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Saudi real estate market heading for strong growth

The vision and steady expansion of the Saudi markets provide very significant opportunity for global institutions, says Blumberg.

June 8, 2010 9:41 by

The US-based Blumberg Capital Partners, which provides a full range of real estate investment management services, is exploring opportunities in Saudi Arabia and some of the GCC (Gulf Cooperation Council) countries to develop strategic relationships in investments. The Saudi real estate market, unlike many around the world, is poised for strong growth, Philip F. Blumberg, founder and chief executive officer of Blumberg Capital Partners, said.

Saudi Arabia was the only country in the region which was least affected by the global crisis because of its solid policies and strong economic fundamentals, Blumberg said in an exclusive interview to Arab News.

The Saudi real estate market is heading for strong growth. And this is not just a possibility; it is happening, he said.

Blumberg, who was in the GCC countries, said very conservative policies had paid off for Saudi Arabia.

Blumberg said the purpose of his visit to the region was two fold: Capital raising for our latest real estate fund, a $1 billion investment fund consistent with our previous fund’s investment policies which have been highly successful.

The second purpose of the visit is to explore investment opportunities in the Gulf region which we are quite positive about in the long-term.

“We are meeting with major financial institutions and investment houses throughout the Gulf. We are also in discussions with sovereign wealth funds in the region,” he added.

Blumberg said: “We believe both the vision and steady expansion of the Saudi markets provide very significant opportunity for global institutions and we welcome the opportunity to explore projects and strategic relationships in Saudi Arabia.”

As Saudi Arabia made plans to build massive economic cities, Blumberg said, often during crises that other markets were experiencing, this may be the best time to invest and grow. Particularly in your own market and infrastructure creation. He was referring to the Kingdom’s plans to build economic cities such as King Abdullah Economic city in Rabigh, the Jazan Economic City in Jazan, the Knowledge Economic City in Madinah and the Hail Economic City in Hail.

The Saudi plan which I believe is much broader in scope than the economic cities — which are important physical markets and provide infrastructure to focus growth around.

It also includes progressive plans for the securities markets and business development. This kind of comprehensive planning that makes us enthused about opportunities in Saudi Arabia, he said.

On the Gulf markets investment side, Blumberg said, we have been meeting with government representatives, hotel and major real estate companies concerning real estate and corporate investments.

When asked about the Dubai property market slump, Blumberg said all the dynamics that occurred in the US market occurred in Dubai as well. But the market, though growing very rapidly over the last 10 years, was investor fueled not demand or user based.

Further, high debt in the form of conventional leverage was also present.

But there was also “hidden” leverage in the form of deposits which were used as well to build projects.

That liability is part of the equation, while the law is very unclear with regard to responsibilities.

These factors if not addressed will bode for a slower recovery in Dubai, he added.

“Over the long-term the Dubai market should thrive, but that may well be years in the making.”

Blumberg was blunt in attacking the subprime crisis in the US which triggered the global housing market slump.

“What happened in the US, and the major factor in the financial crisis of 2008, was over leverage,” he said.

Abundant debt fueled high pricing in real estate. High prices fueled more residential development, though not in the office building sector where existing assets were the target of buyers fueling the highest prices ever recorded in the US.

When the subprime level of loans began to have trouble available debt began to constrain. This triggered a domino effect on debt throughout the system, he added.

The effect was initially a flattening of prices, rapidly turning into a drop in prices, a further severe credit tightening, fueling a market collapse and credit freeze.

This is a classic leverage/credit induced market failure, Blumberg said.

Blumberg, while assessing the state of property market in the US and Europe, said it’s varied by local market conditions – but in general the US economy and subsequently the real estate markets are in recovery. For example, particularly strong are markets in Texas like Dallas and Houston. While other markets like downtown Los Angeles, Phoenix and Las Vegas are still at bottom.

In Europe, we see the same thing but with more volatility. And the state of the European economic recovery is weaker and more fragile than in the US.

While London prices in some cases are rising with yields below 6 percent. That’s more of the irrational pricing, I think caused by short-term “chasing yield” decisions, misplaced in a long-term asset.

A 4-5 percent overall yield won’t look very attractive in a few years as markets get back into equilibrium.

And selling out that position later in the cycle will likely incur substantial losses, possibly more than eliminating the current yield returns.

We would not acquire commercial real estate in the London market at these very high prices and low yields, he said.

While talking about his company’s progress, Blumberg said: “We were considered very conservative too, in this recent real estate frenzy of 2005 — 2008. But it paid off for us as well, in strong returns in 2008 and among the highest returns in the US for 16 years.”


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