Determinants of Iranian Investment in Dubai's Real Estate Sector


Hassan Gholipour Fereidouni
Meisam Namdar

Hassan Gholipour Fereidouni
School of Management, Universiti Sains Malaysia

Meisam Namdar,
Royan Khazar Sari Co., Iran

Correspondence:
Hassan Gholipour Fereidouni
School of Management, Universiti Sains Malaysia (USM), 11800 Penang, Malaysia
Tel: 0060-17 4809810
Email: hassanhgf@gmail.com

Abstract

In recent years, a large number of (upper-middle and upper class) Iranians have invested in Dubai's real estate sector. The purpose of this study is to investigate the determinants of Iranian investment in Dubai's real estate sector (IIDRE) over the period 2000:Q1-2008:Q1. Using a time-series regression analysis, the empirical results reveal that Iran's external conflicts, bilateral trade between Iran and Dubai and Iranian wealth could contribute positively to the expansion of IIDRE. In addition, we find that returns from Iran's stock market and relative economic growth are not significant determinants of IIDRE. The results have some implications for policymakers.

Keywords: Real estate investment, Trade, External conflicts, Stock Market, Iran, Dubai

1. Introduction

The last decade has witnessed a strong growth in Iranian investment in Dubai(1). More than 400,000 Iranians (around 25 percent of Dubai's population (2)) are estimated to have moved up to $200 billion of capital into Dubai (Iran Daily, 2006; Rahman, 2005). The data provided by Dubai Statistics Center (2007) indicates that Iranian direct investments ranked as the top seven among all foreign direct investments in Dubai in 2005 and 2006. Iranian investment in Dubai is classified into several sectors, ranging from banking and finance to oil and real estate. One of the main and remarkable categories of Iranian investment in Dubai is investment in different types of real estate, such as housing, shopping centers, office buildings and industrial properties (Iran Daily, 2006; Mahoney, 2008). To prove this fact, we provide some evidence and statistics as follows:

Some 10 to 30 percent of real estate transactions are conducted by Iranians and even the tallest skyscrapers in the United Arab Emirate belong to Iranians (Iran Daily, 2006; Davis, 2006). According to Fattah (2005) Iranians are estimated to control as much as 30 percent of Dubai's real estate development. Iranians rank only behind the British and the Americans in terms of most important buyers of pre?construction products in Dubai (Thomas, 2006). Iranians are among the biggest purchasers of Dubai property besides Indians, British and Pakistani nationals (Mahoney, 2008). Similarly, figures released by REIDIN (2010) clearly show that Iranians are among the most active real estate actors in Dubai (see Table 1).

Given the growing amount of Iranian investment in Dubai's real estate sector in the 2000s(3), identifying the factors affecting the involvement of Iranian real estate investors in Dubai is important for Iranian policymakers seeking to make effective policies to control Iranian capital outflows to Dubai. With no previous studies on IIDRE, our research makes a significant contribution in this regard.

The purpose of this study is to find those factors contributing to IIDRE. We explore our hypotheses using a time series analysis over the period of 2000:Q1 to 2008:Q1. The paper is structured as follows: Section 2 proposes various factors which could determine Iranian investment in Dubai's real estate sector. The empirical model, the data and results are presented in Section 3. Section 4 concludes and provides some implications for Iranian policy makers.

2. Factors contributing to Iranian investment in Dubai's real estate sector

The variables that are considered for the empirical analysis of the present study are set out in this section. Similar to most studies of foreign direct investment we base our arguments on the eclectic theory as a means of measuring the most significant determinants of IIDRE (e.g. Moshirian & Pham, 2000). The choice of variables is guided by three considerations: the availability of data, the relevance of the variables in question from a theoretical and empirical perspective and the need for a parsimonious specification imposed by the relatively small size of the available sample. The following factors have been selected for IIDRE: (1) relative economic growth, (2) returns from the Iran stock market, (3) bilateral trade between Iran and Dubai, (4) Iran's external conflicts and (5) Iranian wealth.

