U. S. property draws Mideast buyers

(Note: ' ... many foreign investors, particularly from the Middle East, operate "quietly and confidentially ... " ' Does this surprise anyone? A real sneak attack on America, and the cloak-and-dagger is even published for all the world to read!)

January 1, 2003

By Michael Brick

The New York Times

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SAN ANTONIO, Texas - An influx of investment capital from Arab and Israeli investors, in roughly equal proportions, has made the Middle East the second-largest source of international investment in U. S. commercial real estate. Investment from the Middle East is second only to that from Europe, where changes in German pension fund laws have contributed to a surge in investment in American properties.

Within the past year, seven apartment complexes in San Antonio and six more throughout Texas were purchased by Alon USA, a Dallas-based subsidiary of Alon Israel Oil Co., owner of Fina gasoline stations in the United States. The company paid about $180 million to United Dominion Realty Trust for the complexes.

Oil companies are major sources of the investment in American commercial real estate, as are wealthy families that have a long history of quietly purchasing commercial real estate.

Increasingly, though, more money is coming from smaller investors and groups of investors. That is the result of a decade of efforts by financial institutions and money managers to create investment vehicles that can be marketed in the Middle East, especially to observant Muslims. Low borrowing costs and the poor performance of world stock markets have contributed to an increase in investment in American real estate from many parts of the world.

Australian and Canadian investors, in fact, each posted greater increases in U. S. real estate investment than Middle Eastern or German investors last year on a percentage basis, but from much smaller bases.

Real Capital Analytics Inc., a research service based in Manhattan that monitors property transfers in excess of $5 million, tracked almost $1.4 billion in commercial property sales to Middle Eastern investors in the past year, compared with $436 million in 2001. The figure for 2002, which was based on deals closed in the first 11 months of the year and those in contract, accounted for about 23 percent of all international investment in U. S. commercial real estate.

And that total is probably a conservative one because many foreign investors particularly from the Middle East, operate "quietly and confidentially," said Robert White, president of Real Capital Analytics.

These investors increasingly are spreading their money around the United States, in part because of the intense competition for premium office properties in Washington and New York, brokers and analysts said. The bidding wars among German pension funds are playing no small part in that.

From Israel, the most active investor was Alon USA. Others that made the list from Real Capital Analytics were Red Sea Group, a real estate investment company best known for hotel management and shopping mall development in Israel, and one listed as an "unidentified Israeli family."

From the Arab countries, transactions that listed Investcorp SA as the buyer dominate the list. Several major international financial institutions, including UBS AG and Citibank, manage money for Middle Eastern families or buy properties on their behalf as a nominee, as do specialty firms such as Carlyle Group and Investcorp, according to international real estate brokers money managers and lawyers.

"A lot of these funds, the fund manager is a Western, United States company, said Michael McMillen, a lawyer with King Spalding in New York whose practice concentrates on Islamic financing and project financing. "They're looking at this area, the Middle East, as a new market, and these investors are trying to get into the United States, so it's working very well." McMillen, who has worked with institutions such as HSBC Amanah Global Properties Income Fund and the Gulf Investment House of Kuwait, said Middle Eastern investors were starting to buy into offerings that required five to seven years to pay off, as opposed to two- or three-year deals. They are focusing on commercial buildings with a single tenant and a purchase price of $15 million to $20 million, he said. Among the obstacles to selling investment vehicles to Muslims is the prohibition in Muslim law against paying or receiving interest. This has been approached in a variety of ways, including the formation of a broad partnership known as a mudarabah, under which some investors contribute effort and others contribute money.

McMillen said arrangements such as the mudarabah had become particularly difficult to execute and potentially precarious since the passage of the USA Patriot Act. The legislation, adopted after the terror attacks of Sept. 11, 2001, places strict controls on financial institutions.

Copyright 2002 The International Herald Tribune