Middle East.

“It is my impression there is increasing sentiment in the Middle East that they should invest in their own backyard,” says business intelligence consultant Ben Wootliff of Control Risks, a specialist risk consultancy headquartered in London. “There was definitely a feeling from the investors [at a recent Middle East banking conference] that now is the time for regional Middle Eastern companies to be established, whether it be in construction, in retail or in services.”

Heading eastwards.

In addition, a lot of smart Arab money is leaving the Middle East but heading eastwards, not westwards. With the huge liquidity in the region and British real estate “going through the roof” there is still a lot of money looking for a safe haven, says Edmondes, of Trowers & Hamlins’ law firm. “In 2002 and 2003, it was all coming to the United Kingdom and Europe; now a lot more is going out to the Far East,” he says.

One way to lure money to the UK may be to provide “racier investment” alternatives, says Coutt’s Shaw. She says her Arab clients, especially those from the Gulf, tend toward “hedge funds and private equity – something that will provide extreme growth.” Instead of holdings that give 8 to 10 percent growth, many prefer to be offered investments that garner 10 to 15 percent.

As a final pointer, Scorpio’s Dovey warns against generalizations. “To suggest … that just because they are Middle Easterners they will do things like other Middle Easterners is not correct,” he says. “They are just as likely to be interested [in] what a European with 30 million euros will do … In terms of investments they are not different from the Swiss families and the American families we have worked with.” Dovey says financial institutions that take such clients for granted, assuming that they are unsophisticated, risk having millions of dollars of business wrenched away from them. “Remember, these are people who’ve made 10 to 30 to 100 million dollars – they were sophisticated long before the banks were.”