Once-Reluctant Investors Are Drawn to Persian Gulf

March 26, 2008
By Stefania Bianchi

U.S. investors, once reluctant to put their money into the Persian Gulf, are being drawn to the region as their domestic market slows.

U.S. real-estate investment funds say they are receiving growing requests about investment opportunities in the region. By one estimate, nearly $1.5 trillion of real-estate projects are planned or under development there.

A growing number of investors say the region offers some of the greatest opportunities for hotel investment, in particular, because of rapid growth in the region and high hotel prices.

U.S. investors, once deterred from the Gulf by concerns over transparency, investment returns and market immaturity, are increasingly looking outside their domestic market as finding profitable investments at home becomes more difficult.

"We're getting more requests from our investors to go into the Middle East," said Steve Etminani, principal of RCP Development, a Washington company that works in partnership with companies such as the Carlyle Group and Citigroup Inc., in an interview with Zawya Dow Jones.

"The problems with the economy are going to speed up this process as U.S. real-estate investors look to diversify their assets away from the domestic scene and geographically disperse their capital," he said.

Developers in the oil-rich Gulf Cooperation Council region, which includes Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman, are currently spending about $1.45 trillion on real-estate projects, according to the London projects magazine Middle East Economic Digest.

More than 55% of investment in the Gulf's real-estate projects comes from outside the GCC, according to global property consultancy CB Richard Ellis Group Inc.

International-investor appetite in the region has been helped by a falling dollar, to which most of the region's currencies are linked.

Dubai, the second-largest emirate in the U.A.E. after Abu Dhabi, expects to attract approximately $50.1 billion in real estate investment by 2010.

"The downturn in the U.S. and European markets will result in institutions looking to new markets for international expansion and Dubai is a likely target," CB Richard Ellis said in a note Wednesday.

Privately owned Houston real-estate firm Hines Interests LP recently opened an office in Abu Dhabi to tap regional investment opportunities in the Gulf region.

"We're looking into opportunities to build either office, retail or hotel developments here in partnership with local companies," said Michael Topham, chief executive of Hines's European and Middle East and North Africa operations. "We believe there are enough opportunities for both local and foreign investors to make good returns on developments."

The Gulf's hotel sector is another area where investors see good returns. There are currently 40,000 rooms across 415 hotels in Dubai with hotel occupancy running at between 85% and 90%. The number of hotel rooms in the U.A.E. is set to increase rapidly over the next few years to accommodate a surge of tourists drawn to the region by luxury hotel and beach resorts, golf courses, shopping and ski slopes in the desert.

Gulf states are investing heavily in tourism in a move to diversify economies away from oil dependency. More than one trillion U.A.E. dirhams ($272.30 billion) have been committed to tourism-related projects in the Gulf that are expected to be completed by 2018.

"Investment in the Middle East continues to grow, most notably in developments in the luxury segment and those with mixed-use components, especially in areas such as Dubai and Abu Dhabi," thanks to growth in tourist arrivals and in revenue per available room, Ernst & Young said in a recent Hospitality Investment Survey.

Approximately 13% of those questioned in the survey said they thought the Middle East has the greatest potential on a relative basis for "hospitality" investment.

New York research firm Real Capital Analytics, which tracks international real-estate movements, says that since the credit crunch in August, sales activity has slowed considerably in North America and Europe, while leaving Asia relatively unaffected.

"With no end to the credit crunch in sight, property sales in Asia could surpass those in Europe or the Americas in 2008," said Dan Fasulo, the company's managing director.

In the past, many U.S. investors were reluctant to invest in the Middle East as the region had enough capital of its own.

Thomas Boytinck, managing director of Farragut Capital, a U.S. firm that acts as a placing agent for real-estate managers around the world, says the relative immaturity of the market and a lack of transparency also deterred investors.

"Historically, the Middle East and North Africa region has been overlooked,' he said, "because U.S. institutions are very preoccupied with market transparency, working with managers who have a significant track record and who are experienced fiduciaries."