Taken from an interview by Khalil Hanware, the Business Editor of Arab News, who asked the following questions.
1) What is the purpose of your visit to Oman, Kuwait and Abu Dhabi?
The purpose is two fold: capital raising for our latest real estate Fund, a $1 billion investment Fund consistent with our previous Funds investment policies which have been highly successful.
The second purpose of the visit is to explore investment opportunities in the Gulf region which we are quite positive on over the long term.
2) I believe you will be meeting with investors and shareholders during your visit to these countries.
Who are these investors and shareholders?
We are meeting with major financial institutions and investment houses throughout the Gulf.
We are also in discussions with sovereign wealth Funds.
On the Gulf markets investment side, we have been meeting with government representatives, hotel and major real estate companies concerning real estate and corporate investments.
3) You have run successfully real estate fund in the US. Can you tell us about this fund? Were there any Middle East investors in that fund?
For 16 years we have run institutional Funds investing in commercial real estate. Our investors have been major US intitutional investors - pension funds, banks and foundations.
Over 16 years of equity investments in real estate our Funds have produced returns at the top of our industry.
We focus on cyclical investing, buying low and selling high.
We are not risk tolerant: we minimize financial risk by using only low leverage.
We are vertically integrated and manage operational risk through strict policies.
These policies served us well through the last financial crisis in 2008, when we generated very strong returns, have no legacy assets, no debt and distributed our profits and principal to our investors.
4) As you know the sub prime crisis in the US has triggered global housing market slump. What actually went wrong in the US housing market despite strict regulations?
That's a good question, in that regulations in the banking and residential markets did not prevent the same type residential collapse as in Dubai.
However, those regulations will help restore capital flows into US commercial and residential real estate making recovery more rapid than in other markets.
What happened, and the major factor in the financial crisis of 2008, is over leverage.
Abundant debt fueled high pricing in real estate.
High prices fueled more residential development, though not in the office building sector where existing assets were the target of buyers fueling the highest prices ever recorded in the US.
When the sub-prime level of loans began to have trouble available debt began to constrain. This triggered a domino effect on debt through out the system.
The effect was initially a flattening of prices, rapidly turning in to a drop in prices, a further severe credit tightening, fueling a market collapse and credit freeze.
This is a classic leverage/credit induced market failure.
Our company and Funds did not buy as prices were rising, we sold. That's what ultimately generate cash for your investors. Our last property sale occurred in the summer of 2008, several months before the financial crisis.
5) What is the state of property market in the US and Europe now?
Its varied by local market conditions - but in general the US economy and subsequently the real estate markets are in recovery. For example, particularly strong are markets in Texas like Dallas and Houston. While other markets like downtown Los Angeles, Phoenix and Las Vegas are still at bottom.
In Europe, we see the same thing but with more volatility. And the state of the European economic recovery is weaker and more fragile than in the US.
Real estate markets vary by city, as in the US. Clearly mirroring the underlying economy and government policies.
While London prices in some cases are rising with yields below 6%. That's more of the irrational pricing, I think caused by short term "chasing yield" decisions, misplaced in a long term asset.
A 4% - 5% overall yield won't look very attractive in a few years as markets get back into equilibrium.
And selling out that position later in the cycle will likely incur substantial losses, possibly more than eliminating the current yield returns.
We would not acquire commercial real estate in the London market at these very high prices and low yields.
6) As you must be aware that the GCC real estate market also suffered badly during the global financial crisis. Dubai particularly was hit very hard and still it is struggling to recover. What do you think went wrong in the Dubai real estate market?
All the dynamics I mentioned that occurred in the US market occurred in Dubai as well.
But the market, though growing very rapidly over the last 10 years, was investor fueled not demand or user based.
Further, high debt in the form of conventional leverage was also present.
But there was also "hidden" leverage in the form of deposits which were used as well to build projects.
That liability is part of the equation, while the law is very unclear with regard to responsibilities.
These factors I think, if not addressed will bode for a slower recovery in Dubai.
Over the long term the Dubai market should thrive, but that may well be years in the making.
