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Sun 10 Aug 2008 04:00 AM

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The gate keeper

The DIFC's CEO reveals how the financial centre is coping with a new influx of arrivals fleeing distressed Western markets.

Dubai International Financial Centre CEO Nasser Al Shaali reveals how DIFC is coping with a new influx of foreign arrivals, fleeing the distressed markets of Europe and the US.

The revolving doors of the Dubai International Financial Centre have not stopped spinning this summer as big international banks have moved key staff to tap rising liquidity and growing demand for financial services.

Looking on happily has been their collective landlord, 32-year-old Nasser Al Shaali, the US-educated CEO of the financial hub who says that for the first time, international banks are moving their global divisional heads to the region from Wall Street and the Square Mile.

There's a much more aggressive demand for local opportunities and local investments for regional investors.

"Citigroup and Morgan Stanley have done this. Standard Chartered has its huge headquarters here with the region's largest trading floor in the DIFC. We are seeing a lot more influx of bankers especially because of the conditions of the European markets versus what is happening in this part of the world," he says.

Recent arrivals include Dresdner Bank, The Bank of New York Mellon, recruitment-firm Hudson, Crédit Agricole Cheuvreux, SmartStream Technologies, Standard & Poor's and the International Bar Association (IBA), among others.

Ballooning demand for office space at DIFC has meant the centre commands the highest office rents in Dubai, and Al Shaali is now exploring plans to expand it.

DIFC Investments, the revenue-generating arm of DIFC, has two main lines of business including leasing of commercial and residential space within the financial centre and making investments. As the development of DIFC's new space nears completion, lease income, currently making up 28 percent of revenue, is expected to increase.

The average rent for office space in DIFC is around $136 per square foot whereas new buildings will be around $163 per square foot, plus management fee, according to Matthew Hammond, managing director of Jones Lang LaSalle.

"So far, we have roughly 30 percent of the centre completed. We expect all development, both ours and independent developers', to be completed within the next three years," he says.

International companies have been eyeing the financial centre as a platform to serve a broad range of services to the region, according to Al Shaali. This year, however, there have been specific attractions luring companies.

"We've been seeing a lot of bankers arrive over the last two or three years but this year especially we've seen wealth and asset managers coming to the region. They're trying to satisfy the demand of the incredible growth of high-net worth individuals."

The Gulf's asset management industry has grown exponentially over the last three years. The GCC has an estimated $60-65bn of assets under professional management, of which $52bn are spread across some 500 funds, according to research from Shuaa Capital, the UAE's biggest investment bank.Saudi Arabia is by far the largest market with almost half of regional funds, and it also has the highest number of funds in comparison to the other GCC states. Kuwait ranks second in terms of number of funds, followed by the UAE and Bahrain consecutively.

The UAE is estimated to have about $6.5bn of assets under professional management.

That is still relatively modest compared with places such as Hong Kong ($47bn) and Singapore ($20bn), according to a report published by Cerulli Associates.

There's a lot of finger pointing between the scholars and this bickering is not helping the industry grow or become sustainable.

International institutional investors have already started entering regional markets bringing a fresh pool of funds as well as much-needed technical knowledge.

But Al Shaali believes the wealth that's being generated in the region is outstripping the capacity of the region to service or manage it.

"This part of the world is still awash with liquidity while other parts of the world - especially the US and Europe - are short on liquidity and trying to tap into this region," Al Shaali says.

He adds that regional investors have grown substantially in both their sophistication and appetite for local investment vehicles: "There's a much more aggressive demand for local opportunities and local investments for regional investors."

He concedes that the region's infrastructure for financial services lags behind established centres in Europe, North America and even the Far East.

Improving that offering is one of his three main priorities. The other two are bridging into international markets more effectively, and boosting transparency.

"Even as the credit crisis is hitting, we see a lot more opportunities in international markets being taken advantage of by regional players. This continues to be the case."

Another area of growth is private equity. There is no doubt that the GCC's private equity sector is growing rapidly, but the market is still young, explains Al Shaali.

"In our part of the world, private equity is a very new phenomenon, but it is growing in terms of its sophistication," he says. It is no longer simply about leveraged buyouts, which has been the case for quite some time.

"We've seen more active private equity players getting involved in turning around companies in the region, which helps with the development of the capital markets and development of the financial services, as well as improvement in the overall quality of operations."

Al Shaali expects a number of multibillion-dollar deals to be finalised this year involving the Investment Corporation of Dubai (ICD) and other groups, but declines to elaborate.

While DIFC aims to position itself as the leading regional financial hub, it faces competition from its counterparts in Bahrain and Doha, although it's clear he doesn't see them as any sort of threat.

"DIFC is the only common law jurisdiction in a region of 2.5 billion people and 80 percent or more of international business is conducted under the governance of common law," Al Shaali points out.

However the issue of market transparency remains a potential hurdle to overcome in attracting institutional money to the Gulf.

"When it comes to international fund managers investing in the region, some of the key concerns they have are transparency, the availability of information and the depth of the market."

In order for the big funds to be comfortable investing and taking large positions, they need to be confident they can get out of these positions, he explains. Hence "they need to have a deep market that can absorb large trades".

"Our markets are very liquid and dynamic but are still relatively shallow; there isn't the volume, the number of shares and the market makers that are typical of global markets. This is still a work in progress," says Al Shaali.

While the equity markets may still lack the depth to attract the big institutional players, Al Shaali takes encouragement from the growth of the Islamic finance sector and rising demand for Sukuk, or Islamic bonds.

He adds that the DIFC is trying to encourage the development of this market.

The Dubai International Financial Exchange (DIFX) was established as the world's largest Sukuk exchange. And while Al Shaali admits that Islamic finance is still a "drop in a bucket" against conventional banking, it is nonetheless growing fast.

"Islamic finance is very important for us and we are looking at various infrastructures that we are going to set up to support the growth of this industry," he says.The DIFC is looking at developing information systems to improve transparency in the industry and to be able to hold the sector more accountable.

"We're also looking at education in Islamic finance because while you have a very limited number of Sharia scholars you also have a very limited number of Sharia technicians.

"These are the people that are doing analysis and providing the feedback to the scholars about various financial products. These technicians are more directly ‘educateable' so we are focusing on that."

While the Islamic finance sector continues to grow, much recent debate has revolved around disputed standards of Sharia compliance.

"There's a lot of finger pointing between the scholars and this bickering is not helping the industry grow or become sustainable and innovative".

Focusing on innovation and products will set a standard, believes Al Shaali. Interest from international companies in Islamic finance is also growing.

"You have conventional companies that otherwise would have never thought of doing a Sharia-compliant issuance now looking at it as a viable mainstream funding mechanism," he says.

"Most importantly it's not just about attracting capital from Muslims because in some cases, up to 50 percent of Sukuk are subscribed to by non-Muslims."

Islamic finance appeals to ethically sensitive investors and pension fund managers who find Sharia compliance a "convenient, clean investment mechanism that prohibits interest, prostitution, gambling and firearms".

He also believes the image of the industry has been improved since the emergence of the global credit crunch.

"That prohibition on ambiguity or vagueness in transactions would have limited the exposure of Islamic financial institutions to the kind of products that cause a subprime crisis; packaging and repackaging of risk that ended up being very difficult to unwrap.

"There's also a strong argument that because of these principles in Islamic finance, serious situations like the subprime crisis could have been prevented."

RELATED LINK:Is the Gulf ready for home-grown subprime?

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