Desert kingdoms

Some of the most dynamic and challenging property markets in the world can be found in the Middle East and North Africa. Can private equity real estate investors strike oil?

The old real estate adage about location can perhaps find no greater example than the property markets of the Middle East and North Africa. Iran is facing UN sanctions for its alleged nuclear weapons program. Iraq is being ravaged by a devastating war. And across the Red Sea in Africa, Sudan is home to one of the worst genocides of the twentieth century.

Yet in very specific pockets of this volatile region, certain real estate markets are blossoming. In the United Arab Emirates, located just across the Persian Gulf from Iran, Dubai's government is hosting one of the most dramatic property transformations in recent history. Once a relatively small fishing settlement, the emirate of Dubai is now home to many of the worlds' largest real estate projects, from huge land-reclamation developments to the ongoing construction of the world's tallest building.

Fueled by the region's significant oil wealth, other Middle Eastern leaders are looking to follow in Dubai's footsteps, modernizing their countries via improvements in infrastructure and relaxation of foreign investment laws. Kuwait, for example, is spending billions of dollars on infrastructure projects, while in Qatar, the government has established a free trade zone to lure multinational firms. And Libya, long an international pariah as well as a neighbor to war-torn Sudan, is beginning to open its doors to foreign investors.

Yet despite all of the activity in the region, little of the capital targeting the region is coming from international private equity real estate firms. Part of the reason is that it is relatively early in the region's development. An even more pressing issue may be that the markets of the Middle East are heavily saturated with domestic capital. And, perhaps equally as important, it is still difficult for foreign entities to feel comfortable investing and repatriating their capital from many of these countries. Nevertheless, as the search for higher returns continues around the world, investors of all stripes are beginning to size up the real estate opportunities.

In the pages that follow, we explore some of the trends shaping the property markets of the Middle East and North Africa by focusing on three specific parts of the region. First, we go to Qatar, which recently hosted the Asian Games and is now making a bid for the 2016 Olympics. Irrespective of its prospects of winning that bid, the country is spending billions of dollars to build up its infrastructure, including a $7 billion program to construct 32 roads, 19 buildings and 6 drainage works. In addition, Qatar will soon be home to the Pearl, a $2.5 billion residential project built on reclaimed land in the shape of a string of pearls—the country's answer to The World and The Palm in Dubai. As one market commentator told PERE, Doha, Qatar's capital, is “like Dubai eight years ago.”

Back in Dubai, a significant amount of attention has been focused on the size and scope of the emirate's luxury developments. But as gleaming new high-rises and hotels spring up everyday, we turn our attention to more mundane developments: affordable housing projects. As expatriates pour into Dubai and a middle class begins to develop, some property developers are looking to meet the emirate's growing demand for housing.

And finally, we look at Libya, which is slowly making strides towards international recognition and openness. Though the country has been ruled as a quasi-socialist state since Colonel Muammar Qadhafi took power in 1969, real estate observers are touting its potential as a Mediterranean tourist destination. It may not be easy to get a visa—the Libyan government can be a bit obstinate—but foreign investors are waiting impatiently to get in the door.

The rise of Libya in the eyes of international property investors is a testament to the pace of change that is occurring in parts of the Middle East. Two decades ago, most Westerners had probably never heard of Dubai and US jets were bombing Qhadafi's house. Today, the “mad dog of the Middle East”—as Qhadafi was infamously nicknamed by US President Ronald Reagan—is meeting with Western leaders and receiving praise from British Prime Minister Tony Blair.

Soon, Qhadafi could see more than simple compliments come his way. As real estate capital continues to flow to the far corners of the earth, it is finding its way to Tripoli and beyond. Private equity real estate firms may not be far behind.