Middle East – Still standing

As the Arab Spring spreads across the Middle East, investors are flocking to safe ground. LB discovers which states will prosper and which have the most to lose.

It is late April and tanks are being deployed by security forces in Syria following the government’s inability to quell civil resistance protests. Of the long list of countries affected by political unrest recently, those that have hit the headlines most emphatically include Libya, Egypt, Tunisia and Yemen. But does this turmoil have the lawyers in the region’s main financial centres worried?

‘The Middle East is not one generic piece – you have to break it down,’ Niall O’Toole, head of Clyde & Co’s Abu Dhabi office, points out. ‘I’ve heard the UAE described as the Switzerland of the Middle East: it is politically stable, with a highly developed infrastructure and strong capital reserves.’

With four offices across the Middle East (Qatar, Saudi Arabia, Dubai and Abu Dhabi) and more than 25 years’ experience in the region, Clyde & Co is perhaps better placed than most international firms to assess the current situation, and the message coming from the firm is pragmatic. ‘Those who have been based here for a while realised that change had to come,’ says O’Toole. ‘Now it is here and there is a sense of optimism.’

‘The volume of project finance should increase due to the infrastructure programmes introduced under the new BOT law.’
Sam Habbas, ASAR

And that’s not just rhetoric. It appears that Dubai and Qatar have become the region’s safehouses, and the signs are there for all to see. Dubai is returning to capacity.

‘Tourism has come back,’ says Amjad Ali Khan, co-founder and managing partner of UAE firm Afridi & Angell. ‘Shopping malls, hotels and restaurants are all full. People are relocating their families to Dubai and Abu Dhabi so you’re even seeing pressure put on school places.’

Brand Dubai

There is no doubt that firms in Dubai are breathing a sigh of relief as the Emirate starts to recover from its spectacular collapse in 2008. ‘The global credit crisis affected Dubai a lot more severely than in other places,’ says Ali Khan. ‘Rental prices plummeted and the principal driving forces – real estate and construction – both really suffered. The Dubai brand was hit hard.’

The fact that Dubai’s cost base fell significantly in the aftermath of the crisis has helped restore value and stability to the market. Colliers International’s House Price Index measured a 50.4% drop in the blended average rate for Dubai’s residential property between the third quarter of 2008 and the third quarter of 2010 – prices have plummeted to half of what they originally were. ‘Real estate activity is now going both ways again,’ says Stijn Janssen, tax specialist and head of Loyens & Loeff’s Dubai office. ‘We have been advising local investors and investment funds on property deals in London, Paris, Germany and even the Netherlands. Property in Europe is currently at a good price and it’s seen as a solid investment.’ But it’s not just real estate that is booming, and firms are reshuffling across the board to keep up with demand for services. Most notably, Freshfields Bruckhaus Deringer hired new Middle East corporate head Pervez Akhtar from Allen & Overy late last year, while Clyde & Co promoted two lawyers to partnership in Dubai this year. Mohammad Lahouel, chief economist at Dubai’s Department of Economic Development, recently announced that Dubai’s economy would grow by around 4% in 2011. So has the Emirate finally turned a corner?

‘It would be foolish to say that it is over completely,’ O’Toole says. ‘But it is in the process of recovery.’

That process has been accelerated by the perception of Dubai as the financial capital of the Middle East. The consensus seems to be that where there is money, there is protection and investors are putting their bets on the Emirate remaining stable. In fact, as other regional economies start to look shaky, all the indicators are that Dubai is back in business.

‘Dubai has been the victim of heavily sensationalised bad press, but there’s a feeling that it has its confidence back.’
Shane Morton, Taylor Root

‘Multinationals have already started to shift their operations from Egypt and Bahrain to Dubai,’ says Dr Habib Al Mulla, founder and executive chairman of Habib Al Mulla & Co and a respected figure in the UAE legal market. ‘Microsoft has relocated back to Dubai from Egypt, and the conference market has also returned to Dubai again, due to a fall in hospitality prices and good government.’ Dr Al Mulla also points to a recovery in tourism and, anecdotally, to an improvement in high street conditions. ‘A retail company told me that the first quarter of this year was a record high for it,’ continues Dr Al Mulla. ‘Dubai is increasingly being seen as the safe haven and that is being illustrated in corporate deal flow; we’re handling more company relocations, more joint ventures and more franchise agreements.’

