The recent global economic downturn has changed investment destinations and modes of investment for investors and investor groups. With the U.K., Europe and Japan still mired in recessionary uncertainty, the U.S. offers a stable investment destination for investors in one economy that is moving forward and is presently displaying stable growth across many sectors.
Investors from the Middle East have historically focused on the office and industrial sectors, preferring long-term leases and relative stability of those asset classes. Ethika Investments maintains a presence in the office and industrial markets and places renewed focus on the hospitality sector as that sector continues its steady growth trend. With hotels taking a significant decrease in value during the recession and with corporate travel picking up at a rapid pace, many Middle East investors are discovering the value of lodging as a key asset class and diversification opportunity within their portfolio. Sharia compliant investors too, are finding opportunities with limited service hotels tied to major brands, such as Marriott, Hilton, Hyatt and Starwood, where Food & Beverage has been structured to meet Sharia compliance.
With currency and geopolitical stability and historically low financing costs, the U.S. has strengthened its position as the premier G8 market — relative to other possible investment destinations. The U.S. offers economic stability, as well as the opportunity to invest in locations experiencing disproportionate levels of success based on regional economic conditions. In addition, U.S. finance rates are at all-time lows and there is significant opportunity to acquire assets far below their replacement cost.
Why is the U.S. real estate market an attractive proposition for Middle East buyers?
“Alternative investment activity has accelerated in the past few years in the U.S., particularly in the real estate sector. Much of the U.S. based real estate capital is controlled by public and private pension funds. With the S&P 500 up nearly 14% in the past five years, these pension plans have enjoyed an ever increasing allocation to real estate in order to maintain the same mix of assets within their portfolio. U.S. based real estate transaction volume hit $443 billion in 2012, up from $321 billion just two years earlier. — Jones Lang LaSalle
Debt maturities from 2005-2008 and vintage loans have created a unique opportunity for savvy investors to acquire high-quality assets at significant discounts to replacement cost. In the past three months, Ethika has taken advantage of many deals with distressed sponsors to acquire real estate at one-third of replacement cost in a variety of major markets such as Miami for example. In that particular transaction, Ethika took advantage of a sponsor’s debt maturity to negotiate an exit with the lender that allowed the previous owner to avoid bankruptcy. Simultaneously, Ethika leveraged its expertise in property operations and asset management to nearly triple the property’s cash flow resulting in an immediate benefit to the funds investors.” — Andres Szita
In the past, many large U.S. equity investors took the position that they would only pursue investment in the six largest gateway markets, and that opportunities would be abundant in those areas due to capital dislocation related to the difficulties in the CMBS and debt capital markets. In general, what they failed to realize is that most loan servicer’s would not be willing to simply dispose of high-quality assets in those markets at a deep discount relative to their note balances. Nimble private equity firms like Ethika Investments, sought out deals in the top 30 markets outside of the gateway cities and capitalized on opportunities to buy at historical low prices compared to replacement while also benefiting from the current standard yield in many cases.
Investors in the U.S. real estate market can choose a variety of investment strategies depending on their level of risk tolerance, time horizon and return objectives. From fully leased and stabilized multifamily investments yielding 4.5% cap rates in major markets, to more opportunistic asset classes which can deliver 20% IRR investors, working through firms like Ethika, Middle East investors can tailor a program that will deliver the right blend of risk and return of investment. Ethika’s long-standing relationship with foreign investors gives the firm a distinguished insight into structuring to maximize the tax benefits to investors.
Ethika is an opportunistic real estate fund and as such, the fund targets those deals which allow investors to achieve a net return of greater than 17%. The firm focuses primarily on the office and lodging sectors, identifying assets which are in need of financial, physical and/or operational rehabilitation and applying our expertise to undertake a successful repositioning. Ethika primarily targets assets in key central business districts and suburban corridors in the 30 largest U.S. markets, typically with a population in excess of two million.
In the past six months, Ethika has strategically invested in non-gateway markets and purchased first-class assets at historically low rates in U.S. cities such as San Diego, Houston, Pittsburg, Chicago, Salt Lake City, Miami, San Francisco and New Orleans.
What does Ethika Investments offer MENA investors?
“Ethika works with several Middle Eastern banks, family offices and other financial institutions. We plan to continue to grow those relationships and cultivate new ones, providing MENA investors with a unique platform that allows them to access our unparalleled real estate knowledge base and opportunity pipeline, while providing the personal service and attention that each investor deserves.” — Andres Szita
Andres Szita is Co-founder and Chairman of Ethika Investments, a real estate private equity firm that has relationships with various types of investors, including many from the Middle East. He can be reached at 310.954.2009 or [email protected]