Foreign devils

Foreign direct investment can mean many things to a country. For some reason, private equity and real estate funds conjure up especially intense feelings—and metaphors. By Aaron Lovell

Much like the holidays or a strong gin and tonic, foreign direct investment can inadvertently bring out the worst in people. Citizens often react with kneejerk xenophobia, while investors can play the role of the ugly outsider, living up to caricatures worthy of the political cartoonist Thomas Nast. Private equity and real estate funds, in particular, seem to be increasingly drawing fire as they span the globe, from churlish name-calling to government investigations.

German politicians oftentimes reach for pest metaphors—private equity firms are swarms of “locusts,” while REITs would let foreign property investors crawl all over the German residential sector like “cockroaches.” The locust comparison arrived when an election was looming, while the cockroaches slur arrived during the debate over REIT legislation. Sometimes the rhetoric goes beyond angry talk, rude gestures and mean glances.

In South Korea, a drama has unfolded pitting the country's tax authority against some of the biggest names in private equity, including Lone Star Funds, Newbridge Capital and The Carlyle Group. For years, those buyout shops did a brisk business in Korea, snapping up assets at fire-sale prices in the wake of the region's 1997 currency crisis and later exiting into a more-liquid market. But these firms eventually began to face resentment due to the perception of lax tax laws on foreign investors, culminating in the spring 2005 raids on a number of firms' Seoul offices. In 2006, this resentment has turned into new legislation and indictments.

For example, Korean tax authorities have delayed the $6.6-billion (€5.2 billion) sale of the Korean Exchange Bank, a Lone Star portfolio company, while the government investigates the initial acquisition for tax and currency law violations. Press reports from the region suggest that concern over the fund's other investments on the peninsula—development firm Kukdong Engineering and Construction, the Star Tower building in Seoul—can largely be seen as a popular reaction to the tax-free profits the firm has made in the country.

Obviously, many in the investment community feel the concerns of the Germans and Koreans are slightly misguided. While some wariness towards outside investors is certainly healthy—backed up with sensible oversight and regulation—many critics are fighting what can be a much needed lubricant for economies around the world.

In Germany, for example, US investors have recently set their sights on residential housing portfolios being held by municipalities and corporations. Seeing how these real estate assets are a drag on many a German balance sheet, foreign ownership could be seen as a good, efficient thing—if one can get past the roaches and locusts.

Much like a strong gin and tonic, foreign direct investment can bring out the worst in people.

Sometimes foreign investors can help bring reform and innovation to the market, whilst rejuvenating an asset. If a LBO shop invests in a flailing bank that has the government as a minority owner—and the private equity group is able to nurse the bank back to financial health—then the government profits as a large shareholder, as do the local citizens who avoid any tax liabilities due to a government bailout.

Recently, though, talk of the all-powerful free markets might seem somewhat hypocritical in the US considering the lingering homegrown aversion to FDI. Just witness the late winter uproar when Dubai Ports World, a subsidiary of company-state Dubai, tried to purchase the UK's Peninsular and Oriental Steam Navigation Company, which managed a number of US ports. While the deal had a national security profile, it was nothing that warranted the resulting political furor.

The Dubai deal brought to mind some of the hysteria seen in the real estate world in the 1980s. Discussing foreign ownership of real estate at a recent conference, Dale Anne Reiss, director of research at Ernst & Young, harkened back to the Japanese buying sprees of the 1980s, when landmark US properties like Midtown Manhattan's Rockefeller Center, the Sears Tower in Chicago's Loop and the Pebble Beach golf course on the coast of California were being snapped up by Tokyo-based property investors.

In hindsight, the hysteria seems to have overblown. “Nobody is coming over and putting wheels on those [assets] and wheeling them off to Japan,” she said. “They're still in New York, Chicago and Monterey.”

Macquarie buys Hong Kong property from GIC
Macquarie Global Property Advisors, the private equity real estate subsidiary of Macquarie Bank, has acquired an office building in central Hong Kong from GIC Real Estate for HK$2.4 billion ($300 million; €240 million). The property, a 29-story office building known as the Low Block, is one of two office towers in Grand Millenium Plaza. The acquisition was made out of MGP Fund II, which closed on $1.3 billion in 2005. Thus far, the fund has acquired properties in Asia with a combined value in excess of $1 billion. Earlier this year, MGPA acquired the Hong Kong office property Vicwood Plaza from Morgan Stanley in a $300 million transaction.

Carlyle forms Japan JV
Global investment firm The Carlyle Group has formed a joint venture with Japanese real estate management and securitization consulting firm SOW to create a diverse portfolio of mid-sized retail properties in non-metropolitan areas across Japan. The joint-venture partners aim to accumulate more than 10 assets with a value of up to ¥30 billion ($270 million; €210 million), of which ¥8 billion has already been invested to acquire two mid-sized shopping centers: Power Centre Otsu in Shiga and LOC Town Odate-Nishi in Akita, according to a statement from Carlyle. Carlyle closed its first Asia-dedicated real estate fund, Carlyle Asia Real Estate Partners, with $410 million of equity commitments in July 2005.

HDFC plans $750m India fund
HDFC Real Estate Venture Fund, the private equity real estate arm of Indian financial institution HDFC is planning to raise a $750 million (€585 million) vehicle that would primarily invest in the country's hospitality sector. Last year, HDFC raised $500 million, primarily from domestic investors, for its first fund. The second vehicle will target investors outside of India according to press reports. According to an earnings release by the company, HDFC's first property vehicle has already invested approximately 70 percent of its capital.

Morgan Stanley in Hong Kong office deal
A consortium led by Morgan Stanley has acquired a 23-story office tower in central Hong Kong for HK$2.3 billion ($295 million; €230 million) from Hang Seng Bank, a unit of HSBC. Joining Morgan Stanley on the deal are Gateway Capital and Pamfleet, a Hong Kong-based operating partner that has teamed up with the investment bank on previous transactions. The office property totals 260,000 square feet, a significant portion of which, approximately 116,000 square feet, is leased by Hang Seng. Morgan Stanley made the acquisition from MSREF V International, which closed earlier this year on $4.2 billion.