hat tip-Margo I.
RISING oil prices and falling property prices are reshaping London at a pace not seen since the oil price quadrupled to $12 a barrel in 1974 and the resulting recession slashed real estate values.
Last week, Kuwait bought an office block in the City for £400 million, roughly the income from six million barrels of oil at today’s prices. In May 2007, the block would have cost £540 million, roughly the income from 17 million barrels of oil at last year’s prices. This 11 million-barrel saving comes from oil prices doubling to $130 a barrel and the price of City property falling by 25 per cent. The beneficiary, in this case, was St Martins, the state of Kuwait’s long-time UK property arm. It purchased the new 500,000 sq ft site in Lime Street from British Land.
The rulers of the Gulf states have long enjoyed a love affair with London. When the sun gets too hot in their native lands they like to flock here, to their palatial houses in the centre of town, in Mayfair and Belgravia, and out in areas such as Coombe Hill in Kingston and St George’s Hill in Weybridge. Their adoration of racing sits nicely with the highlights of our summer season, of the Derby followed by Royal Ascot.
Right now, fleets of limousines are being polished, gardens are being spruced up and swimming pools cleaned in preparation for the annual invasion.
This year, though, extra spice has been added to the romance. They have moved beyond owning mansions, cars and bloodstock to buying up some of our plum commercial parcels of real estate. The soaring cost of oil has meant that for them, London, their favourite playground, has become one giant Monopoly board. If they alight on a property they like they can acquire it. Nothing is beyond them – they are that wealthy.
As a result, the property industry is entirely in their thrall. Just one example: when the Ministry of Defence decided to sell Chelsea Barracks in 2006, developers clamoured for the chance to own the plum piece of land – rightly so, since such sites rarely come on to the market. After hectic bidding, this property jewel went in April last year to Nick and Christian Candy, backed by the Qatari government, who paid £959 million for the 12 acres. While that price was dizzying enough, what gave the industry pause for thought was that the nearest other bidder was thought to be at least £100 million behind.
But consider this: when the MoD put the troop quarters and parade ground up for sale they were told by their advisers, Drivers Jonas, to expect to receive £250 million. In the end, the ministry collected almost £1 billion.
That, don’t forget, was last April. Since then, oil has gone through the roof. For the fortunate suppliers, money is gushing into their bank accounts.
Middle East buyers spent £8.9 billion on office, retail and industrial property in the UK in the year to May 2007, according to property agents DTZ. They have an unexpected cash surplus of around $300 billion to spend, thanks to rising oil prices. At the same time, buyers without access to oil money are largely being driven out of the market, thanks to the credit crunch.
The huge surge of Gulf riches is affecting the London market in two ways. The first comes from a quickening in the number of deals for existing real estate. “There is definitely a lot of activity out there but it tends to be below the surface,” says a leading City investment agent, who does not want to be named because the principals he does business with like to keep their affairs quiet.
These “investment” deals involve nominee companies, fronted perhaps by banks or firms of lawyers. They buy occupied blocks of offices or shops from landlords. The unnamed nominee could be anyone from a member of the Saudi royal family to an oil-enriched Russian. The really big deals tend to be done by the so-called sovereign wealth funds. The big daddy fund of SWFs is the Abu Dhabi Investment Authority (Adia) with assets of $875 billion. It owns Berkeley Square. So far this year, Adia has spent £640 million on three blocks in Knightsbridge and the ExCel exhibition centre.
Kuwait has two SWFs. St Martins is wholly owned by the Future Generations Fund established in 1976. Along with the older General Reserves Fund they hold worldwide assets valued at $213 billion. St Martins, the developer of London Bridge City, is run by the shy, discreet managing director Nigel Brown, from modest offices south of the Thames near London Bridge.
Brown downplays the oil-rush story. “We had a review of our investment ratings about three years ago and decided we needed to own more property around the globe. We now think that property has got much better value for money. This is a tremendous addition to our London portfolio. We have an appetite for landmark buildings. We anticipate that this will be the start of a very active period for us over the next two years.”
St Martins will be redeveloping the “threepenny-bit” block above St Paul’s station after the almost-finished block opposite on Cheapside. But the Kuwaitis act almost like a conventional UK developer compared with two oil-fuelled syndicates that really will change the face of London, barring a very nasty accident in the Middle East.
They represent the second and much more visible effect – a couple of very high, so far unbuilt, towers. A Qatari syndicate has paid about £100 million to rescue the struggling Shard tower next to London Bridge. That will be a 1,016ft monument to oil money. A syndicate called Arab Investments is working on a tower of about the same height called The Pinnacle in the City. Neither will be finished before 2011. Neither would have been started without oil money.
