Asset repatriation fuels competition in the Middle East

Asset repatriation fuels competition in the Middle East

By Peter Guest

Published: April 6 2008 19:58 | Last updated: April 6 2008 19:58

Since September 11 2001, Middle Eastern investors have been repatriating their assets and reinvesting in the region.

The result has been significant growth, but also competition between the emerging financial centres.

Initially, the best returns for returning investors were to be found in the region’s property boom and much of the early localisation took the form of real estate investment, says Dr Humayon Dar, chief executive of BMB Islamic.

The level of economic activity in the region meant that infrastructure investments gave high returns and, despite equity price inflation and a consequent correction, returns from local products have been high.

This is in part, Dr Dar says, why some foreign funds have struggled to gain traction in the Gulf Co-operation Council region.

“A number of [local] investors do not consider investing outside the region if locally they can have a return between 25 to 35 per cent,” Dr Dar says. “They will not be interested in a fund offered by a US fund management firm or a European fund management firm which offers a modest return of nine to mid-teens.”

The credibility of local fund managers has been enhanced not only by their returns but by the establishment of local regulatory frameworks in Dubai and Qatar and the continued development of existing regulation in Bahrain,

Dr Dar says. “These developments have actually helped the local players to play an active role in fund management.”

Often, this is to the detriment of overseas managers, particularly in specialist areas such as Islamic finance.

“About four or five years ago, there was a lot of interest by western fund managers to offer Islamic equity funds in the GCC region,” Dr Dar notes.

“And many such western players have actually failed to raise sufficient amounts of money. Why? Because they have failed to compete with the local fund managers . . . because of their distribution capabilities.

“Local players are very close to the investors, and they are in a better position to raise money. In the past, it was very easy for asset managers to fly from London, New York or elsewhere, into the region and have the money in their briefcases when they come back. That culture is diminishing very quickly now.”

The development of financial centres in the GCC has accelerated in the past four years. Until the Lebanese civil war that began in 1975, Beirut was the financial hub for the Middle East.

After the fighting broke out, Bahrain took over as the region’s main domicile, and is still considered the most advanced of the centres. Dubai opened the Dubai International Financial Centre in June 2004, a dollar-denominated environment allowing 100 per cent foreign ownership, zero income tax and high-tech infrastructure. Just under a year later, in May 2005, Qatar launched a similar initiative.

“Dubai has probably made the most headway in the last couple of years,” says Nigel Sillitoe, executive officer for the Middle East at Thames River Capital. “They’ve grown faster than any other centre. They may not have as many firms as Bahrain, but Bahrain’s been around for decades.”

Although the region is often perceived as one single jurisdiction by overseas investors, there is clearly competition between the centres.

“Whilst they all talk about being complementary and not competing, it’s very difficult to have very different financial centres competing for quite a small number of international banks and asset managers,” says Mr Sillitoe.

“My concern is that because you are going to have these different financial centres with different regulations, particularly on the fund side, it could be that eventually you have to be licensed in every single territory in which you want to do business.”

If this were to happen, he notes, asset managers would need to maintain costly offices in each of the centres.

Although the Emirates have shown impressive growth, their markets are dwarfed by that of their neighbour to the west.

Saudi Arabia has the largest economy and population in the GCC by a long chalk, and is flush with oil wealth.

While it remains effectively closed to foreign majority ownership and is hard to access, its potential is enormous.

Work began this year on the King Abdullah Economic City on a 35 mile stretch of coastline between Jeddah and Medina.

“There is clearly a will to develop investment skills, to open up to worldwide investments, but on the other hand, Saudi Arabia clearly wants to do it its own way, which is not some sort of big bang,” says Gilles Glicenstein, head of BNP Paribas Investment Partners.

BNPP IP recently entered into an asset management joint venture with Saudi Arabia Investment Bank, a major local player, which will allow the company to access local investors through SAIB’s distribution networks, and the two will collaborate on manufacturing new products.

“They are very anxious to modernise their approach . . .  the country wants to be included in all that demand that comes from the rest of the world, to be part of the investment in that zone,” says Mr Glicenstein.