Six Winning Strategies for Middle East and China Deals (or Why the New Silk Road Failed)

By Jeffrey Towson, Kevin Tetarenko, Ehab Tantawy

What Happened to the New Silk Road?

In 2007, the “new Silk Road” was born. It was headline-making vision for how the Middle East and Asia would reconnect after 700 years of political and economic separation. It was a grand vision – a historic re-opening of ties that would be a game-changing new geopolitical axis.

And the economics of this vision were both simple and powerful. Oil-rich GCC countries would integrate with rapidly rising and energy hungry Asia. The new Silk Road was to be the beginning of massive movements of oil, capital, infrastructure projects and people. Continue reading

Fadi Arbid of Amwal Al Khaleej: What’s Next for Middle East Investing?

The Middle East is an unusual emerging market. It attracts investors with its oil wealth (+40% of the world’s proven oil reserves). Its consumer and competitive dynamics are fairly stable and predictable. And it has a +70-year history of successful deals with Western partners. All of these things make it particularly attractive and manageable for global value players.

But the number of companies in the region – and deals – is quite small. Especially when compared with the large amount of local capital. So stocks and public bids attract too much money. And attractive private deals are hard to access. Typically, the biggest challenges for the MENA investor are deal access and valuation.

With this in mind, we spoke with Fadi Arbid, the CEO of Riyadh-based Amwal Al Khaleej, one of the Middle East’s first private equity firms. Launched in 2004, Amwal has delivered one of its most successful PE track records. We discussed with Fadi how the financial crisis has impacted the region and where the opportunities are likely to be in the next several years. (continued here) 

An Interview with Dividend Income Investor.com (Oct 11, 2011)

The text below is from an October 11, 2011 interview with Steven Dotsch of Value Talk / Dividend Income Investor. The link is here.

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Today we’re joined by Jeffrey Towson, who was Head of Direct Investments Middle East/North Africa and Asia Pacific for HRH Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud – grandson of King Abdulaziz Alsaud, founder and first ruler of Saudi Arabia.

Continue reading

Podcast – “How Saudi Prince Waleed Invested Globally and Grew $30k to $22B” by Tradestreaming.com

You can go to the Tradestreaming link to hear the audio.

The Tradestreaming Introduction is pasted in below. Note: in the audio my title was said to be Chief Investment Officer which is not correct. This correction is also noted below in the text and on their site.

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Saudi’s Prince Waleed took $30k and investing globally, turned it into $22 billion — all with staff of only 2 or 3.

He was able to accomplish this by applying a framework to invest globally. Like Buffett, Waleed is a value investor. But the similarities end there — Waleed is a deal maker, on the prowl to see where he can add value and how.

In this podcast, we’re joined by Jeff Towson, who was Head of Direct Investments Middle East/North Africa and Asia Pacific for Waleed** for almost 10 years. He’s written a new book describing the Waleed model,What Would Ben Graham Do Now: A New Value Investing Playbook for a Global Age. He explores the essential question of our day: how does a foreigner properly invest in emerging markets?

In today’s episode of Tradestreaming Radio, we discuss:

  • ways global value investing differs from what Warren Buffett did so well
  • how Waleed and others like him find and invest in value in inherently chaotic environments
  • why global investing is a hybrid of investment banker, business development exec and investing
  • what geographies Towson is looking at now for their investment potential

** In the audio of this program, I mistakenly refer to Towson as Waleed’s Chief Investment Officer.  His correct title was Head of Direct Investments Middle East/North Africa and Asia Pacific.

18. Navigating 3 Real Estate Bubbles in 3 Countries

The new Shanghai (and Chongqing) property tax is creating some fascinating discussions in the Mainland. Maybe it will eliminate speculation? Maybe it will bring down rising property prices? Maybe it will alleviate the real estate bubble? And so on. But this is now my third real estate bubble in eight years. First, the Middle East, then the US and now China. I’m getting a bit tired of this story.

Eternal investment truth #1 is that “real estate gets sick but never dies”. You may lose some money or have to wait out a bad market. But, assuming you didn’t use too much debt, you still have your building and your investment won’t go to zero.  It’s hard to die in real estate.

