By Paul Blustein
Washington Post Staff Writer
Tuesday, March 7, 2006
Middle Eastern investment in the United States is once again picking up steam, showing big gains since the tense period following the Sept. 11, 2001, terrorist attacks. And while some takeovers are triggering alarm -- most famously, the purchase by a Dubai-owned company of a seaports management firm -- others are evoking warm welcomes.
Spearheading the trend is Dubai's Mohammed bin Rashid al-Maktum (popularly known as "Sheik Mo"), ruler of the freewheeling city-state, which is part of the United Arab Emirates. The ports deal is just one of a series of recent purchases by companies he controls.
Other acquisitions include a $1 billion portfolio of 21,000 apartments in U.S. Sun Belt cities; a 2.2 percent stake in the automotive giant DaimlerChrysler AG that cost another $1 billion; and a Manhattan landmark building, 230 Park Ave. The emirate also made major purchases in other countries over the past year, notably a $1.5 billion takeover of Britain's Tussauds Group, which owns the famous waxworks, along with theme parks, roller coasters and other entertainment-oriented businesses.
On Thursday came news that yet another Dubai acquisition is drawing Bush administration scrutiny because of the national security risks -- this time of plants in Georgia and Connecticut that make precision components used in engines for military aircraft and tanks.
But an entirely different reaction greeted the disclosure several months ago that Dubai Investment Group had acquired the Essex House hotel in Manhattan and promised to sink $50 million into renovating it.
That announcement prompted New York City Mayor Michael R. Bloomberg to exult: "Another iconic hotel overlooking Central Park will be preserved and its unionized workforce protected. This is excellent news for New York's tourism and hospitality industries."
Behind such transactions are two powerful forces. One, of course, is the high price of energy, which has left several oil-producing Arab countries swimming in cash. The other is the burgeoning U.S. trade deficit -- $726 billion last year -- which means that the United States needs foreign capital; a country that imports more than it exports must cover the gap with money from abroad.
Until now, investments in the United States from Europe and other parts of Asia have dwarfed those from the Middle East. But an increasing share of the foreign money required to fuel the U.S. economy is likely to come from places that, like Dubai, trigger visceral reactions among Americans seared by memories of the Sept. 11 attacks.
"The price of oil is going only one way -- up -- for the next five years, because it is going to take at least that long for alternatives to kick in," said Youssef M. Ibrahim, managing director of the Strategic Energy Investment Group, a consulting firm based in Dubai. "So there is no question in my mind that billions of dollars will continue flowing this way, and people cannot handle all of that kind of money here. You've got to circulate the money, and the United States is still the biggest market."
Already, the list of U.S. businesses owned by Arab investors -- not just from Dubai -- includes some well-known names. Among them are Caribou Coffee Co., the fast-growing rival to Starbucks Corp.; Church's Chicken, a fast-food concern; Loehmann's, a specialty retailer; TLC Health Care Services Inc., a provider of home nursing and hospice care; and even several financial publications, including the American Banker.
Such "direct" investment in hard assets -- companies, factories and real estate -- is generally preferable for the U.S. economy, in the view of most economists, to foreign investment in bonds, stocks and other financial assets. One advantage of direct investments is that they cannot be dumped in a panic the way that, say, a Treasury bond can. Moreover, they often involve high-wage jobs. Average annual compensation per worker at U.S. subsidiaries of foreign companies is about $60,500, 34 percent higher than the rate at all U.S. companies, according to the Organization for International Investment.
The main drawback of a direct investment is that it involves foreign control, which can raise national security concerns. That is why an interagency government panel, the Committee on Foreign Investment in the United States, reviews many foreign takeovers. That process may be revamped by Congress due to indignation over the panel's decision to approve the purchase by Dubai Ports World of Peninsular and Oriental Steam Navigation Co., a British firm that manages container terminals on the East Coast.
