The Middle East takes center stage

Buoyed by the wealth generated from extensive natural resources and a loosening of foreign ownership laws, many Middle Eastern countries are transforming their local real estate markets.

Despite armed conflict in Iraq, political instability in Israel and a nuclear standoff in Iran, the Middle East is rapidly becoming one of the most dynamic real estate markets in the world. The emirate of Dubai, to take the most striking example, has made a concerted push to modernize its infrastructure, broaden its economic interest and foster both foreign and domestic investment through a relaxation of regulations on private ownership.

The impact on Dubai's real estate market has been significant. In addition to a range of huge landreclamation projects such as The Palm and The World, the tallest building in the world, the Burj Dubai, is scheduled for completion in 2008. And all this activity shows no signs of slowing down—a leading industry practitioner has predicted that the total value of real estate investment in Dubai could reach $50 billion by 2010. Even the recent death of Dubai's ruler, Sheikh Rashid bin Saeed al-Maktoum, who was largely responsible for the push to modernize, is unlikely to deter future growth.

Outside of Dubai, other cities and countries have begun to follow the example set by their neighbor. Saudi Arabia, for example, which has one of the youngest populations in the world, recently relaxed certain foreign ownership restrictions in its successful bid to join the World Trade Organization. In Qatar, the government has established a free trade zone in an effort to lure multinationals and other foreign investors. And in Kuwait, billions of dollars of infrastructure projects are currently in the planning stages. Opportunities for real estate investors are not far behind.

In the pages that follow, our journalists take a look at the forces that are transforming the Middle East, analyzing the impact (both positive and negative) on the region's real estate markets and the opportunities for private equity real estate funds. We take an in-depth look at Dubai (of course) and see what is being built, by whom and what the predictions are for the future of the city. We also travel to other, often overlooked, parts of the region such as Bahrain and Oman that are beginning to attract interest. And the chief executive officer of Dubai International Properties, the international arm of Dubai Holding, gives us an overview of his firm's investment strategy—and global ambitions. Though our focus is almost entirely on the countries that make up the Gulf Cooperation Council, other parts of the region will no doubt grow in importance in the years to come.

Though much of the activity in the region's real estate markets has been fuelled by the extensive wealth generated by the Gulf's natural resources, perhaps there is also something else: the recognition that a well-diversified economy is the key to longterm health and stability. As the world's oil supplies become further depleted, leaders around the world are beginning to slowly recognize the stark realities facing their economies. The leaders of the GCC countries are no different.

Yet despite the region's emergence as a distinctive center for opportunistic real estate investment, many of the world's most well known private equity funds have shied away from the Middle East. With the exception of Colony Capital, which has set up an office in Lebanon, few other brand name firms have been looking, at least intensively, in the area. Certainly, much of their attention has been focused on the larger economies of India and China, but an added concern of many are the political and economic risks of investing in an emerging and volatile region.

It is no doubt early in the economic emergence of the Middle East. Each country possesses its own unique risks and investment pitfalls. But, of course, risk of any sort presents its own opportunities. And as private equity real estate managers continue to scour the globe in search of higher returns, their eyes are turning to the Middle East. Sam Zell, for example, recently told PERE that “there might be some interesting places to play in the Middle East.”

If the legendary real estate investor, known for his predictive abilities, is optimistic, maybe others should be as well.