The pick up in work heralded by lawyers is also reflected by recruiters who are seeing firms start to hire again.

‘International firms are hiring associates across the board,’ says Shane Morton, private practice recruiter and head of Taylor Root’s Dubai office. ‘Dubai has been the victim of heavily sensationalised bad press, but there’s a feeling now that it has its confidence back.’ Nevertheless, it would be unfair to suggest that most of the work is happening in Dubai. Instead, Dubai is the business base for the region. All the big deals are being led from the Emirate and it is clear to see that the unrest is propelling demand for legal services.

Feeling the pinch

Some of the areas recently hit by civil strife were unexpected. Saudi Arabia, which boasts a per capita GDP of $24,200, had managed to keep its domestic troubles out of the headlines until recently. The turmoil in Bahrain was even more of a surprise; its reputation as a major financial hub has long been assured by the country’s regional pre-eminence in Islamic finance and its status as the most free economy in the Middle East and North Africa (MENA) according to the 2011 Index of Economic Freedom. As late as 2008, it was named the world’s fastest growing financial centre by the City of London’s Global Financial Centres Index. The recent unrest will leave a mark. One international partner based in Bahrain, who preferred to remain anonymous, says: ‘The double hit of the protests and the negative PR Islamic finance has been attracting is going to make it very difficult for Bahrain over the next few months.’ However, not everyone feels that Bahrain is dead in the water just yet.

‘The situation in Libya has given Bahrain a bit of space to breathe,’ says Rosanna Tolhurst, head of strategy and business development at UAE heavyweight Galadari & Associates. ‘The situation in Bahrain was fundamentally driven by religious issues, it was not driven by commercial issues as, for example, we saw in Egypt. It will take time, but handled well they could come back strong.’

Kaashif Basit, partner at KBH Kaanuun, a boutique Gulf firm that has offices in Dubai and Kuwait and is about to launch in Bahrain, agrees: ‘Western business is entrenched in Manama, and while some companies are temporarily relocating to Dubai, financial institutions in Bahrain are unlikely to relocate from their home jurisdiction.’ Basit also argues that it would be wrong to write off Islamic finance. ‘Yes, there has been some recent uncertainty in the Islamic finance market, but going forward sharia-compliant products will play an important role in this region due partly to the perceived greater risk of conventional finance products.’

The growth of Islamic finance before the credit crunch was exponential. Data obtained by Bloomberg shows that the global value of Islamic finance transactions rose from $2.87bn in 2004 to $50.17bn in 2007; an increase of over 1,600%. In 2008, the sector crumbled and deal value fell by 66% to $16.82bn.

‘The situation in Libya has given Bahrain a bit of space to breathe. I think Bahrain will come back strong.’
Rosanna Tolhurst, Galadari & Associates

‘I think that the issues you see today with controversial defaulting sukuks, and the legality of these structures, has put a dampener on the growth of the sukuk market,’ says Tamer Bazzari, founder and chief executive of newly launched UAE investment company, Genero Advisory. The statistics certainly show a cooling appetite for Islamic finance. According to Bloomberg, global sales of sharia-compliant bonds dropped by 15% to $17.1bn last year.

Nevertheless, the International Monetary Fund (IMF) estimates that global Islamic finance assets exceeded $260bn in 2010 and predicts that assets could grow to $1trn by 2016. Interestingly, Deloitte suggests that around 60% of those assets are shared by Middle Eastern countries, which represents a significant pot for the region’s financial centres to compete for, should Bahrain slide from its dominant position.