Eternal investment truth #2 is that lots of capital always means lots of demand for real estate. If there’s lots of money floating around, real estate in premier locations, such as London, Tokyo and Shanghai, always goes up. And if it’s also an island, say New York or Hong Kong, then the prices really, really go up. In the petrodollar-filled Middle East, it seems like half the population quits their jobs and goes into real estate every time the price of oil hits $90 a barrel.

Shanghai real estate today is a perfect storm of truth #1, truth #2 and the fact that there are few other investment options.  There is really a lot of economic power behind the surging Shanghai real estate market. So it’s pretty hard to believe that the new property tax, which is small, is going to have any impact on prices or change many people’s behavior.

But Shanghai in 2011 reminds me not of the US boom, but of Dubai around 2005. Back then I would drive along central Sheikh Zayed road and, just like Shanghai’s Century Avenue today, notice a new skyscraper almost every month. I would be continually startled by grand new projects. New Palm islands doubled the effective coastline. Ski slopes moved indoors, hotels went underwater and buildings started to rotate. And apartments seemed to be flying up everywhere. Very similar to Shanghai today, every family I knew owned several apartments around town.

Most importantly, Dubai then, like Shanghai today, was mostly about the two mentioned truths. It was overwhelmingly a story of lots of local capital searching for somewhere safe to go.

But I don’t think Shanghai will suffer Dubai’s fate. Dubai’s problem was it was very dependent on European and Russian homebuyers flying in. And the market collapsed because in one month in 2008 most of them went home. Demand dropped by 50% in just a few weeks. Thousands of leased cars were left abandoned at the airport. Palm islands and other massive projects were halted mid-construction. The shopping malls became ghost towns. It was actually pretty spooky.

Shanghai does not have this problem. 50% of city is not going to move away one month. Buildings may be vacant but the demand is real and local.

Shanghai’s real estate problem is both better and worse.  It will not collapse like Dubai. But the rising home prices are making life less affordable for significant segments of the city’s population.  That problem doesn’t have an easy answer and I am very sympathetic to the officials and economists who grapple with it (fortunately as an investor its not my problem). Hence the new property tax. Hence the increasing restrictions on how many homes Shanghai and non-Shanghai residents can buy. Hence the increasing down payment requirements. And so on.

I think the most important difference between the Chinese real estate bubble and those in the US and in the Middle East is that people see this one coming. The Dubai collapse was completely unexpected. It hit the city like a sudden typhoon. And even Warren Buffett says he didn’t see the US sub-prime mortgage crisis coming. It’s the unexpected crisis, the black swans, which can wipe you out.  And this is likely the most important aspect of Shanghai’s new property tax. It shows that the government is actively preparing for a possible real estate bust – in a way that neither the US nor Dubai governments did.

9. Singapore’s New Lesson for Dubai: Family-Friendly Casinos Work

Dubai, which has long drafted Singapore, should note Singapore’s recent launch of the Marina Bay Sands casino. It’s an important lesson in how a city-state can build family-friendly casinos and jump start tourism.

Singapore’s recent opening of the Marina Bay Sands appears to be a glowing success. The $5.5 billion resort has logged approximately 5 million visits since its opening in April 2010. And even this is while it is still in a state of partial, phased opening. According to a recent Wall Street Journal article, they are expecting over 70,000 visitors per day when it is fully completed by the end of the year.

But Singapore’s entrance into the casino business was after a long and agonizing decision by the government. There were concerns that gaming would invite crime. That it would be incompatible with the family-friendly environment of the city and the local sensibilities. That it would change the reputation of the city. They did not want clean, law-and-order, family friendly Singapore to become a casino town like Las Vegas or Macau. These are likely the same concerns that Singapore’s city-state cousin Dubai would have, given their cultural sensitivities.

But Singapore’s casino initiative has now proven four things that Dubai should seriously note:

Lesson #1: Casinos are not incompatible with law-and-order, clean, family-friendly cities. With the right government oversight, they can be introduced in a controlled and limited fashion. You can contain all the gambling within the casinos themselves. You can contain the casinos within specific real estate developments. And you can control entrance to the casinos through fees and other mechanisms.

And Dubai is already comfortable creating such controlled environments. They already limit alcohol, clubs and bars to within specific hotel resorts only. Note the Sands serves coffee and tea, not alcohol, in the casinos. In short, you can get all the benefits without the risks to the city’s reputation or sensibilities.

