Among globally active real estate funds, investment firm Colony Capital has made their mark after over 13 years of investing in real estate to the tune of almost $1 billion annually and managing equity capital on behalf of leading institutional investors. By identifying and buying real estate, real estate-dependent companies, distressed assets and non-performing loans, the firm’s funds year after year realized internal rates of return in excess of 20%.
With leisure-related projects in hospitality, resorts and gaming strong in the list of participations, the company’s pedigree of past or present investments in high-profile properties includes names such as the Las Vegas Hilton, the Savoy Hotels chain in the United Kingdom, the Fukuoka Dome baseball arena in Japan, and the Costa Smeralda resort of Agha Khan fame on Sardinia. Last month, Colony made headlines by being in negotiations over acquiring several casinos in the United States.
Earlier this year, Colony Capital set up an office in Beirut, the 13th branch in their global network. Also notable from a local perspective is that Colony’s founder and chairman, American entrepreneur, Tom Barrack, has roots in Zahle, and that one of Colony’s 12 principals is Lebanese Naji Boutros, who joined the firm last year after acquiring a strong reputation as head of Middle East and European real estate at Merrill Lynch. EXECUTIVE talked to Boutros about the regional and local financial market in real estate investments, and about what it takes to be a Lebanese success story in global finance.
Why is real estate so very important for Middle Eastern financial markets?
Middle Eastern investors have always acquired real estate and globally are today among the most important investors in this field. I think that three factors make real estate a favorite asset class for Middle Eastern investors. For Islamic investors, if it is structured properly, real estate is SHARI’A-compliant. Secondly, real estate is not volatile; it is a hard asset. The third reason is what happened during the tech crisis, where a lot of money was wiped out.
How does the Middle East figure in Colony’s investment strategy? Are there projects that you would qualify as totally off market?
We are working with top decision makers in the Middle East who are offering us a lot of incentives to be with them, because we bring brand recognition to their local market. These economies range from monarchies to pluralist secular democracies. You can imagine which one that is, Turkey.
Is the participation of Middle Eastern investors in Colony Capital evolving positively then?
A year ago, we had zero participation of Middle Eastern investors in our worldwide operations. Today, it stands at 5%. That is fantastic. They like it and want more and more and more. I anticipate this participation to quadruple within 24 months to then be in the 20% of our global operations. We would like to become the vehicle of choice for Middle Eastern investors globally investing in real estate. By aligning our interests with theirs’ and by having such a sophisticated global experience platform at their service, we are doing well.
The current economic environment seems to correlate once again high revenues for the Middle East with somewhat subdued outlooks for many developed markets. Do you see another wave of Arab investments flowing out of the region?
I think what we are seeing is a recalibration of Arab investments. You have some repatriation of money back from the US. We don’t really know the number but it is a lot of money. That money went back to the Middle East, plus you have the generation of additional capital from oil prices and other factors. Smart Arab investors are channeling this money towards productive investments in their own countries. I cite what Dubai has done, which is incredible. Chapeau bas, there is one decision maker and so much attention and focus goes towards productive investments in his own country. I am today an amazed believer and supporter of what is happening in Dubai. We are talking about medical tourism in Lebanon but Dubai goes out there and proactively attracts the Mayo Clinic and the Harvard Medical Institute.
The presence of Colony in the region is relatively recent. When did you open your office here in Beirut?
We started our institution and moved in about five months ago.
How many staff do you have?
We have six highly qualified staff, and we are hiring the best out of Lebanon and bringing back the best Lebanese from outside to Beirut. We looked in Lebanon unsuccessfully for five months before bringing people back from the outside.
Is Lebanon a great location where you as real estate funds or financial firms in general can work on a Middle Eastern scale?
It is not a great location. The one attraction is that Lebanon is closer to Middle Eastern clients and the more these clients will come to Beirut, the more financial services will locate here. The second attraction is that Lebanese like to be back here. There are top financiers around the world working with investment banks and investment companies like ourselves, who are willing to come back to Beirut. They are ready to make huge sacrifices to be in Lebanon. But if you were to approach it objectively, why would Lebanon be better than a place like Dubai or Switzerland, where you have so many incentives for firms to operate in?
How do you evaluate the local market conditions for real estate investments?
To us as global real estate investors, the most important thing is who is behind a particular project and which asset management company is doing the work. We find it extremely disturbing that you have many briefcase salesmen in Lebanon, but very few long-term driven, institutional transparency-type of asset managers and real estate brokerage houses. That is what is missing. Recently we start to see global powerhouses like Coldwell Bankers coming here and we like that.
