The slump seems to be history. While its problems are not forgotten, the housing market, whose crisis pitched the United States economy for years after 2008, is this year flipping into the engine of economic growth, if statements of US banking majors are worth the paper they are printed on. “If this call is right, housing will take a leading role,” JP Morgan Chase said in a special report on the US economic outlook at the start of 2013. They reinforced their expectation even further in March by predicting US home prices to increase 7 percent this year.
For those who are fascinated with catchy numbers and price records, the latest benchmark of the US housing market’s recovery is New York’s General Motors Building on Fifth Avenue. In a transaction that valued the GM Building as the most expensive office building in the country, a 40 percent stake in the sprawling 50-floor tower changed hands for $1.4 billion last month.
The deal involved players from the Middle East. The sellers were Kuwaiti and Qatari sovereign wealth funds and the United Arab Emirates-based Meraas, a holding associated with the ruler of Dubai, Sheikh Mohammed. The buyers had a Lebanese angle — albeit slightly remote — as one of the investors was M. Safra & Co, the New York investment arm of the Brazil-based Safra banking dynasty of Syrian-Lebanese extraction, who acquired the stake alongside a Chinese business magnate. More interestingly, the $1.4 billion price tag of the transaction puts the GM Building’s new value at $3.4 billion, up 20 percent from the last transaction on it, which was in 2008.
A few blocks down from the GM tower stands 285 Madison Avenue, the home of advertising agency Young & Rubicam (Y&R) for almost a century. At the beginning of this year though, Y&R sold the property for $190 million to RFR Holding, among whose partners in the transaction was private equity firm Quilvest, based in Paris and headed by Lebanese Fady Michel Abouchalache.
This is where the recovery of the US real estate market gets interesting. Not only did headline deals like the GM and 285 Madison transactions signal profit potentials, but trends in the US housing market indicate a range of opportunities for investors. Commercial real esta ste prices increased 4 percent year-on-year in April, and home price performance was even more robust, up 11 percent year-on-year in March.
The value of all this to Lebanese investors is that they can access US real estate opportunities through local intermediaries. Quilvest’s clients include Blom Invest, part of Lebanon’s second largest bank. Optimum Invest, a Beirut-based investment house whose license was upgraded to financial institution last October, is partnered with Colony Capital, a Los Angeles-based investment company. Colony American Homes Inc, a subsidiary of Colony Capital that specializes in the acquisition and rental of foreclosed homes, benefited strongly from the recovering home market.
Lebanon fronts the money
“At Blom Invest, we have zero expertise [when it comes to investing in the US real estate market]. At Quilvest, they do all the research and identify opportunities,” says George Abboud, head of private banking at Blom. With Blom raising $20 million over three months until March 2013 from 40 Lebanese clients, the Lebanese bank is one of several clients for Quilvest’s REP II Fund, a $300 million global opportunistic real estate private equity program.
The REP II fund is the second generation of this program after the $240 million REP program, which was launched in 2009 and included deals such as the one for 285 Madison. The new fund will invest opportunistically in real estate funds and in direct property deals globally.
However, since Blom Invest is only interested in exposure to the US real estate market, it has created a special purpose vehicle which will only participate in US deals with an aim to invest in up to six specialized real estate funds and four direct property deals.
So far, Quilvest has invested around 25 percent of Blom’s $20 million commitment into four funds and one deal. “We told our investors to expect their money to be invested in three to four years but we aim to do it in less than two years,” says Abboud. “I hope all the money will be invested by mid-2014 as the market is going up.”
With a minimum ticket of $250,000, the investments are expected to stay on investors’ books for at least five years with the fund managers targeting a 15 percent annual internal rate of return. Raising funds from Lebanese investors wasn’t child’s play in these turbulent economic times, but Blom found among its roster of clients Lebanese investors looking to diversify away from their shaky home country. While Blom has not directly invested in the fund, some senior managers of the bank have committed their own capital for a total not exceeding $1 million, or 5 percent of the $20 million commitment.
For Optimum Invest, partnering with Colony Capital, headed by Tom Barrack — also of Lebanese roots — was a great fit to provide its clients with access to US residential investment opportunities.
“Colony has the infrastructure and the expertise of entering the real estate market and managing a portfolio. It bought a society [Colony American Homes] which is now part of the fund that specializes in renovating and managing single family homes,” says Optimum’s Chief Executive Albert Letayf in explaining his firm’s partnership with Colony.
Colony American Homes benefited from the recovery of the US housing market and the demand for rental homes to such an extent that the company announced plans for a $260 million initial public offering (IPO) at the end of May. It delayed the IPO plan just a few days later as market conditions for real estate investment trusts weakened temporarily. According to Letayf, the postponement was because Colony believes there is “a lot more upside potential,” implying that investors in the fund will reap additional returns from the IPO.
With a minimum ticket of just $50,000, the average ticket size was much higher at $1 million, and the total commitment in Colony’s $2.4 billion American home fund stood at $8 million as of January. While the fund has been closed to further capital since January, Optimum has invested a stake in the fund — with the size undisclosed — and would sell part of it to interested clients.
While the fund has a life of seven years, Letayf expects his clients to start reaping revenues as of next year. As the fund aims to renovate and rent out the homes acquired, Letayf expects dividends of up to 7 percent annually. As for the annual rate of return, Letayf forecasts up to 20 percent for his investors while adding that they have higher expectations at Colony.
“You can’t do [real estate investment] as an amateur anymore. The time when you would buy an apartment in Paris because it was cheap and wait for the price to go up is in the past. Things are more complicated now because of tax issues, contract [constraints], etcetera,” says Letayf, as he explains how he intends to continue working with Colony Capital.
Lebanese and other Arab investors are often property-savvy, given that real estate is an asset class with extensive tradition for them. The changing conditions of risk and reward for property investments in Lebanon today, according to the sector leaders that conversed with Executive, mean that most Lebanese investors have saturated their appetites for local luxury properties.
The uncertainty over short-term price developments after the stagnation of property prices in the past year apparently led to further investor diversification toward international opportunities where the US markets and Berlin are adding new chances for those who have in the past already reaped returns from the US and other markets such as London, Paris and Beirut.
