UK draws Arab funds away from U.S.

Part of the reported withdrawal of some Dh735 billion in Arab funds from the U.S. is said to have been invested in UK property.

The Council on Foreign Relations, a U.S. think-tank, claims that Arab investors - mainly Saudis - have withdrawn as much as $200 billion (Dh735 billion) from the U.S. after September 11, 2001. It estimated that Saudi Arabian investors alone have some $750 billion invested in the U.S.

This shift has also been noticed by prestigious City of London law firm, Trowers andHamlins.

"Although not of the magnitude as some analysts have suggested, there has been a seismic shift in the investment strategy of Arab institutions," said Nick Edmondes, partner.

He said Middle East investors are targeting the UK property market after withdrawing capital from the U.S. They invested Dh4.85 billion (£827 million) in European property in 2001, according to figures published by DTZ Research.

Of this, 91 per cent was invested in the UK.

In the first three quarters of 2002 alone, Arab investment in UK commercial property was Dh5.14 billion (£875 million), a 15 per cent increase over all of 2001.

"Capital coming out of the Gulf that would have been invested in the U.S., is now being ploughed into Europe, particularly the UK real estate market," said Edmondes.

"Additionally, Islamic funds are targeting the UK because of the ease with which it is possible to develop structures compliant with Shari'a Law and the prospect is there for long term growth," he added.

The most recent dispute to accelerate capital flight from the U.S. is a $1 trillion civil lawsuit brought by relatives of 900 families of September 11 victims against seven Saudi banks and royal family members.

"Even if the class action fails and there is no seizure of Saudi assets, this reinforces the perception that there is a risk to investing in the U.S. that Gulf investors could do without," Edmondes points out.

"As a result of September 11, Islamic businesses have had U.S. bank accounts mistakenly frozen for alleged support for terrorist activities and Middle Eastern businessmen and investors are routinely body searched at U.S. customs and have their financial affairs investigated. Needless to say, such a climate is hardly conducive to investor confidence."

Other political and economic factors, have contributed to the cooling of Gulf enthusiasm for U.S. investments.

"The weakening of the U.S. dollar and the stabilisation of the euro have helped entice capital away from the U.S. market to Europe. If you add to that high-profile business scandals, it's not hard to see why Middle Eastern investors are going cold on the U.S.," said Edmondes.

He also pointed out that the perception that the Bush administration has not played a big enough role in trying to resolve political tension in the Middle East has also dampened Arab enthusiasm for portfolio investments in the U.S.

Trowers and Hamlins has offices in Bahrain, Egypt, Oman and UAE. They recently advised on the world's largest power and water project in Abu Dhabi worth $1.67 billion.