Location, location, location

Dubai's $500m fund, set up two years ago to help inject capital into the emirate's stagnant real estate market, is soon set to be activated. The CEO of ICD-Brookfield Management, Douglas Kirkman, shares his outlook on the market in 2013
Real estate is a key economic driver for Dubai.
By Shane McGinley
Thu 06 Jun 2013 09:44 AM

As a CEO you often have to balance the demands of high-profile bosses with the differing viewpoints of various stakeholders. For experienced real estate executive Douglas Kirkman this juggling match is a particularly global and high profile one.

Previously senior vice president of the Brookfield Property Group, Kirkman was appointed chief executive of ICD-Brookfield Management Limited in February and looks after the management for the ICD-Brookfield Dubai Real Estate Fund.

The ICD acronym in this case refers to the Investment Corporation of Dubai, the investment arm of the government of Dubai. Its chairman is Dubai’s ruler, HH Sheikh Mohammed Bin Rashid Al Maktoum, and it holds stakes in more than 30 companies, including Emaar Properties, developer of the world’s largest mall and tallest building, Emirates Airline, Borse Dubai, Emirates National Oil Company (ENOC) and Emirates NBD, the UAE’s largest bank by assets.

Sitting on the other side of the dash mark is Brookfield Asset Management, the Canadian asset management company which manages a global portfolio valued at over $180bn, including exclusive stretches of Manhattan and London’s Canary Wharf.

The union of these two global conglomerates under one umbrella occurred in October 2011 when the ICD-Brookfield Dubai Real Estate Fund was set up to help boost the emirate’s battered real estate market.

At the time, Dubai was still reeling from the impact of the real estate crash, when the global financial crisis pierced the overinflated Dubai property bubble and sent prices tumbling by about 60 percent from their peak. That resulted in nearly half the emirate’s development plans being mothballed or sent to the shredder.

Kirkman was brought onboard to help mastermind part of this recovery, but a lot has already changed in the timeframe since the fund’s existence was announced. “Psychologically Dubai was in a different place [in 2011] and perhaps ICD and Brookfield thought there may be distressed situations in the market where Brookfield may be able to bring its real estate acumen and knowledge of capital structures and its real estate platforms to help work through some of those issues,” Kirkman says.

“The way the crisis has played out here I’d say a lot of those stalled projects either have investors who aren’t that excited about being deluded or banks who are probably more interested in extending an existing loan in the hope that when that extended loan becomes due the world will be a better place and magically they have been saved.”

He believes struggling developers and investors need to be “dealing with the pain today… or, in the case of the banks, take a haircut on their loan.” Unfortunately, he believes “that is not the way projects are being dealt with,” and “they tend to be mothballed”.

Over the last few months more than a dozen multi-million and multi-billion dollar mega project launches — from gigantic ferris wheels and theme parks to epic residential projects — have been clamouring for headlines. But the ICD Brookfield partnership will focus more on the projects that got left behind by the crisis.

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“The investment strategy of the fund will target opportunities currently available in the Dubai real estate sector, with a focus on a wide class of assets in both freehold and non-freehold areas,” the company stated in October and put the timeline for operation of the fund at around eight to ten years.

Mohammed Ibrahim Al Shaibani, CEO of ICD, said at the 2011 launch the company was “looking forward to participating in the recovery of the Dubai real estate market”. “This venture with Brookfield is the first ‘Dubai-only’ investment fund that is sponsored by a leading international investor,” he said.

Sheikh Ahmed Bin Saeed Al Maktoum, chairman of Dubai’s Supreme Fiscal Committee, said the establishment of the fund was “another big step” in the Gulf emirate’s economic growth.

While the benefits for Dubai and the ICD are obvious, the reason for Brookfield’s input  isn’t so clear, despite it having around 2,000 staff in Dubai through its construction arm Brookfield Multiplex.

“We are a believer in the Gulf and a believer in the MENA [Middle East and North Africa] region. As a launch pad into the rest of that area we believe this was an excellent starting point,” Kirkman says.

“We have an operation in India and we do have guys on the ground in Mumbai and I oversee India from here. We felt beyond India we are not invested in Africa or in South Asia much to speak and we believe this is a good toe-dipping exercise in an area that has the rule of law, has property rights, that has good infrastructure and we felt if Dubai was a good start point there was no better partner than the Investment Corporation of Dubai.”

Personally, Kirkman says he is a “huge believer that the future of world GDP” is in this region. “Europe is stagnant and going to be like that way for some time to come. The US is seeing anaemic growth. I may be old but I still have a few years left, and I have always found it more enjoyable to work in a burgeoning market where there is a story I can believe in.

“I set up central and eastern Europe for my [previous] company Blackstone fifteen years ago and I set up Blackstone’s Indian operations. They were far more enjoyable than buying up distressed commercial real estate loans in Europe and having to fight through working those out.

“I came here in February 2000 so I have seen what Dubai has done. In London all you read about Dubai is the residential market but actually to me that misses the whole point. Put Dubai in the middle of your Google Earth and then from Iceland through to China you are right in the middle of it. It is geographically right there in the middle and that is what excites me.”

Once he is able to get the ball rolling, Kirkman says he is focused almost solely on the commercial real estate sector: “I would only be looking at commercial. If it is residential it is not something I historically have any expertise in. Residential is not one of the platforms that is significant within Brookfield. We own around 100+ million square feet of office space globally and are one of the largest stakeholders in Canary Wharf and we are in the World Financial Centre in New York.

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“I don’t know how many tenants we have but we leverage that to get new tenants and know what sort of leasing they want and know the lifestyle of the building. In the commercial space if I was looking at a mothballed project I would need to be comfortable with the physical product and what they were building was fit for the purpose.”

Kirkman has visited almost all of the free zones in the emirate and he believes that diversity of quality is quite broad. “Long term, I am not interested in owning poor, inefficient floor place. Is it laid out in a good location? Is there demand? Is it poorly laid?”

A major obstacle is the predominance of strata ownership — where multiple owners own small amounts or floors within a building — which he believes is a major disincentive for potential investors and large global tenants.

“I want to be the single owner, not to be dealing with a gazillion strata guys who own a piece of a building. You may have some industrious investor who wants to go through a building and get it back into single ownership. Then you can do something with it that you can’t when you have a group of different owners fighting, but that is a lot of work.

“Collective ownership is difficult to manage as the only tenants you can talk to are small ones who need one floor or less, but those guys are not credit worthy tenants and are coming in price led because it’s cheap, so as a result it is problematic.”

Kirkman recommends that one idea in theory could be for Dubai to introduce a scheme similar to those already existing around the world. “We could look at some sort of change in strata regulation, in theory. In the US you have the Right of Eminent Domain and other countries have similar concepts, where [the government] come in and, if it is for the collective benefit, can buy land and give fair compensation [to individual owners].

“In theory we could say these guys have all been bought out by the government and then you get back into single ownership and [could] then auction them off building by building and floor by floor and then you have assets which are useable again.”

However, while this has worked in elsewhere, introducing it here could be problematic: “I keep saying in theory as it could come with a lot of consternation for existing investors and I am not sure a government would want to get them into the PR issues that surround that.

“It would be easy but it would come with PR issues. They could do it but whether they would want to is a separate point and, in a way, it may be easier to turn your head and move on rather than say ‘we need to get rid of those buildings.’”

As Kirkman moves towards the end of the funding cycle and looks to start investing the capital he has accumulated, let’s hope he will be able to match the different demands of his dual pay masters.

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