But is there not an overemphasis on real estate in Lebanon’s investment landscape?
I think the focus should be productive real estate versus real estate that you trade, which is totally unproductive for the economy. It should be operating real estate where you employ people. The focus of investors should be channeled towards hotels, not towards residential accommodations. We’d also like to see world-class urban planners to come and help in setting the right regulations that are essential for the long-term benefit of the country. What really annoys me in this country is that people think that a plot of land has the more value the more meters you can build on it. This is absolutely wrong, because values are driven by demand and not by supply. People should ask, ‘how can I attract the most value for my land, how can my land be competitive versus somebody else’s land’?
How can one increase the competitiveness of land?
In Sardinia, for example, we went to the urban planning authorities and told that them we want to build less than what is allowed. By doing so, we created a scarcity of buildable land. When you create that rarity factor you attract the crème de la crème. The billionaires will come to you. Lebanon is not doing that. What we have to address is the competitive edge of Lebanon. To me it is very simple: We have a beautiful mountain area, which is green and attracts our tourists. We have cultural heritage, and a few unspoiled beachfront spots. What we have to do is optimize the value of these places.
Is Lebanon then a good market under the perspectives espoused by Colony, namely to focus on undervalued properties and apply a “cautiously contrarian” approach?
Yes and no. Yes, because we can find value investments in Lebanon. There are distressed sellers in Lebanon, be they distressed individuals or banks, who would like at attractive prices to dispose of their non-performing loans and real estate owned. What is unfortunately detracting us from here, is number one that we are having difficulties in finding sizeable deals. Number two, we are having difficulties in finding unique deals; number three, we are having difficulties in keeping the noise away – you can interpret that in any way you like.
Does that indicate that you have not executed projects here?
We are not yet comfortable with stability and transparency, which goes back to noise. And we haven’t yet seen the incentives that could be offered to a global group such as ourselves. All of this to date is pointing us to analyze a lot of things in Lebanon but not yet make any investments here. We haven’t found the right deal yet. What we are doing instead is using our base in Lebanon to analyze and make investments in other parts of the world.
So beyond nice buildings and nice scenery, what values do you find in Beirut and Lebanon that contribute to your performance?
We love being here, we love the culture of this place we love the beauty of this place, the human being. This is a place that has generated intellectual capital and achievers found around the world – be they doctors, engineers, or financiers. That is why I say that we’ve got an amazing brain center at Colony in Beirut.
[Colony Capital CEO] Tom Barrak has got an amazing love for this place. When we acquired Costa Smeralda, Tom said in his opening speech, “the Phoenicians are back.” and he was so proud of it. We love this place and I cannot describe how much it hurts us because we are operating globally and we contribute and add value to all these places globally and we want to do that in Lebanon and we want to see this place get better.
How does one take his or her heritage and advantage of being Lebanese to become a true real success in finance?
What you need to do is forget everything you learned at school and remember what your grandmother told you, which is walin haram, watch out from the bad people. Your reputation and credibility and long-term relationships, this is what matters, but stay away from bad people. Give it your best shot, work hard. This is not stuff they taught you at school but I think this is the basis of success. To be appreciative, and hard working and remember what your grandmother told you.
From your experience, would you endorse the statement that a Lebanese should go abroad to succeed?
I left Lebanon with $2,000 in my pocket and worked hard. I busted my chops, cleaning dishes and doing whatever. I had a scholarship at a university in the US, got educated at Stanford and Notre Dame and I did well at work. Now I work with Colony, and I am giving back to Lebanon. I like to give back more to Lebanon. Would I have had this opportunity if I didn’t leave? I don’t think so. My mind, the way I think would be different if I would have remained here. I encourage the young people to go wherever their opportunity is. Don’t forget Lebanon; be like what the cedar is like. You have your roots here, and when you find your roots, then you can grow high into the sky. This is a great place to be from, and we have a lot to give back to it. In order to give back to it, one has to find his opportunity wherever it is. If it is in shoe shining, in planting grapes, be the best shoe shiner and the best viticulturist around. Be the best; give it your best.
With those principles on your internal billboard, you yourself rose from starting out with $2,000 in your pocket to what net worth today?
My net worth is measured in terms of the friends and relationships I have, the family I have. That’s my net worth. What we must focus on are the essentials, the priorities in life. Start from the foundation up, fix the human infrastructure and let’s stop all this plastic surgery business. Let people focus on what it is deep inside that governs their lives. Otherwise you end up building a society with false expectations, starting with the children.