ICD Brookfield Place sale should set a precedent, says Brookfield boss

The sale of a 49 percent stake in ICD Brookfield Place should plant a flag in terms of institutional investment in commercial real estate in the Middle East, according to the regional boss of one of the sellers.

The almost half-share in the 1.1 million square-foot office tower – part of the emirate’s Dubai International Financial Centre – was sold by ICD Brookfield, a joint venture between Toronto-based mega-manager Brookfield Asset Management and partner Investment Corporation of Dubai, the principal investment arm of the government of Dubai. The deal was believed to value the asset at approximately $1.5 billion. The purchaser was a partnership between Abu Dhabi-based manager Lunate and Riyadh-based conglomerate Olayan.

The exit, which was announced last week, represents the biggest single real estate asset transaction by value in Middle East history. But Jad Ellawn, managing partner and regional head of the Middle East at Brookfield, said the sale was significant for another reason. He told PERE: “A bit of the goal here is to start creating precedents for third-party institutional real estate transactions in the region.”

“Selling in the Middle East was not usually a primary consideration but now it’s viewed as smart to recycle capital,” he said. Ellawn explained the best quality properties in the region, many of which are held by sovereign or sovereign-related entities, have rarely traded. But this sale should precipitate more owners of high-grade properties to consider selling in certain circumstances: “Groups are starting to think, we don’t need to own every asset but only assets which are core to our operations. I see ICD Brookfield Place setting the precedent here.” Significantly, while hailing from the Middle East, buyers Lunate and Olayan are not state-affiliated.

The exit has been long in the making. After the joint venture to build ICD Brookfield Place was formed in 2011, the building opened in 2020 and reached 98 percent occupancy two years later. It now houses blue chip tenants including banks Bank of America Merrill Lynch, BNP Paribas, JPMorgan, law firms Clifford Chance and Freshfields Bruckhaus Deringer and consultant E&Y.

While rents achieved at the property have not been formally disclosed, they are thought to be considerably higher than other buildings in Dubai’s financial district, contributing to its notable valuation. But that has also prompted onlookers to wonder if such a deal is sufficiently replicable to interest international institutional investors. “[Will] it lead to more bigger ticket investment here?” asked one Dubai-based broker at a major, international property services firm. “There is a distinct lack of grade A office space like [ICD Brookfield Place],” he said.

“If the new precedent is international institutional capital can now come to Dubai, [people should realize] there aren’t enough Brookfields or quality assets like that to warrant such outside involvement,” said another person familiar with the transaction who also requested anonymity. But he countered: “If this is a precedent for local investors to sell to outside capital, then it should be something they look at.”

“Not every deal in the UAE needs to be an ICD [Brookfield Place],” Ellawn said. “I don’t think it traded because it is unique, but because it generates significant amounts of cash. Smaller transactions are happening [too] and they’re cap rates are enough.” But he also said he did expect to see more regional institutional trading happening before international institutions engage the market. “I think it will come and we’re not far away,” he said. “The market has come a long way in the last five years and in the next five years it will come a long way again.”

Brookfield’s exit comes in better times for Dubai’s office market. According to broker Cushman & Wakefield’s Annual Market Update 2023/2024, office supply is expected to tighten as there are high occupancy levels – 89 percent citywide, 92 percent for Class A assets. In tandem, city-wide rents increased 21 percent year-on-year in 2023, the broker said, though they still are 16 percent of peak rental values recorded for the sector in 2014.

That is one of the reasons that while Brookfield’s exposure to ICD Brookfield Place has reduced to 25.5 percent, the manager remains committed to growing its exposure to Middle Eastern real estate. Currently property accounts for $3 billion of Brookfield’s $8 billion total assets under management in the region. Ellawn declined to reveal the extent of the firm’s current deal pipeline, but said: “We’re evaluating a number of different acquisitions here and hopefully we should be announcing in the coming year some more interesting opportunities.”

And in a further sign of institutional commitment to the region, he said while ICD Brookfield Place was funded from Brookfield Corporation using Brookfield’s evergreen balance sheet capital, subsequent and future outlays will be from the firm’s flagship, opportunistic closed-ended Brookfield Strategic Real Estate Partners series – vehicles which require exit moments for their assets.