The Mideast Money Trail
Oil-rich countries are pouring their petrodollars into Europe
In a city where real-estate prices can be jaw-droppingly steep, One Hyde Park is in a lofty league of its own. Situated in London's affluent Knightsbridge neighborhood-amid exclusive shops and hotels, like Harvey Nichols and the Lanesborough-the residential complex's 86 units will reportedly sell for around $8,000 per square foot; its four penthouses have price tags of nearly $160 million each. The sole financial backer for the $3 billion project? Sheik Hamad bin Jassim bin Jabr al-Thani, Qatar's foreign minister.
Indeed, as an investor, Hamad has been very busy in Europe. He also heads his government's $40 billion Qatar Investment Authority, which owns a 7 percent stake in the French media company Lagardere, is considering buying 10 percent of Airbus manufacturer EADS, and recently was outbid by an Australian bank when the British utility Thames Water was sold for around $16 billion.
But the investment spree isn't limited to just Hamad and QIA. Europe in general-and Britain in particular-are seeing a flood of petrodollars flowing in as the Middle East's oil-rich gulf states look for smart, safe havens in which to invest their massive fortunes. And the amounts they're willing to invest overseas are staggering. British bank Standard Chartered estimates that the region's net foreign assets total between $1.2 trillion and $1.5 trillion, and growing. "When you've got that much money to invest, there are no areas you won't look at, because you want to be diversified," says Steve Brice, chief Middle East economist at Standard Chartered, which itself became an investment target this year, when Dubai fund Istithmar spent $1 billion for 2.7 percent of its shares.
Avoiding America. Certainly a good chunk of gulf money will continue to end up in the United States. But that said, Arab investors are starting to favor Europe over the United States, mainly because of the reaction last year when the government-owned Dubai Ports World bought British ports operator P&O. The $6.8 billion deal included a number of major American ports. A political storm over security worries erupted, forcing DP World to agree to sell the U.S. ports to an American operator. Political fallout like that "seems less likely in Europe and the U.K.," Brice says. London Business School economist Richard Portes agrees: "They're rather wary of the atmosphere in the States. There's a feeling of insecurity for any investor who is Muslim." They've also seen that the United States is willing to use financial embargoes. "They would not expect the British or French to do that."
But why is Britain the repository of choice for Mideast funds? British investment laws are less onerous than those of many other countries in Europe. There's also Britain's colonial history in the Mideast. "These guys speak English as a second language," Portes explains. "They're used to dealing with the U.K. Neither side really trusts the other-but that's OK; they're used to it." Bahrain's Gulf Finance House is, for example, opening a London office charged with scouting for mainly real-estate investment opportunities-largely in Britain but also on the Continent.
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."
This story appears in the April 30, 2007 print edition of U.S. News & World Report.