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March 12, 2008 When Related Cos. lost a key investor in a multibillion-dollar residential, retail and hotel project in Los Angeles last year, the developer looked past U.S. pension funds and instead filled the void with petrodollars: Istithmar World Capital PJSC, a Dubai government-owned investment vehicle, agreed recently to put up $100 million. Such sovereign-wealth funds have shot to public prominence in the U.S. after acquiring stakes to shore up financial firms, such as Citigroup Inc. Increasingly, government-controlled Middle Eastern funds and private Arab investors are becoming partners of convenience, if not choice, for real-estate developers grappling with tight credit and risk aversion among traditional investors such as pension funds. Casino operator MGM Mirage Inc. received a $2.96 billion investment from Dubai World, the parent company of Istithmar, for a 50% stake in a 76-acre Las Vegas hotel, condominium and retail development slated to open next year. Embattled Los Angeles office landlord Robert Maguire hopes to take his company private with financial backing from the Qatar Investment Authority. Arab investors also are looking at a big Los Angeles property project and several developments in Manhattan, brokers say. "There is no question this trend will continue," says Frank Liantonio, executive vice president for global capital markets at real-estate broker Cushman & Wakefield. “We're in an environment where capital structures are strained. Sovereign-wealth funds are perfect candidates for solutions to the problems we're encountering.” Related, the closely held company that developed the Time Warner Center in New York, has turned to the Middle East twice in recent months for capital infusions. In December, Mubadala Development Co., the investment arm of Persian Gulf emirate Abu Dhabi, Kuwait Investment Authority and Olayan Group, a Saudi Arabian company, have invested about $1 billion in Related in the form of long-term subordinated debt. In a separate deal reached in December but disclosed only in recent weeks, Dubai's Istithmar signed on as an equity partner in Related's $3 billion Grand Avenue project -- dubbed The Grand -- in Los Angeles. The $100 million commitment represents a 40% stake in the Frank Gehry-designed project. Mandarin Oriental Hotel Group, which will manage the development's luxury hotel, has committed $42 million. Both investments await Los Angeles city and county approval, which are expected this month and are needed to help Related secure financing for construction, due to start this year. Istithmar, whose U.S. holdings include retailers Barneys New York and Loehmann's and a sliver of Time Warner Inc., owns a majority stake in New York's Mandarin Oriental Hotel in the Time Warner Center, among other buildings. Late last year, it sold two office towers on New York's Park Avenue for more than $1 billion each. One of the buyers was Bahrain-based private-equity fund, Investcorp. Istithmar didn't return calls seeking comment. John Fraser, co-head of Investcorp's real-estate group, says the market for raising money from Middle Eastern investors is fertile. "Capital is looking to invest opportunistically, either buying high-quality assets or restructuring plays," he says. Indeed many are making the trek to the Middle East to look for money. Antares Investment Partners, a Greenwich, Conn.-based real-estate investment and development firm, is raising a $500 million fund from Middle Eastern investors and others to jointly buy commercial real estate in the New York metro area. "There is a real sense over here that the time to invest in the U.S. real estate market is now," said Joseph Beninati, Antares co-founder, while visiting Abu Dhabi, in the United Arab Emirates, to meet potential investors. He says the fund will target well-situated and cash-generating properties with "broken capital structures," such as excessive leverage. Unlike U.S. pension funds, cash-rich Middle Eastern investors have longer time horizons and are rarely under pressure to liquidate, Mr. Beninati says. "They are never in a position where they have to liquidate in 36 months because a pension fund has to be paid." Sovereign-wealth-fund investment in U.S. property development is still relatively uncommon though it is bound to grow, says Jeff Blau, president of Related. "There is a macroeconomic shift in where wealth resides around the world, and these investors are searching for superior returns" in various assets, he says. Related's initial partner in The Grand, the massive California Public Employees' Retirement System pension fund, pulled out of The Grand project last year. Calpers has stakes in other property investments in Los Angeles. "We felt we were adequately exposed to the downtown L.A. market," says a spokesman for MacFarlane Partners, which manages some of Calpers' real-estate investments. Mr. Blau says that unlike U.S. financial firms, the developer wasn't in need of a bailout and had plenty of interest from sovereign-wealth funds and pension funds. "We didn't go search for this money. This was a one-phone-call transaction," he says.
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