Back in December 2009, Keynesian wrote an article titled Dubai’s W Hotel-Union Square Sold for $2M where Istithmar World PJSC was forced to accept $2M for its W Hotel in New York at a foreclosure auction, leaving it with a $283M loss. The move was not a surprise and as part of a restructuring program, the debt-laden emirate had to start offloading its portfolio of trophy assets. The highly leveraged portfolio was built during a huge global spending spree at the peak of the oil and property bubble. According to a report by Monitor Group, between 2003 and 2007 Istithmar invested $3.8 billion of its own capital, but took on a further $14 billion in debt. Today, Istithmar is going through a deleveraging process, one that some argue might mark the end of the once notorious investment arm.
On March 3rd, Istithmar lost its second Manhattan property in three months as it defaulted on its $300 million mortgage on the former 300,000 square-foot Knickerbocker Hotel site in Times Square turning the property over to its lender Danske Bank A/S. It was planning to convert the site and an adjacent vacant lot it had purchased for $76 million into a high-end hotel. Moreover, its two properties W Washington D.C. and Mandarin Oriental New York are on credit rating watch lists for performance issues.
If Istithmar learned anything from past experience, it’s that expectations always fall short of reality.
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Loading ...Tags: Danske Bank, Dubai World, Istithmar World, Knickerbocker Hotel
I don’t know which one is more amazing:
Mohammad bin Rashed letting this company which he was chairman out in the dry or the vaulation for the hotel which went from $285 Million to $2 Million in couple of years!
Dubai had a property bubble and was never part of an Oil bubble as it has very little oil to speak of
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Keynesian Reply:
March 8th, 2010 at 5:52 pm
In a way Bo6air the oil bubble fuelled the property bubble as the GCC was splurged by excess cash which was directed to Dubai.
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Leveraging is euphoric. However, deleveraging is a nightmare my friend.
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Keynesian is correct although it’s technically not true that a bubble in crude oil existed. Crude oil is still in a commodity supercycle bull market, even if for about half a year until the collapse in 2nd half 2008 the market underwent a parabolic rise in price.
The Dubai property bubble was fuelled by a credit bubble, exacerbated by regional oil wealth that increased geometrically, or arithmetically, (not sure which is the correct term) over 8-9 years until H2 2008.
Deleveraging is indeed a nightmare, but has the collapse of the credit bubble (1982 – middle 2008) really ended? is credit on life support?
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Keynesian Reply:
March 8th, 2010 at 9:31 pm
Well said dxb. I guess you can even say exponential growth in wealth! Credit is gone.. Its time for paying down those debts and a vicious cycle of saving..
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though there was certainly overlap of the “bubbles”. the reality is the Oil one was not a cause for the Dubai RE bubble. Otherwise, you would ve seen many firms/banks etc. in so much pain as part of being exposed to Dubai.
What fueled the Dubai RE bubble was the availability of cash locally and internationally (British Banks, Russian Banks etc.) and the availability of the Free Hold concept for none GCC citizens!! that’s pretty much it. Even Abu Dhabi banks who are much closer geographically do not have that much exposure to Dubai RE related debt… as most the developers in Dubai were local Dubai firms (Emmar, Nakheel, Damac ..among others.)
it was simply cheap money along w/ change in ownership laws and very aggressive leadership that felt invisible at times……the Oil/gas (Qatar boom) was only a coincidence…..but it fueled the RE bubble in Kuwait, Bahrain, and Saudia Arabia (though this one is starting from really low prices)…that might be true……but Dubai had a different dynamic all together
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Sal Reply:
March 9th, 2010 at 12:04 am
Between 2002-2008 oil prices hiked at a 30% annual rate. It might be an indirect affect, but Dubai fed in part on the oil wealth of its neighboring Gulf countries.
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@sal: if anything, it is indirect. just plain psychological. The oil money was little exposed to dubai. it was much more exposed to the american/english RE bubble. just some individaul investors had some exposure, not the soverign funds and very few in any of the corporate investors (most are really local firms with very few international exposures.) The saudis have larger exposure, but it remains relatively small as they are mostly pretty much local investors (developers in Saudia Arabia.) as I said the biggest exposure was at the Dubai level and the international banks that lent out to investors (traders really) that were filiping the units. The westerners are now pretty much gone out (not all of course) and this has brought the RE crushing down. and I think it still has much more room to decline… the supply is overwhelming
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