10 December, 2009

The first Domino

Surprisingly our local newspapers seem to have missed this story yesterday. Never mind, we at the UAE community blog are happy to assist them with the dissemination of relevant news.

According to this report by Dow Jones Newswire (printed in the Wall Street Journal Asia online edition and picked up by Zawya.com), Istithmar World (Dubai World’s investment vehicle) defaulted on loan payments on a hotel investment in NYC in October, which led to a foreclosure auction a few days ago where they got $2 million for their equity in the property.

The whole thing is terribly complicated and involves ‘junior debt’ and ‘mezzanine financing’ etc. but this really just obfuscates the issue. Let’s ignore debts and defaults for a minute and simply look at the bottom line. Which, I think, is the whole point of investing after all.

According to the article, “[I]stithmar spent about $50 million in cash and borrowed $232 million to buy a 90% stake in the trophy hotel in October 2006. In June, Istithmar bought the remaining stake from UBS AG for about $4 million”.

So, Istithmar spent more than $50 million in cash and got back $2 million for their stake at the auction.
OK, someone will pick up the debt and with it, loads of negative equity because the value of the property is now less than half of what Istithmar (and their lenders) paid three years ago at the height of the market. But the bottomline is that Istithmar put more than $48 million in the sand in the space of three years. And this - involving New York City prime property and not, say, a reclaimed lump of sand in the the Persian Gulf - is quite an achievement for an investment firm. (You have to remember here that Istithmar means ‘investment’ in Arabic and not as you might think perhaps ‘reckless and shortsighted debt splurge’.)

As the saying goes: the money is in the buying. Clever investing means not to overpay.

The first Domino has fallen.

By the way, the report makes a mistake by muddling up Dubai World with Dubai Holding. Its closing paragraph states that “[D]ubai World is expected to sell some non-core assets including Central Park South landmark the Jumeirah Essex House..”
Jumeirah Group (which owns and manages Essex House) is of course part of Dubai Holding, Sheikh Mohammed’s personal investment holding company. It has nothing to do with Dubai World other than the name Dubai in it and the fact that ultimately one man controls everything.

Ehm, you can clearly see the difference...

8 comments:

Seabee said...

There are more than a few stories like this dotted around, assets being virtually given away. Buying at the top of the market, with borrowed money, and selling at the bottom says a lot about the brains behind the investments.

the real nick said...

Seabee,

Selling and defaulting are a bit different, though...

Rupert Neil Bumfrey said...

You do have to admire the journalists as they pick over the scraps they seem to be allowed to consume.

Today Business24/7 reported the "Gross Profit" made by Nakheel, as we may all know it is the bottom line that truly counts, NET PROFIT!

Full accounts as posted on NASDAQ Dubai http://www.nasdaqdubai.com/marketinfo/marketnews_detail.html?id=a041dd80-ae73-4712-b4d6-9543bce7e772

This is not an attack on UAE or journalists, in these very difficult times, but please be aware that debate does indicate an interest and hopefully resolution of the situation.

nzm said...

It appeared very briefly on The National homepage, and was also covered on the Gulf News site.

Nick: the report that you link to also appears to have been cleaned up - no referrals to sales of Dubai Holdings assets anymore! It's little wonder though, that there's so much confusion when each company has Dubai in its name.

Rupert Neil Bumfrey said...

Now I do wonder what your editorial policy actually is!

nzm said...

Looks like some Abu Dhabi companies are about to come under scrutiny as well.

Kyle said...

The first Domino has fallen.

I'm not surprised. After all, it was just a matter of time.

It was fun to see Dubai experiment with dare & ambition but somewhere along the way, it lost focus and sense of direction and here we are in the midst of this huge pile of mess. All those credit & crisis management wannabe's should seriously consider going back to school.

In a way, this whole -- let's call it: Freakinomics -- could turn into an academic's (non-fiction) bestseller of all times.

Dream you must but not at the expense of reality

BuJ said...

shrewd

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