The fact is, despite the lack of liquidity in other markets there remains a need for financing in the Middle East. In 2010 alone, the value of project finance deals that were signed exceeded $27bn and, while standard financing has been favoured in the past, Islamic finance is becoming a core component of deals. For example, the financing on the mammoth Riyadh PP11 IPP project in Saudi Arabia last year (where Milbank, Tweed, Hadley & McCloy represented the sponsors GSEI Dubai, an affiliate of GDF Suez, and Baker Botts advised the Saudi Electricity Company and White & Case acted for the banks) comprised two Islamic finance tranches. The project marked the first time that international banks took on financial risks without the Saudi government providing a guarantee to the investors at the Saudi Electricity Company, and it also illustrates how attractive the Saudi market has become. Much has been made about the rivalry between Dubai, neighbouring Emirate Abu Dhabi and Doha in Qatar, but Riyadh in Saudi Arabia and Kuwait City are also looking to increase private sector involvement in their economies and reposition themselves as financial players. Most notably, Riyadh is pushing a law through to allow sharia-compliant mortgages.

‘By the end of this year I believe the mortgage law will be finalised,’ says Ali Abedi, finance specialist at leading Saudi firm, Hatem Abbas Ghazzawi & Co. ‘There is huge demand for low-income housing and finally young Saudis who have just graduated will be able to buy their own homes.’ Interest, or riba, is banned under sharia law so the idea that the religiously conservative Saudi Arabia is liberalising its approach to the retail finance sector could be very significant going forward.

Regional tensions

While the so-called Arab Spring marches across the Middle East, another battle is going on as the region’s financial centres vie for supremacy. Bahrain is currently out of the picture, but it’s not the two-horse race between Dubai and Doha that one would think. Abu Dhabi and Riyadh are also competing for the top spot.

Al Tamimi & Company – widely considered one of the leading firms in the region, with eight offices spread across all of the key hubs as well as Jordan, Kuwait and Iraq – has no doubt that Dubai remains the number one jurisdiction.

‘I can say with comfort that the 250 financial institutions in the Dubai International Financial Centre (DIFC) see Dubai as the regional hub,’ says managing partner Husam Hourani. ‘Employees always want to stay in Dubai for the good schools, the telecommunications and the infrastructure – it is, and will continue to be the regional focus.’ Hourani adds that the Emirate is not complacent and understands that its regulatory regime needs improvement. ‘When the recession came along we realised that we needed to make our laws clear and transparent, that our regulation supported commerciality – it was not suitable for a climate dealing with bankruptcy,’ he comments.

‘The UAE is described as the Switzerland of the Middle East: politically stable with a highly developed infrastructure.’
Niall O’Toole, Clyde & Co

On the recruitment side, however, it would seem that all eyes are already on the next big thing. ‘All the larger international firms are looking more closely at Abu Dhabi rather than Dubai,’ says Louise Wall, managing consultant at Laurence Simons’ Dubai office. ‘Construction and projects are the main needs, followed by corporate and finance, especially for the Magic Circle firms.’ Law firms are already eyeing up the government of Abu Dhabi’s ‘Plan Abu Dhabi 2030: Urban Structure Framework’. Plans don’t get any more comprehensive than this: covering real estate, tourism, industry and even culture, it is a major country-building exercise. Opinion is mixed as to whether or not it can pose a threat to its rival Emirate’s role in the region.

Then there is Saudi Arabia. Of course oil-rich Riyadh has the money and, although nobody would actually go on record as saying they would see it as the next financial centre, the infrastructure plans are enormous. The country plans to launch six ‘economic cities’ by 2020 to help it diversify its economy, including an industrial zone, research and development centres and a central business district. It is anticipated that the cities will contribute $150bn to Saudi’s GDP.

‘I can say with comfort that the 250 financial institutions in the DIFC see Dubai as the regional hub.’
Husam Hourani, Al Tamimi & Company

Last but not least is Qatar. The country placed itself in direct competition with the DIFC through its decision to establish the Qatar Financial Centre (QFC) in 2005. That the country has been granted the 2022 World Cup has helped its confidence to sky rocket and law firms are showing much more interest in setting up shop. This year alone Clifford Chance, McGrigors and, most recently, Baker & McKenzie have opened their doors in Doha. ‘In Qatar, the 2030 vision – and the hard deadlines imposed by the 2022 World Cup – provide a clear, long-term programme for growth,’ says James Elwen, head of McGrigors’ new office, when commenting on the reasons behind the firm’s move. ‘We are confident that the firm’s focus on energy, infrastructure and professional financial services will give rise to new opportunities here.’

As the Arab Spring shows no signs of abating, the drive to diversify regional economies has never seemed so pressing. LB