Western realty investors turning away from Gulf

Western investors have cooled on Gulf property markets, leaving the scene for local billionaires at least until global credit conditions ease – or markets in the region become more open and predictable.

In Dubai, Abu Dhabi and Kuwait, it is domestic investors who are again calling the shots in real estate, now that debt-starved British and United States property buyers have refocused on other areas they see as cheaper and more competitive.

"Given current economic conditions, US and British institutions are taking a lot of convincing to splash out in the Gulf," said Fadi Moussalli, a director in Jones Lang LaSalle's Dubai-based International Capital Group.

"There is less enthusiasm for Gulf property because foreigners are busy dealing with crises elsewhere," Moussalli said.

Before the credit crunch, Western property buyers were making good progress in opening up fledgling Gulf property markets. But the balance of power has shifted back to local businessmen and their wealth.

Citing data from emerging markets researcher Reidin, Jones Lang LaSalle said less than a fifth of real estate purchases in Dubai in 2008 so far were made by European or US investors.

"A lot of people are [still] looking in the Middle East but it tends to be dominated by local capital," said Charles Graham, a principal at property fund manager Europa Capital. "There is a lot of it [local investment cash] and the return requirements are for the most part less demanding than our own," Graham said, adding he was not tempted yet to break away from Europa's core markets to gain a foothold in the Gulf.

Capital constraints and worries at home are not the only issues driving western investors away from the Gulf. Some believe prices in hotspots like Dubai are close to peaking after years of sky-high growth, while others feel precious capital can earn higher yields closer to home.

House prices in Dubai, which have surged almost 80 per cent since the start of 2007, were likely to fall 15 per cent after a 2009 peak as massive increase in supply overwhelms demand, a Reuters poll showed.

Others are concerned that a clutch of measures to combat property price inflation, such as rental caps, trading restrictions and proposals for a property capital gains tax have made Gulf property investment risky.