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...