Nor perhaps would the two most adventurous projects in west London. The first is One Hyde Park, the block of 86 superluxury f lats near Harrods, where construction is currently blocking half of Knightsbridge. The development managers are the Candy brothers, the young high priests of the price-it-highandthe-rich-will-come brigade. But their money comes from Qatar.
At Chelsea Barracks in Chelsea Bridge Road, 319 ultra high-end flats are being built under the ebullient supervision of Nick and Christian Candy. Would any UK developer risk tens of millions building flats and try to sell them for tens of millions today? No. Neither project would be happening without oil money.
Aren’t the Qataris just a little nervous? Nope. A few weeks ago the development arm, Qatari Diar, appointed the former head of property at the Royal Bank of Scotland, John Wallace, to bring some stern banking rules to a business that seems to spend money like, well, oil. “Qatari Diar is looking to do far more here,” Estates Gazette was told. “It plans to take an active role in the market.”
Will all these new deals change London? In once sense, no: the capital has been open to foreign capital for decades. But in another sense oil money will change the London skyline for ever. For who else would dare fund two 1,000ft towers like the Shard and the Pinnacle?
DUBAI’S CHEEKY DREAMS
DUBAI, along with Abu Dhabi, is a member of the seven-state United Arab Emirates. But it has a lot less oil than Abu Dhabi. This has not prevented the state making a series of cheeky bids just lately. Last week the state-owned leisure business Dubai World bought the Turnberry Scottish golf resort for £55 million from global hotels group Starwood, who wanted £100 million. Dubai already owns 330 Travelodge budget hotels.
DP World – the Dubai ports business – is one of three bidders who have put in offers at about £100 million below the asking price for Wal-Mart-owned industrial developer Gazeley.
A more surprising move by Dubai was the announcement two weeks ago that a ruling family-owned business called Limitless, set up in 2005 to spend money on real estate abroad, was thinking about making an offer for Minerva, a London developer with two huge holes in the ground in the City being bravely developed into 1,000,000 sq ft of space.
Perhaps the most interesting move was made in February when Dubai’s investment fund Istithmar paid the Crown Estate £130 million for the old Metropole Hotel in Northumberland Avenue. Dubai was not acting alone. A Libyan fund called LIFCO has taken a stake in what will become a hotel again after nearly 70 years in government hands. Colonel Gadaffi ($41 billion in revenues last year) has plenty of oil money as well now.
THE biggest revenues but the least visible spender: Saudi funds tend to be channelled through nominee companies via banks or lawyers into individual properties. The sovereign wealth funds tend to buy shares in real estate businesses – also via nominee companies.
One visible sign of Saudi wealth is the ownership of London’s most successful house builder, the Berkeley Group. Saudi billionaire Maan al-Sanea holds a 29.2 per cent stake. A couple of weeks ago Berkeley boss Tony Pidgley announced the pair were setting up a fund with £100 million of oil money to spend on housing land, prices have collapsed by 30 per cent since the start of the year.
ABU Dhabi bought Berkeley Square in 2001 for £315 million from the BP Pension Fund. The deal included the verdant square and many of the surrounding buildings.
In early 2007 Abu Dhabi paid the Pru £185 million for No 1 Knightsbridge Green, close to Harrods. Then in March Lancer Asset Management, which runs the UK property portfolio for the Abu Dhabi royal family, spent £320 million for two former Thistle hotels – also in Knightsbridge. A month later UK property veteran Raymond Mould was given £200 million by the royal family to invest in UK property. In early May a £320 million deal was done to buy the ExCel exhibition centre in the Royal Docks.
THE Qataris are by far the most aggressive and adventurous buyers. They have long held a 14 per cent stake in Songbird, the company that owns £6.2 billion worth of offices in Canary Wharf. Last year they courted the ire of Middle England by taking a 25 per cent stake in Sainsbury’s as part of an unsuccessful takeover bid.
They have an 80 per cent stake in the Shard. A £959 million deal to buy the 12-acre Chelsea Barracks site was consummated this year; 319 luxury flats are planned. A development of 86 flats at One Hyde Park is under way.
GET SET FOR THE RUSSIANS
RUSSIA has oil revenues second only to Saudi Arabia. But the Russian invasion of London real estate has only just begun.
Like the Saudis the Russians tend to use nominee companies and then UK front organisations. But one deal came to light in late 2006 when Vladimir Chernukhin, former deputy finance minister of Russia, bought the former Midland Bank headquarters at 27 Poultry for £72 million. He has teamed up with developer Marcus Cooper to turn the HQ into a luxury hotel.
In January a Russian developer called PIK chugged into Cannon Street station to buy a £110 million stake in a £410 million development. PIK is now the junior partner of Hines, one of America’s most prestigious developers, in building an eight-storey block of 600,000 sq ft over the station.