June 26, 2008 / 4:23 AM / 9 years ago

Asia, Mideast to unleash "go west" property drive

<p>Construction workers are seen next to their boat in front of newly built high rise buildings on the south bank of the Suzhou creek in downtown Shanghai January 17, 2008.Nir Elias</p>

SINGAPORE/SEOUL (Reuters) - A wave of capital from the Middle East and Asia could be on its way into ailing U.S. and European property markets, as a weak dollar and falling asset prices lure sovereign wealth funds and institutional investors.

Since Japanese investors bought a string of U.S. offices in the 1980s only to be burnt by a market crash, global property investment flows have been mostly one way -- from the West to Asia.

But that looks likely to change.

"Instead of talking about emerging markets in Asia, now emerging markets could be in the U.S.," said Yu Lai Boon, chief investment officer of Dubai World, a state-owned investment firm.

"As investors in the Middle East, we're seriously looking at the U.S. and European markets right now as the beginning of investment for the next golden era."

The New York Post reported on June 11 that the Abu Dhabi Investment Council was negotiating to buy a 75 percent stake in New York City's landmark Chrysler building for $800 million.

Last year, North American investors pumped about $8.4 billion directly into Asian property, while the reverse flow reached only $2.7 billion, according to Jones Lang LaSalle.

They handed over another $30 billion, treble the Asian contributions, to global property funds, which invested $25 billion in Asia and $29 billion in North America.

At a Reuters Global Real Estate Summit this week, several executives said capital flows could become more balanced, with Chinese, South Korean and Japanese investors looking abroad.

With the U.S. dollar falling about 3 percent against the yen so far this year, and around 13 percent over the last 12 months, their spending power has been magnified.

Investors are just waiting for U.S. office blocks and shopping malls to suffer the same fate as the London office market, which has fallen 18 percent in value since a peak last year.

"Up for Sale"

U.S. commercial property prices had dropped about 5 percent in the last year and would probably fall another 10 percent in the coming 12 months, said Asieh Mansour, chief economist at Deutsche Bank's (DBKGn.DE) property investment arm RREEF.

A global credit crunch, sparked by the U.S. subprime mortgage crisis, has dried up the kind of private equity deals that had buoyed commercial property in 2006 and early 2007.

And although office vacancies in many cities are low, the prospect of layoffs in the financial industry has cast a pall over future occupancy.

"The dollar is so low that the U.S. is up for sale," Mansour told Reuters.

"I've been on the phone with many Japanese investors who are doing due diligence and are very interested," she added. "They're mostly larger pension funds related to banks."

During the asset bubble in the late 1980s, many Japanese firms went abroad, investing heavily in the U.S. property market.

The Savings and Loans crisis caused office prices to fall as much as 70 percent. When the Tokyo market slid, Japanese investors were forced to sell U.S. assets.

But the thirst for foreign investments is back.

In February, Japan's largest property firm Mitsui Fudosan Co (8801.T) unveiled a plan to redevelop a site in London's West End. The firm expects overseas business to grow to 20 percent of its operating profit by 2016 from 7 percent now.

Trading firm Marubeni has also teamed up with Hong Kong's Sun Wah Group to invest in Western property markets.

New Kids

But the new kids on the block are South Korean and Chinese.

Mirae Asset Maps Investment Management, a unit of South Korea's biggest mutual fund firm, bought the 43-storey Citigroup Center in San Francisco for about $370 million in May.

A fund manager at the firm said he was waiting for the right moment to pounce on more U.S. assets.

"I think the West such as San Francisco is in a better condition than the East," said the fund manager, who asked not to be identified because of the commercial sensitivity of such negotiations.

"There are more IT companies than financial companies so the area is less affected by the subprime problems."

Flush with dollars from a huge trade imbalance, Chinese sovereign wealth funds are beginning to test the waters in New York real estate, said Scott Latham, an executive vice president at property services firm Cushman & Wakefield in New York.

The newly created China Investment Corp has put together a four-person team for alternative investments, but their allocation will probably be less than 5 percent of the sovereign fund's $200 billion war chest.

"They are coming," Latham said. "We've seen them in the bidding process over the past four months on a number of assets we've handled."

Chinese investors were recently among a throng of bidders for three former Equity Office properties marketed after Harry Macklowe defaulted on loans he used to buy them last year.

But Latham said the Chinese could be late starters.

"I think that unlike the Middle Eastern sovereign wealth funds, they have not yet figured out an efficient way to get the money out of their country," he said.

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Ilaina Jonas in New York)

Writing by Dominic Whiting; Editing by Kim Coghill

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