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Making the Arab Spring Eternal

Making the Arab Spring Eternal

The seeds of economic liberty and free markets have been planted in the Middle East. But can they grow, asks Jay Akasie.

August 15, 2011 2:29 by

…Switzerland of the Middle East.

Kuwait has also led the way in developing a true private sector.

Instead of the all-or-nothing approach of Dubai, Kuwait is a trailblazer in the field of public-private partnerships. Later this year, the tiny sheikhdom will initiate one of the most ambitious PPPs in the MENA region’s history. The Kuwait Health Assurance Co is a quasi-private entity charged with administering health insurance and healthcare for expat workers. According to a study by the National Bank of Kuwait, expat workers can expect to see a business partner co- manage the enterprise in the next few months.

The Arab states can lead the world in the 21st century in reforming the healthcare industry just as they led the world in defining the oil industry in the 20th century.

Kuwait’s public-private partnership will grant health care coverage to most expatriates employed in the private sector, an activity currently undertaken by the government through its public hospitals and clinics, according to NBK analysts. “The company will be sole provider of insurance to around 60 percent of expatriates Kuwait’s expatriate population has been growing at a fast pace and constitutes around 68 percent of the total population. Growth in the expatriate population going forward is expected to remain moderate, although slightly off recent high,” according to the bank.

The tiny Gulf nation is also forming a partnership to build and operate a water company and power plant in North Al-Zour. The good news, according to the NBK study: “If the five-year plan is executed faithfully, the growth of the non- hydrocarbon sector should overtake growth in the oil sector. The plan is indeed structured to diversify the economy away from hydrocarbons.”

Kuwait’s five-year plan for public-private partnerships is such that 80 percent are non-oil, a clear indication that savvy Arab states are as serious about weaning themselves off oil as they are encouraging private enterprise.

Another sign that the MENA region is caught in a by-gone era is that the real estate markets continue to show very little promise for sophisticated investors who are not connected to the elite families of each country. The test of any society’s economic resilience is to what extent its real estate is investment-grade and open to outsiders.

A new study by Jones Lang LaSalle indicates that the MENA region is missing out on significant regional and global flows of capital because of that very problem: the shortage of investment-grade real estate as well as the price gap between buyers and sellers. In other words, the real estate markets across much of the MENA region continue to be artificial.

“While recent events have created some uncertainty across MENA, there are areas within the region, particularly the GCC, where there remains a reasonable level of demand among local investors. The problem is one of finding and securing the right product at a price that makes sense,” the head of Capital Markets for the MENA region at Jones Lang LaSalle, Andrew Charlesworth, said.

The Jones Lang LaSalle study rips the lid off two startling trends:

The first is that the amount of overseas capital allocated to investing in MENA real estate is negligible. The second trend is that although local investors are seeking to increase exposure within the region, especially in stable countries such as Qatar and the UAE, these investors are limited by the products that are available to them. Plus, asset pricing does not fully incorporate local market risks.

According to the study: “In a region awash with liquidity, the lack of tenable investment opportunities leads investors to deploy capital overseas. Clearly, the MENA real estate markets have the potential to capture a much higher proportion of capital flows from both international and regional buyers. Unlocking this potential, however, will require a few adjustments: an increase in the product available; willingness of owners to transact with greater transparency; and realistic pricing that is benchmarked against global markets.”

Investors also continue to be frustrated by the lack of bank finance and the cost of financing when it is available in the MENA region. The study states that even for investment-grade commercial properties (ie, buildings in central locations of high demand with long-term leases and strong tenant covenant) available in the MENA region, institutional investors are simply not willing to purchase at yields available in mature markets like London. “Together with limited transaction activity, the custom of privately conducting local investment deals discourages international investment and inadvertently stifles recovery of the regional real estate markets,” according to the study.

Other important findings from the Jones Lang LaSalle study:
• Buyers outnumber sellers in all markets with a distinct polarisation occurring between those countries perceived as stable, such as the UAE and Saudi Arabia, and those still characterised by political uncertainty.

• In the prevailing atmosphere of risk aversion, factors such as political stability and security of income are at the forefront of investment decisions.

• The majority of respondents indicated plans to increase investment in the MENA real estate market over the next 12 months. Actual transaction activity will remain constrained by the lack of suitably priced products.

• In terms of yield spread, the lack of differentiation between cities and asset classes suggests investors are focused on…

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