The Mideast Money Trail
Oil-rich countries are pouring their petrodollars into Europe
Beyond the U.K., there's also increasing interest in countries ranging from Germany to Sweden to Turkey, says Tony Horrell, chief of property-management service Jones Lang LaSalle's capital markets group, which estimates that Middle Eastern investors will pour $15 billion into foreign commercial and residential properties this year-a 50 percent increase from 2006. "There is a love affair with real estate." In the past, Horrell says, Arab investors placed more emphasis on trophy buildings-the biggest or the most expensive-but they're wisely expanding their horizons now. Abu Dhabi Investment Authority recently bought a luxury shopping mall in Sweden, and Kuwait Investment Authority bought a Turkish shopping center. "These are good, strategic plays," Horrell says.
Billions. In addition to property deals, gulf states are taking big stakes in major corporations and buying entire companies outright. For example: KIA is German automaker DaimlerChrysler's second-largest shareholder, with a 7 percent stake; Abu Dhabi's Mubadala Development has a 5 percent stake in Italy's Ferrari; Saudi tycoon Maan Abdulwahed al-Sanea (whose portfolio includes many U.K. investments) recently declared he has spent around $6 billion for a 3.1 percent stake in the British bank HSBC; and Istithmar is considering paying $4 billion for a controlling stake in a (so far unnamed) western European media company. Dubai Investment Capital paid nearly $1.6 billion two years ago for Tussauds Group-which owns the famous Madame Tussauds wax museum and the London Eye observation wheel-but recently sold it for more than $2 billion; DIC also made an unsuccessful bid last year for a top English soccer team, Liverpool FC, and shelled out more than $1.3 billion for U.K.-based Travelodge hotels. Bahrain's Arcapita owns Northern Ireland's biggest electric company, Viridian.
And those headline deals probably represent just the proverbial iceberg's tip. Huge amounts of Arab money almost certainly end up in American and European equity funds; those stakes aren't always so readily noticeable. Trying to figure out where all the money goes, and how much it totals, "is impossible-we've tried," Brice says. "That's not accidental, of course. If you've got billions to invest, you don't want everyone knowing what you're buying-it could force prices up."
If Arab funds are getting high marks for making savvy investments-which also include major developments in their own region-it's because they learned the hard way, from experience, how not to invest their coffers. When oil prices spiraled from the mid-1970s to the mid-1980s, the main recipients of those petrodollars were big banks and U.S. treasury bills. Much of that largess was recycled by the banks as (ultimately bad) loans to Latin America, resulting in a worldwide debt crisis. "This time, [the Arab states] are doing it wisely," Portes says. "They're diversifying."
Neither does he see much of a downside for the U.K. and other European countries on the receiving end of the petrodollars windfall. Real-estate prices in some parts of London, such as Mayfair and Hampstead, have skyrocketed because of a wave of Middle Eastern money, and the huge investment sums also tend to push up the pound-a negative for British exporters. "Otherwise, the U.K. has prospered very well from this foreign investment," Portes says.
Domestic backlashes against Arab owners aren't likely, either. Middle Eastern financiers tend not to be asset-strippers, Portes says. Brice notes that Liverpool football supporters actually favored the Dubai offer because they thought the gulf state would invest more money in the club. Ultimately, the club went to American businessmen George Gillett and Tom Hicks, who paid nearly $348 million for it. Of course, Liverpool wouldn't have been the first English Premier League team with an Arab owner. Mohamad al-Fayed-more famously the owner of landmark London department store Harrods and father of the man who was with Princess Diana when they were killed nearly 10 years ago in a Paris car crash-bought Fulham FC 10 years ago.
The International Monetary Fund estimates that gulf state oil revenues hit a record $360 billion last year, a 28.5 percent jump over 2005. And since the boom in oil prices isn't expected to end anytime soon, the gush of petrodollars into Europe's real-estate markets, stock markets, investment banks, and brokerages may have only just begun. That's true, admits property-investment expert Horrell: "Everyone's pretty happy."