History Repeating Itself: Sovereign Wealth Purchases of US Landmarks (LRG Capital Report)

In May of this year, the nations of Qatar and Kuwait joined a consortium of investors including Boston Properties, Morgan Stanley and Goldman Sachs, to purchase the General Motors Building (pictured below on the left) and three other skyscrapers totaling $3.95 billion. The GM building on its own was sold for $2.9 billion, making the transaction the most expensive sale of an office building in the world. Last month, the Abu Dhabi Investment Council purchased a 90 percent stake of the Chrysler Building (pictured below on the right) in New York City for an estimated $800 million dollars. The landmark building is regarded as a masterpiece of Art Deco architecture and considered by many contemporary architects to be one of the finest buildings in New York City. For a brief time, it was the world’s tallest building before it was surpassed by the Empire State Building in 1931.

As commodity prices continue to rise, countries rich in natural resources stand to gain a surplus of capital and will have to find a place to diversify their new found wealth. This is especially true for the oil rich nations of the gulf region who are raking in profits with oil hovering at levels not seen in decades. Only time will tell whether or not these investments prove to be successful, but this isn’t the first time foreign nations with a surplus of cash have started snapping up US landmarks. Unfortunately for the foreign investor, history has shown that many of these trophy purchases have turned out to be colossal mistakes.

In the 1980s, Japan was in a similar position as the oil producing nations are in today. The combination of a thriving export market, coupled with a strong tariff policy on imports, pumped up the yen and led to a massive buildup of cash for the country. The result was an era of easy credit, which ultimately fueled a stock and real estate bubble that rivaled any other in history. At one point, the common claim was that the land beneath the Imperial Palace in Tokyo dwarfed the value of the entire state of California. Within years, wealthy Japanese investors bought such iconic properties such as the Rockefeller Center and the Pebble Beach golf course. Other investments included Universal Studios and Columbia Records.

The Mitsubishi Estate purchase of the Rockefeller Center Properties is a good example of just how quickly these high profile deals can go wrong and how staggering the losses can be. The problem with overheated economies is that they seem to lose their steam at the worst possible time. When Mitsubishi acquired its interest in 1989 for approximately $1.4 billion, the Nikkei 225 index topped out at around 39,000. By September 1990, the index was cut in half and a decade long recession was to follow. At the same time, the Manhattan commercial real estate market, which for years was viewed as a solid investment, began to falter. The original estimates that enticed Mitsubishi to the deal called for rents in the complex to reach $75 a square foot by 1994. Instead, by 1992, rents in other prime- spaces were dropping to less than $30 a square foot. With a deflationary recession at home, and decreasing commercial property prices in Manhattan, Mitsubishi was forced to push the Rockefeller Center into Chapter 11 bankruptcy protection by May 1995.

Japanese investors spent $78 billion on US properties between the late 1980s and 1995. The total losses from these transactions are estimated between $38 and $62 billion. The current commodity boom is no different from what happened in the 1980s with Japan; newly minted millionaires from commodity rich countries are going to have to find a safe place like the US to invest their petrol-dollars. The biggest difference being that the current US recession is proving to be extremely tricky to navigate to the extent that the financial sector and real estate losses are anyone’s guess right now. There will, of course, be opportunities to invest safely and make good returns, but investors should be very wary and do their own due diligence before making any decisions. As with the last boom in the 1980s, there’s a new crop of bankers and lawyers that will be eagerly waiting to collect fees on trophy deals that may end up costing much more in the long run.