Under the influence, in many cases, of a new generation of leaders, this is a transition time for the six Gulf Co-operation Council (GCC) member states and their neighbours. The death of King Fahd Bin Abdelaziz brings a reformist to the throne in Saudi Arabia. Bahrain and Qatar’s rulers have promoted democratic reforms. Controversy over liberalisation in Kuwait is at its most intense in the National Assembly. Abu Dhabi, the financial powerhouse of the United Arab Emirates, seems determined to catch up with its most entrepreneurial partner in the seven-member federation, Dubai. Oman is developing some dream tourist developments on its Indian Ocean coast.

Winds of change

These winds of change could be very positive for investors in real estate. Already, GCC nationals are making big profits and, increasingly, foreigners are being allowed into markets that until recently were closed. Even the most conservative (and biggest) market, Saudi Arabia, is starting to present real opportunities.

“The region is witnessing a paradigm change. The economic landscape of the Middle East – and the GCC in particular – is undergoing a transformation, with more openness to the outside world,” says Gulf Finance House (GFH) chief executive Esam Janahi. “The region will have to attract more inward investments, including FDI, which will drive more growth to the benefit of the people.”

Mr Janahi has emerged as one of the new breed of dynamic entrepreneur-bankers, stimulating and participating in the growth of a new regional real estate market – most notably by driving ahead with the huge new Bahrain Financial Harbour (BFH) scheme. He enthuses about GFH’s real estate achievements: “We’ve positioned ourselves in Dubailand’s Legend Park, we’re looking at other projects in GCC countries, we’re involved in a $1.2bn development in Jordan and we’re seeing good opportunities in Lebanon.”

GFH has also bought UK business parks, land in Paris and is developing Spain’s Al-Andalus project.

GFH is part of the booming Islamic financial services industry, whose products are structured in line with Sharia law, so as not to charge interest. This underpins the growing consumer and real estate financing markets of Saudi Arabia and other GCC states.

Transformation

There is a new generation of Gulf real estate companies, often working closely with new generation leaders – the most famous of whom is Dubai’s Crown Prince Sheikh Mohammed Bin Rashid Al-Maktoum, who has driven the emirate’s transformation into a global-scale business and leisure hub. GFH, for example, was established only in October 1999 at the cutting edge of the burgeoning international Islamic banking industry.

If Dubai has broken new ground, others are following. This raises intriguing new opportunities for even smaller foreign buyers – but investors accustomed to mature real estate markets should understand they are entering a very different and new milieu.

Until 2001, when Bahrain became the first Gulf state to allow foreign ownership of real estate, no-one outside the GCC could buy property on the Arabian peninsula. Since then markets have gone into overdrive, prompting questions common in more mature real estate markets. Is it a property bubble or is the trend sustainable? What if interest rates go up?

In this nascent market, foreign investors should also consider questions such as: is sufficient legislation is in place? When will demand overtake supply? What is the secondary market like and, in one of the world’s most inhospitable climates, will a building’s fabric endure through the life of an investment?

Cultural change

Many of the institutions that support mature real estate markets have yet to be created in the Gulf. The cultural change that the property market is demanding of local people is also immense. Resistance to foreign ownership has been traditionally strong. The bulk of freehold residential opportunities aimed at non-GCC nationals are on man-made islands or areas reclaimed from the sea, away from traditional zones of occupation (although still desirable).

Traditionally, land has been in the gift of the region’s ruling families, who may be progressive in some areas of the economy but tend to hold on very tightly to land. This continues to be the case even though the property market is undergoing radical change.

Owning hotels, apartments, shopping centres and commercial properties, and collecting rent from them, has been a favourite income stream for generations of sheikhs. Increasingly, rather than real estate being owned by individual ruling families, it is owned by companies – the majority of which, however, are ultimately owned by the same families. This is just one aspect of the Gulf’s nascent real estate market that could deter conventional investors, who might consider it too unpredictable.

However, the Dubai experience shows this need not be the case in markets where demand is strong. Stories abound of investors paying minimal deposits to buy villas or apartments ‘off-plan’ and reselling quickly for a double-digit return, long before the property is built. Such speculation tends to be centred on the segment of the residential market that is opening up to FDI – one reason why groundbreaking schemes like the Pearl-Qatar have introduced controls.

Market segments

Potential investors in Middle East real estate will become aware that only a few segments of the market are open to all. So far, the emphasis has been on Dubai’s luxury properties.

In Bahrain there are now opportunities to invest in properties that may generate more sustainable income flows in growing residential areas popular with expatriate workers. And in Saudi Arabia there are tourist developments in the holy cities of Makkah and Madinah.

Some fast-growing segments of the Gulf market remain out of bounds for most foreign investors, for the moment. The ruling families of the Gulf retain some of the most lucrative areas, one of which is shopping centres (see table 1).

“The quantity of mall footage across the Middle East and the six GCC countries continues to grow inexorably,” says Simon Thomson, principal of Retail International.

The latest figures from Retail International suggest that the amount of floor space completed across the GCC is a gross leasable area (GLA) of just over 4.5 million square metres. A further 2.5 million square metres (GLA) is under development. By 2010 an additional 4 million square metres could have been added to the total stock if all the projects in the pipeline are fully implemented. This would bring the total up to about 11 million square metres.

Clear leaders

“While this would represent an uplift over the next five years of some 150% across the GCC, the running is expected to be made by the UAE and Kuwait, followed closely by Qatar," says Mr Thomson. “In real terms, Saudi Arabia and the UAE will remain the clear leaders with projected totals reaching up to 4 million square metres and 5 million square metres respectively,” he adds.

Retail space in regional shopping malls yields significantly different returns across the Gulf but, given the less-than-transparent nature of land deals in the region, calculating an accurate rate of return is not easy (see table 2 below).

Nobody can predict whether the ruling families will relinquish these segments of the real estate market but so far, there is little sign of this happening.