Lesson #2: The benefits are massive. The most powerful benefit is that gaming drives tourism, which happens to be Dubai’s lifeline. Casinos are a powerful mechanism to draw in tourism and it is a particularly stable type of tourism.

Attracting such inbound tourism has always been the strategic objective of Dubai and its industries; feeding the real estate, hotel and retail businesses of the city. But it has always been unstable, depending on warm weather or real estate purchases or retail shopping trips. Casinos create stable inbound tourism. Gaming has supported Las Vegas’ isolated existence in the desert for decades.

And you also get a multiplier effect as people already visiting stay longer on trips. It moves the destination beyond “stop-over” or “weekend-visit” status. So not only do you increase inbound tourism from Russia, Europe, and Middle East; but you also add extra days to all the existing tourism. Dubailand, the still developing theme park, was envisioned with just this objective of increasing the average length of stay.

Lesson #3: In Dubai such a tourism impact could be even larger than in Singapore. The US has Las Vegas. And China and Asia already have Macau. But Europe and the Middle East have no such gaming destination within easy flying distance. Certainly not one capable of combining gaming with mega-real estate and a scenic location. Dubai could be the family-friendly casino town for Europe.

Lesson #4: Casinos directly drive real estate, Dubai’s other growth engine. Dubai has already excelled at real estate but suffers from fluctuating foreign demand. Casinos could re-build and re-invigorate the real estate market likely faster than any other move Dubai could make at this point. Singapore is already reporting an increase in the residential, retail and office demand all around the bay where the Sands is located.

The long and the short is that Singapore has just shown Dubai, its long-time emulator, a potential silver bullet for its current situation. Since its collapse, Dubai has become a well-driven car with a great structure but without much of an engine. A family-friendly casino initiative could provide a powerful engine and could re-launch Dubai. It would be a similarly agonizing decision for Dubai but the lessons from Singapore are worth considering.

4. Of Course Chinese Real Estate Is, as Jim Chanos Says, a Bubble – But So What?

I witnessed first-hand Dubai’s rise and fall.From 2002 when there was nowhere to eat, to 2007 when you couldn’t get across the congested city traffic, to 2009, when it was a ghost town.With all respect to Mr. Chanos’ comments, the current Chinese real estate bubble is not worrying – and it is not Dubai times 1,000.

Jim Chanos, king of shorts and now leading China contrarian, has been asserting that China is a bubble, real estate in particular.  My general thinking is “ok?”.  Of course Chinese real estate is a bubble.  Claiming China is a bubble is like claiming a rocket ship has turbulence.  China is developing fixed assets across a continental economy at a rate never before witnessed.  There are multiple bubbles all the time.  And this is not worrying and it is not Dubai

Dubai’s real estate, unlike China’s, was built on 50% foreign demand.Dubai’s collapse in 2008 was the result of European and Russian homebuyers suddenly going home.50% of Shanghai is not going to move away one month.China has a balance sheet problem.Dubai’s big problem is on its income statement.

China successfully dealt with such a Chanos-described “bubble” just ten years ago.In 1999, Beijing and Shanghai Grade A office buildings had vacancies of 30% and 38%.And in 2002, the state banks had very high non-performing loan ratios.China Construction Bank’s NPL was well over 15%.But by 2005, CCB went public with a non-performing loan ratio reduced to 4%.And in 2006, China was again building and had 80% of the world’s cranes.China knows how to deal with the current bubble.

Chinese real estate needs to be viewed as state capitalism writ large. Today’s high real estate vacancies mean prices are going to fall.NPL’s will increase.And banks and state-owned enterprises will recapitalize through public markets and government support.But the assets and the re-developed cities will remain. State capitalism is doing what it does best – fueling the creation of assets and driving development.This is not Dubai nor is it a sub-prime mortgage type bubble.

Keep in mind, that in the time it will take New York City to re-build the World Trade Center, China will have built 50,000 skyscrapers.Approximately 2 Chicago’s per year for twenty years.

Chinese real estate is massive government directed development.  It is inherently turbulent with multiple bubbles occuring all the time.  But the people and institutions are well prepared for this.  The banks and government are good at managing the turbulence and the population saves and prepares for tought times.  Per Nassim Taleb, its not a black swan if you see it coming.