There are also complicating issues such as multiple ownership structures in commercial properties which need to be addressed to encourage capital flows needed for recovery.
I have great respect for the royal family and its leadership, decisiveness and vision. And they may well make reforms to the system required to shorten the recovery.
Dubai is a great story, still in its early chapters.
7) Will Dubai recover from the current debacle?
Yes, it will. How long recovery takes is the question.
But in order to support growth, Dubai and Abu Dhabi have formed some of the top companies and management skill in the world.
Investment Funds in Abu Dhabi are potent and very sophisticated, blessed with prudent, visionary leadership in its royal family.
Two of the words best airlines come from the UAE, hotel firms like Jumeirah, developers like Aldar and others, top seaport and airport management companies in the world.
These are stabilizing forces in a volatile global market.
8) Saudi Arabia was the only country in the region which was least affected by the global crisis because of its solid economic policies and strong economic fundamentals. Real estate market is also doing well in Saudi Arabia. What do you think of Saudi real estate market?
We would like to explore opportunities in Saudi Arabia.
You are correct, the Saudi market unlike many around the world is poised for strong growth.
And its not just a potential, its happening.
Very conservative policies have paid off for Saudi Arabia.
We were considered very conservative too, in this recent real estate frenzy of 2005 - 2008.
But it paid off for us as well, in strong returns in 2008 and among the highest returns in the US for 16 years.
We believe both the vision and steady expansion of the Saudi markets provides very significant opportunity for global institutions and we welcome the opportunity to explore projects and strategic relationships in Saudi Arabia.
9) What is your take on Saudi Arabia's plans to build massive economic cities during the time of real estate crisis in the region?
Often during crisis that other markets are experiencing, can be the best time to invest and grow.
Particularly in your own market and infrastructure creation.
The Saudi plan which I believe is much broader in scope than the economic cities - which are important physical markets and provides infrastructure to focus growth around.
It also includes progressive plans for the securities markets and business development.
Its this kind of comprehensive planning that makes us enthused about opportunities in Saudi Arabia.
10) As you are traveling in the GCC region, what is your observation about GCC real estate market? Where this market is heading?
It varies widely by country. I've commented on two very important GCC markets, Saudi Arabia and the UAE.
Over the long term we see good strong potential through out the Gulf, including markets like Qatar and Oman.
Oman is an example of visionary, very progressive leadership in the Sultan, conservative business principles in both the government and private sector while having a clear economic a urban growth plan.
And the private sector business environment which is open, friendly and healthy.
11) What is your advice to real estate investors in the GCC region?
The same as any region.
Before investing assess risk, not return.
Employ debt cautiously if at all.
Avoid markets which rely on flipping properties and debt (or gearing) to generate profits.
Buy low and sell in premium markets. Avoid investing fads or trends.
Importantly, determine your own goals for investment and be careful to anticipate whether the real estate investments you are considering will meet your goals.
If you use a professional real estate investment manager, which can be a very effective way to diversify your portfolio, experience and track record are key above all.
Determine if they have a policy which limits debt.
And since this last cycle was avoidable, look at how the manager performed over the last 4-5 years as well as their long term track record.
And how they emerged from the 2008 crisis.
Make sure they have good governance policies and provide transparency.
I naturally believe investment Funds can be a very productive and efficient way to invest in real estate (particularly commercial real estate).
Following these principles can make it a very good investment relationship, especially in this current under valued real estate market.
12) What is your prediction about real estate market and what trends you expect in 2010?
Globally and in the Gulf markets as well, I expect we will large scale de-leveraging.
Its a painful process for borrowers and lenders, but necessary for markets to come into equilibrium.
I'm concerned about the levels of government borrowing, especially in the West. I expect to see inflationary pressures.
Fortunately, our real estate investments being primarily commercial office buildings, are leased properties and these leases are indexed to inflation and actually benefit from it.
That's historically been one of the investor attractions to US real estate.
Globally, the de-leveraging process drives prices down making these next few years among the best investment markets in my career.