Arab direct investments would probably be more extensive were it not for the political and legal atmosphere in the post-Sept. 11 era. "Middle Eastern investors are still a little skittish about investing in the United States," said James A. Fetgatter, chief executive of the Association of Foreign Investors in Real Estate.
To some extent, Arab investors think U.S. property is overpriced, so they are putting more of their overseas bets in Asia, said Gary Sheehan, an executive with Sentinel Real Estate Corp. in New York. But an additional factor is their fear about what might befall their holdings at the hands of U.S. authorities.
"I was in Bahrain the week before last and had a meeting at a bank where they said they would love to invest in the States," Sheehan said. "But they said: 'Syrian interests own 12 percent of our bank. So we know that if push comes to shove' " -- that is, a serious confrontation between Washington and Damascus -- " 'our assets will be frozen.' "
Such negativity toward investing in the United States could well deepen as a result of the controversy over the Dubai ports deal, some in the region warn. Sheikha Lubna al-Qassimi, the UAE economy minister, told the Financial Times last week that the United States will become less attractive if investment decisions are subject to political interference. "There are other countries that are competing for [our] money," she said.
But worries about a drying-up of Arab investment are overblown, according to others, including C. MacLaine Kenan, an executive in the Atlanta office of Arcapita Inc., one of the biggest firms serving as a conduit for foreign Arab investors in U.S. businesses.
Arcapita has raised billions of dollars from investors in the UAE, Saudi Arabia, Qatar and neighboring countries and has invested the majority of it in the United States, where it owns Caribou Coffee, Church's Chicken and other companies, as well as real estate. The investments have to conform with sharia, or Islamic law, which means that they cannot involve businesses that traffic in alcohol, pork, pornography or gambling and that they have to use special types of financing to avoid violating Muslim rules against charging interest.
"Our investors will spend some time complaining about U.S. politics, but at the end of the day, they're pretty shrewd in divorcing the economic opportunity from the political issue," Kenan said. "And they generally know the political problems will in most cases blow over. So every now and again, we get people saying: 'I wish this [U.S.] administration would do better. But by the way, how's this investment going?' "
The typical Middle Eastern investor is "a pretty happy camper," Kenan added, because markets in the region have soared along with oil prices. "So they have more appetite for investment abroad, and they know the United States is a place a smart investor needs to have some money."
Whatever Arab investors abroad finally do, their clout is relatively small -- at least for now. At the end of 2004, investors from Arab countries held just $4 billion in direct investment in the United States, according to Commerce Department data.
British investors, by contrast, held $252 billion, Japanese investors held $177 billion, Dutch investors held $167 billion and German investors held $163 billion. Their holdings span industries often deemed "critical," such as telecommunications (Finland's Nokia Corp. and Sweden's Ericsson Inc.), energy (British Petroleum PLC and Royal Dutch Shell PLC) and utilities (E.On AG of Germany, which controls much of the gas and electricity distribution in Kentucky).
Although foreign investors are far from controlling the U.S. economy -- their payrolls constitute an estimated 3.5 percent of the nation's workforce -- the United States is growing increasingly dependent on them as the trade gap widens. To obtain the money necessary to pay for imports, the United States this year will probably need to attract foreign capital at the rate of about $20 billion a week, which is equal to selling three companies the size of the maritime firm purchased by Dubai Ports World, noted Brad Setser, an economist with Roubini Global Economics LLC in New York.
To be sure, most of the money flowing into the United States comes in the form of Treasury bonds and other financial assets rather than corporate acquisitions. Foreigners held roughly $9 trillion of U.S. financial assets at the end of 2004, according to government data. Middle Eastern oil exporters held a modest percentage of that, including about $121 billion in U.S. government securities, the data show.
But the oil revenue flooding into the Mideast means that the region's financial strength is rising apace. The cumulative trade surplus of Middle Eastern oil exporters, which was $500 billion from 2000 to 2005, will come close to $800 billion by year-end, Setser wrote recently.
"Which is just to say," he said, "that there are a lot more Dubai Ports Worlds out there."