(1) Relative economic growth
One of the most important determinants contributing to the expansion of Iranian investment in Dubai real estate can be Dubai's economic growth over the last decade(4). Dubai's economic growth has encouraged Iranian investors to invest in Dubai real estate sector (such as apartments and villas) in order to achieve higher returns on unit capital. In other words, Iranian investors have considered Dubai's economic growth as a good proxy of higher returns to capital when choosing Dubai as a location for investment. This argument is consistent with a number of previous studies such as Schneider and Frey (1985) and Culem (1988) who argued that relative economic growth in the host countries encourages foreign investment in those countries. According to various publications of the Survey of Current Business on the U.S. FDI abroad, U.S. investors invest more abroad during an economic slump in the U.S. and they invest less abroad during an economic boom in the U.S. (cited in Moshirian & Pham, 2000). Based on the above discussion, it is expected that higher economic growth in Dubai attracts further Iranians who want to invest in the Dubai real estate sector.

(2) Returns from the stock market
We examine the return from Iran's stock market as an important determinant of IIDRE. The reason is that Iranian investors may look at the stock market as one of several indicators of society's overall confidence in future business conditions. Therefore, falling returns from Iran's stock market may create more incentives for Iranian investors to invest in the domestic or Dubai real estate sector. In other words, falling stock prices may imply a lack of confidence in the business future which in turn may motivate Iranian investors to invest in Dubai stock market or real estate sector. In fact, there is some evidence that Iranian shareholders moved their investments into the Dubai stock market or real estate sector when the Tehran stock market crashed in 24 September 2005 (Fathi, 2005). Previous studies also are in agreement with our argument. For example, Moshirian and Pham (2000) found that U.S. foreign direct investment in real estate abroad is negatively correlated to returns from the U.S. stock market. Therefore, we hypothesize that IIDRE is negatively correlated to returns from the Iran stock market.

(3) Bilateral trade between Iran and Dubai
Another important determinant that is likely to have an impact on IIDRE is the amount of bilateral trade between Iran and Dubai. This factor is chosen because Dubai is the key trading partner of Iran in terms of exports and re-exports (IRICA, 2008). Habibi (2008) argues that the geographic proximity of the two countries and the presence of a large expatriate Iranian community in Dubai have led to a significant increase in bilateral trade. Given the increasing trend of trade between the two countries, many Iranian businessmen have decided to have their own residential house, warehouse and office to operate their businesses in Dubai. Therefore, it is expected that trade activities between Iran and her main trading partner (Dubai) contribute to the increase of IIDRE. This argument is consistent with previous studies which showed that there is a positive relationship between trade and foreign direct investment (e.g. Jain, 1986). Similarly, Moshirian and Pham (2000) found that U.S. bilateral trade contributes positively to the expansion of U.S. foreign direct investment in real estate abroad.

(4) Iran's External Conflicts
Several academic scholars and policymakers argue that the tendency of affluent Iranians to transfer part of their capital to Dubai's real estate sector has been largely related to the tension between Iran and the West (Zibakalam, 2008; Fattah, 2005; Fathi, 2005). Nuclear programs, violation of human rights as well as support for terrorist groups (claimed by the West) have been the major reasons for the tension between Iran and the West. It is believed that Iran is rapidly developing the capacity to produce nuclear weapons, and it possesses rockets capable of striking Israel. Iran's nuclear programs and its dispute with the International Atomic Energy Agency (IAEA) have soured relations with most Western countries and consequently several rounds of United Nations sanctions have been imposed against Iran (Palmer, 2007; Global Market Information, 2010). In addition to the UN sanctions, the U.S.(5) and European Union have attempted to make the international sanctions more comprehensive and efficient. For example, the U.S. has been able to discourage many foreign firms from engaging in trade and investment activities in Iran (Habibi, 2008). Moreover, Israel and the U.S. have always threatened to launch a preemptive strike against Iran's nuclear facilities. The current sanctions, extended psychological campaigns against Iran and the fear of more punishment to come, has scared off domestic and foreign investors and pushed up the risk, cost and inconvenience of doing business in Iran (The Economist, 2007; Habibi, 2008; Zibakalam, 2008). Under this situation, capable domestic entrepreneurs and investors have refrained from implementing efficient projects in Iran. In other words, these disputes and tensions have led to higher political risks and discourage many wealthy Iranians from investing in Iran due to a higher risk premium. As a result, they have transferred their capital to other countries of the Middle East region or even to European countries' real estate and financial sectors. Specifically, many wealthy Iranians have purchased a second residential site in Dubai used for temporary or permanent habitation by family members and possibly used and being preserved for harder times such as a possible attack from the U.S. or Israel.

