TFLE01: STATUS OF UAE INVESTMENT IN LEBANON

UNCLAS SECTION 01 OF 02 ABU DHABI 003127

SIPDIS

SIPDIS
SENSITIVE

STATE FOR NEA, EB

E.O. 12958: N/A
TAGS: EINV ETRD ECON EFIN LE AE

SUBJECT: TFLE01: STATUS OF UAE INVESTMENT IN LEBANON

Sensitive but unclassified. Please protect accordingly.


1. (SBU) Summary: Prior to the most recent outbreak of hostilities
in Lebanon, UAE-based companies had an estimated US $2.3 billion
invested in-country, largely in Beirut's real estate and luxury
services sectors. While most UAE-owned properties have not been
damaged by Israeli air strikes, investors are suffering losses due
to a damaged infrastructure, labor shortages and lost tourism
revenue. Several companies have issued public statements indicating
their intention to maintain their current level of investment in
Lebanon despite these losses, but their positions may change as the
likelihood of an extended conflict increases. According to an
official from the Abu Dhabi Investment Authority, the UAE government
does not possess any significant investments in Lebanon. End
Summary.

SCALE OF INVESTMENT
--------------


2. (U) Foreign direct investment from the Gulf into Lebanon has
steadily increased since 2001, as Gulf investors acquired surplus
liquidity from rising oil revenues and looked to Lebanon's growing
international tourism industry and booming real estate market as
sources of potential profit. Media reports estimate that
approximately 80% of the investment from UAE-based companies was put
into real estate development, mostly in and around central Beirut.
Much of the remainder went into tourism-related services such as
amusement parks, hotels, restaurants and retail space. As is common
in the region, investors have frequently united the two ventures
into "mega-projects" consisting of high-end real estate interspersed
with commercial spaces to create self-contained communities catering
to wealthy expatriates and other high-value consumers.


3. (U) Several prominent UAE-based firms possess significant
investment risks in Lebanon, including the following:

-- The Abu Dhabi Investment House announced plans for a US $600
million "Beirut Gate" commercial and real estate development project
in March 2006, though construction had not yet begun as of the onset
of hostilities;

-- Al Futtaim Group reportedly has an estimated US $450 million
invested in a range of hotels, real estate development projects and
retail facilities;

-- Al Habtoor Group has several enterprises worth an estimated total
of US $450 million in Beirut, including the high-end Metropolitan
Palace Hotel, the recently opened US $150 million Habtoor Grand
Hotel Convention Center and Spa, and the country's largest amusement
park, Habtoor Land;

-- DAMAC Properties has an estimated US $150 million invested in "La
Residence by Ivana Trump," a tower of luxury condominiums under
development in downtown Beirut;

-- Dubai Islamic Bank has invested up to US $50 million into three
large real estate projects in various parts of Beirut, with another
US $200 million allocated for the projects' completion;

-- Emaar Properties has commenced several unspecified projects with
a total estimated value of US $250 million, including a number of
retail facilities under its subsidiary Emaar Malls;

-- Reef Real Estate Investment has invested a reported US $20
million in a number of real estate projects throughout Beirut;

-- Rotana Hotels manages the Gefinor Rotana Hotel in Beirut and the
Hamzieh Rotana Hotel on the highway from Beirut to Damascus, and
reportedly had started development on a seaside resort in Raouche;

-- Tamweel, a prominent Dubai-based mortgage lender, is believed to
have financed a large number of private real estate purchases
throughout Lebanon.


4. (U) Portfolio investment from the Gulf has also bolstered
Lebanon's stock market in recent years. While many UAE investors
were scared away in 2005 by the bourse's instability following Rafiq
Hariri's assassination, a number were lured back by the market's
dramatic recovery and superior performance in comparison to other
emerging markets in the region. Media reports indicate that
investment was focused in those publicly traded firms related to the
country's successful real estate and tourism sectors, particularly
Solidere, the large real-estate development firm founded by Hariri.
While the scale of UAE investment is not known in absolute terms, it
is believed to be a relatively small portion of UAE citizens' total
overseas portfolio investments.

ABU DHABI 00003127 002 OF 002




5. (SBU) In contrast to the large private-sector ventures, the UAE
Government does not have any significant investments in Lebanon,
according to an official from the Abu Dhabi Investment Authority
(the main investing arm of the emirate of Abu Dhabi). Additionally,
officials at the Abu Dhabi-based Arab Monetary Fund (AMF) have
stated that Lebanon is not heavily in debt to the AMF. Bashir
Al-Haskouri, an AMF economist, told Econchief on July 24 that
Lebanon's total public debt is $35 billion, but only a small portion
of that is owed to the AMF.

IMPACT OF CONFLICT
--------------


6. (U) Due to the geographic concentration of UAE real investments
in and around Central Beirut (particularly the Solidere district),
none have been significantly damaged by Israeli strikes. However,
public statements from several of the companies indicate that the
hostilities have triggered shortages in supplies and labor due to
damaged and threatened transportation routes, as well as a sudden
drop in the country's tourist consumer base. Consequently most
UAE-owned facilities have been closed or reduced to a skeleton
staff, and are currently operating at a loss.


7. (U) UAE financial investments have likely been more directly
affected by the conflict, due to its impact on the Lebanese bourse.
The market's major BLOM Index slid more than 25 per cent in the
first five days of the conflict, triggering first a reduction in the
daily pricing limits of all shares and bonds to 5 per cent and
finally the closure of the market on July 17. Particularly hard-hit
was Solidere, the largest company on the market and a favorite of
Gulf investors. Shares of Solidere slid in value by 14 per cent on
July 13, and had dropped to below US $20 a share for the first time
in more than a year by the time the market closed.


8. (SBU) Thus far, no UAE-based company has announced intentions to
significantly reduce or withdraw investments from Lebanon due to the
conflict. While some corporate representatives (specifically from
Al Habtoor Group and the Abu Dhabi Investment House) have publicly
noted the need to monitor the situation closely and reevaluate, many
(most notably DAMAC Properties) have affirmed their intentions to go
forward with their investment plans as soon as the hostilities
cease, noting Lebanon's economic resilience in the face of past
political turmoil. This same pattern is apparent among investors
from across the Gulf and the Arab world.


9. (SBU) Comment: The decision by UAE companies not to withdraw or
draw down their presence in Lebanon is explicitly based upon the
assumption that the present hostilities constitute only a short-term
disruption. If the possibility of an extended conflict becomes more
apparent, investors will likely reevaluate their stance and may
shift their investments away from Lebanon to minimize losses and
seek financial gain elsewhere. End comment.

QUINN