Middle East investment in U.S. property rises as returns drag at home

By Herbert Lash

NEW YORK (Reuters) - The boarded-up building sat vacant on a tattered block in San Francisco until a small New York developer and a Kuwaiti real estate partner snapped it up in April 2014, attracted by the proximity to Twitter Inc (TWTR.N) and other tech companies.

Over the next year and a half, New York's Synapse Development Group worked to win approval to redevelop the 1904 landmark on Market Street into a 203-room hotel run by London-based Yotel.

The Kuwait Real Estate Co (KREK.KW), or Aqarat, later approached Synapse to deepen the two firms' ties as general partners, and they plan to invest $25 million in the future. They are working on a project in the Williamsburg section of Brooklyn, and Synapse is eyeing other U.S. urban markets for future deals.

Synapse and Aqarat aim to leverage their capital with an outside investor to buy about $200 million of real estate, Synapse Chief Executive Justin Palmer said in a recent interview.

"This is a calculated maneuver to invest more capital in U.S. real estate," Palmer said, referring to the higher risk that general partners take on compared with limited partners.

Yotel's "small, but smart cabins" - rooms about half the normal size - demonstrate the partners' efforts to maximize their revenue per square foot.

The Kuwaiti money is an example of the increased capital flowing into global real estate from the Middle East, some of which is heading abroad for the first time. This year, investment from the region is poised to hit a record $18 billion to $20 billion, or at least 13 percent more than the prior record in 2013, according to real estate advisers CBRE.

REGIONAL INSTABILITY

Investment from wealthy families and their business holdings is growing, driven in part by rising geopolitical tensions, the plunge in oil prices and the search for better returns abroad. Weaker growth and reduced opportunities at home have also driven capital abroad.

Families that formerly felt no need to invest abroad are now doing so, said Ali Zahed, a managing director at global property adviser CBRE (CBG.N) in Dubai.

"Ever since the appearance of these radical groups in Syria and Iraq ... I wouldn't say (it) has pushed the alarm button, but has definitely been taken note of by some of these large family groups," Zahed said.

Ninety percent of Middle East investment hails from Saudi Arabia, Bahrain, Kuwait, United Arab Emirates, Qatar and Oman, the six countries that form the Gulf Cooperation Council.

Ethika Investments LLC, a Los Angeles-based real estate investment firm with a number of Middle East investors, said it noticed an increase in capital flows about 18 months ago, just before the sharp downturn in energy prices.

"What drove it initially was just flight to quality assets and (U.S.) economic growth," said Austin Khan, chief investment officer at Ethika.

Early in the economic recovery, capital flowed to London and Paris, markets Gulf investors traditionally favored for their proximity to home, Khan said. But rising prices and fewer local opportunities pushed these investors to the United States.

"We have raised a tremendous amount of capital from that region in the last 12 months," Khan said.

Bahrain-based Investcorp, an alternative asset manager that has relations with more than 1,000 Gulf clients, acquired eight multi-family properties in Las Vegas, Denver, Chicago, Atlanta and Dallas for about $400 million in October. The properties have a combined 3,400 units.

Investcorp is the largest private Gulf investor in U.S. real estate and has been among the top 10 foreign investors in the U.S. market over the past decade, the company said. More than 70 percent of its investors are individuals and family businesses.

So far this year Investcorp's acquisitions have topped $1 billion, and a few other deals are in the process of closing before year end, said Herb Myers, managing director of real estate investment at Investcorp in New York.

The firm looks for properties that generate consistent cash flow and are located just outside the central business districts favored by millennial office workers.

"We were early to some of those suburban - I call them inner-ring markets - just outside the CBD," Myers said. "We've been able to harvest some gains recently and exited some properties we bought relatively early in the cycle."

(Editing by Matthew Lewis)