Press Release – Wall Street Journal – A Kuwait Firm Buys GE Offices

A Kuwait-based financial services firm seeking more diversity in a world awash in cheap oil is paying $107 million for a new Cincinnati office building occupied by General Electric Co. in its biggest real-estate investment in the U.S.

Kamco Investment Co.’s purchase of the new development, named General Electric @ The Banks, is a sign that a new cadre of foreign investors is playing a bigger role in the U.S. commercial real-estate, even in smaller markets like Cincinnati.

The deal comes at a tricky time for the U.S. commercial real estate.  Overall U.S. sales volume was down 12.2% from last year to $299.1 billion as of the end of August, according to data firm Real Capital Analytics.

But a few foreign players are boosting spending.  Chinese investors have purchased or have contracts to buy $12.6 billion worth of property in 2016, more than double last year, while investment from Kuwait jumped to $726 million from $500 million, Real Capital said.

What’s more, Kamco’s investment in Cincinnati comes as foreign and other investors increasingly are looking to smaller cities for deals with higher yields.

Foreign investment used to focus on major markets such as New York, San Francisco and Chicago.  But prices in those cities have soared in recent years, driving down yields or so called capitalization rates, a common metric in the real estate industry that shows the relationship between price and income.

At this later state in the cycle, cap rates are more attractive for buyers in smaller markets.  For example, the cap rate in Kamco’s purchase of the 12-story Cincinnati building is about 5.5%, according to people involved in the deal, meaning that the building’s annual income is about 5.5% of its purchase price.  In cities like New York and San Francisco cap rates of high-quality office buildings are well below 5%.

Kamco, which is listed on the Dubai stock exchange, has been expanding its investments geographically as it deals with a “dramatic drop in oil prices,” the company said in its 2015 annual report.  The Cincinnati purchase is part of that diversification effort, according to Faisal Sarkhou, Kamco’s chief executive.

The company is looking for other U.S. property, Mr. Sarkhou said in an interview with The Wall Street Journal.  Besides diversification, Kamco is getting know-how from the U.S. real-estate industry, he said.  The firm hopes to “cross fertilize” its experience with other participants in U.S. deals “to build at home and develop markets,” he said.

Participants in the Cincinnati deal include 90 North Real Estate Partners LP, an investment company with expertise in working with Middle East partners.  The London-based firm helped negotiate and structure the purchase of the building from its developer, Atlanta-based Carter & Associates LLC, and also took a small equity stake.

About 60% of the purchase price came from Des Moines, Iowa-based Principal Global Investors, according to Daniel Copper, who is head of 90 North’s operations in North America.

Principal’s investment was structured as a lease to keep the deal compliant with the financial rules of Islamic or “Shariah” law, he said.

Principal didn’t immediately respond to a request for comment.

Kamco’s risk is limited because General Electric has leased most of the space in the building for 15 years, with options for another 25 years.  GE, which has links to Cincinnati dating back to 1948, occupied the building last month.

GE two years ago leased the space on the banks of the Ohio River and vowed to move up to 2,000 workers there.

With many of the jobs coming from suburban locations, the deal has been hailed as a sign that Rust Belt cities were beginning to enjoy the same trends that have been rejuvenating larger cities on the East and West Coasts.

Office tenants in Cincinnati occupied an additional 160,000 square feet as of the end of the second quarter, according to real-estate investment-services company JLL.  That helped push the vacancy rate down to 15.9%, JLL said.

Original article written by Peter Grant for the Wall Street Journal