Why the Mideast has an eye on Shanghai

Shanghai boasts what may be the world's largest collection of postmodernist skyscrapers (Natalie Behring-Chisholm/Getty Images).

Flush with cash from high oil prices, Middle East property investors are increasingly active in Asia, building homes and hotels in the region and tapping its capital markets.

Arab investors - ranging from state-backed funds to listed developers - have traditionally scoured Europe and North America for acquisitions but are diversifying into Asia, lured by rising realty values from Shanghai to Singapore.

Tighter U.S. legislation on fund flows to and from the Middle East since the September 11 attacks is also prompting some Arab players to park more petrodollars in Asia.

"They're going into existing entities to get the operating platform into the market, deploying their capital directly or getting into joint ventures," said David Edwards, strategy and research head at LaSalle Investment Management.

Recent deals include a $600 million residential and leisure project on Indonesia's island of Lombok by Dubai-listed Emaar Properties in April and the December acquisition of a 25% stake in Thai developer Raimon Land by Istithmar, the private equity arm of the Dubai government.

According to Jones Lang LaSalle, Middle East investors bought about $300 million worth of Asia-Pacific commercial properties last year - a figure excluding Arab investment through funds managed out of the United States or Europe.

Though a fraction of the $13 billion that Arab Gulf investors ploughed directly into real estate around the world in 2006, this represents an increase from the previous year when funds from the region had a negligible presence in Asia.

Jones Lang LaSalle expects Middle East investment this year will exceed 2006 levels, fuelled by projects in China and India.

United Arab Emirates-based developers Aldar Properties and Deyaar have announced plans to invest in Asia even as existing investors such as Istithmar raise their profile.

"We're looking at a more systematic way to allocate more investment," said Istithmar's property chief Richard Johnson, adding that the group would invest a further $250 million in North Asia this year.

SHARIA DEMAND

To spur investment from the Middle East, Asian firms have created property-focused investment vehicles that conform with sharia or Islamic law which prohibits the leasing of real estate for purposes such as pornography and alcohol production.

Earlier this year, Malaysian palm oil group Boustead launched the Al-Hadharah Boustead Real Estate Investment Trust, a sharia-compliant property trust.

CapitaLand, Southeast Asia's largest developer by market value, set up a division two years ago to grab a share of the estimated $400 billion in funds deployed by Islamic investors based mainly in the Middle East.

CapitaLand also has a sharia-compliant joint venture with Bahrain-based Arcapita Bank to invest in Japanese residential property and says it plans to launch more of such products.

Indeed, Middle East investors often favour housing over commercial and retail properties because of the Islamic injunction against the charging of interest for profit.

"Office buildings where the nature of most tenants - financial institutions which make money off debt - could be an issue," noted LaSalle's Edwards.

LISTING IN ASIA

Even without the requirements of sharia law, competition for property assets in Asia is intense because the region is dominated by family-run conglomerates who prefer to keep their real estate on their balance sheets.

Restrictions on foreign ownership of property are also common throughout the region.

This lack of asset liquidity is spurring some Middle East players to buy into listed Asian firms in order to expand.

In April, Dubai-listed Emaar Properties - the largest Arab property firm by market value - teamed up with Indian developer MGF group to buy a 87.3% stake in Singapore-based retailer RSH Ltd for $150 million.

The deal follows the January acquisition by Dubai-based ME Development LLC of Singapore-listed waterproofing-materials firm Hitchins Group - since renamed Middle East Development Singapore and in the midst of being transformed into a developer.

Saudi developer Tanmiyat Investment Group has said it would set up a Singapore-based finance company to fund its overseas expansion while Emirates International Holdings, 36% owned by Emirates Investments Group, has hired a bank adviser to study the possibility of an overseas share listing.

"The real driving force is economic opportunity in Asia, coupled with the ranks of sophisticated U.S.-trained financial advisers that have emerged in the Middle East," said Bambang Sugeng Kajairi, the managing director of CapitaLand's sharia arm.

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