The above discussion is consistent with Khodov (2000). He argued that citizens from countries with transitional economies or dictators purchase real estate abroad for the purpose of preserving their capital. In other words, the author opines that investors are guided by hedging inflationary and political risk, laundering money illegally obtained in one's own country, and creating a refuge in the event of the confiscation of property and judicial prosecution. More specifically, he discussed that national capital outflow to foreign residential real estate is possible when the situation deteriorated as far as galloping inflation and political instability. Therefore, we hypothesize that a positive relationship is expected between Iran's external conflicts and IIDRE.

(5) Iranian wealth
Previous empirical evidence suggests that national wealth and income are the factors determining the amount of countries' foreign assets abroad (Russekh & Ruffin, 1986; Ueda, 1990; Moshirian & Pham, 2000). Given past empirical research on the effects of wealth and income on real estate investment abroad, it is expected that IIDRE should be positively related to Iranian wealth and income.

3. Empirical Model, Data and Results
The aim of this paper is to discuss and analyze the determinants of Iranian investment in Dubai's real estate sector. Given the earlier discussion, the following time-series model is fitted to guide the analysis.

log IIDREt = b0 + b1 REGt + b2 RSMt + b3 logTRAt + b4 logIECt + b5 logGDPcapt + Ut (1)

with the following expected signs:

b1 > 0, b2 < 0, b3 > 3, b4 > 0, b5 > 0

where IIDRE is the Iranian investment in Dubai real estate sector; REG is relative economic growth (Dubai/Iran); RSM is the returns from the Iran stock market; TRA stands for bilateral trade between Iran and Dubai; IEC is Iran's external conflicts; GDPcap denotes the Iranian wealth and U is the error term. It should be noted that all variables have been transformed into natural logs except the REG and RSM. The model is estimated by using a time-series regression analysis.

Data
To empirically estimate the above model, we utilize quarterly data over the period 2000:Q1-2008:Q1. The relatively small size of our sample is due to the limited availability of data regarding the IIDRE series. The data comes from different sources. Data relating to the IIDRE is obtained from Real Estate Investment and Development Information Network (REIDIN.com-DUBAIFocus)(6) . Information on Iran's political risk as a proxy for Iran's external conflicts is taken from the Economist Intelligence Unit (EIU). This indicator is assessed on a scale from 0 to 100, with higher values indicating higher political risk (such as war and international disputes). Tehran stock index is used as a proxy to measure returns from the Iran stock market and is taken from Tehran Stock Exchange. GDP per capita (as a proxy for wealth) is obtained from the Central Bank of Iran. The data on the relative economic growth is taken from Dubai Statistic Center and Central Bank of Iran. Finally, information on bilateral trade between Iran and Dubai is obtained from Datastream.

Results
The result of estimation is shown in Table 2, where t-statistics are given in parentheses below the coefficient estimates. The dependent variable is Iranian investment in Dubai's real estate sector (IIDRE). The overall fit of the model is reasonable because the explanatory variables explain 68% of variation in IIDRE. The sign of Iran's external conflicts (IEC) parameter is the expected one and it is statistically significant. The positive sign of IEC implies that Iran's political conflicts contribute positively to the expansion of IIDRE. This result is consistent with Zibakalam (2008), Fattah (2005) and Fathi (2005) who argued that the tendency of affluent Iranians to transfer part of their capital to Dubai's real estate sector was related to the tension between Iran and the West. The wealth variable (GDPcap) is statistically significant with a positive sign. This finding is in agreement with the expectation that wealth is a contributor to the Iranian investors' decisions to invest in Dubai's real estate sector. This finding is also consistent with the study by Moshirian and Pham (1986) that showed that U.S. financial wealth contributes to the expansion of U.S. investment in real estate abroad. Moreover, our analysis finds that bilateral trade between Iran and Dubai is positively related to IIDRE, concurring with other similar studies (Habibi, 2008; Jain, 1986; Moshirian & Pham, 2000). This result indicates that trade activities between Iran and her main trading partner contribute to the expansion of IIDRE.

The relative economic growth and returns from stock market variables are not statistically significant at the 5% or even at the 10% level. It means that these two factors are not Iranian investors' concerns when they make the real estate investment decision in Dubai.

Table 1: Value of Property Transaction by Nationality in Dubai (UAE Dirhams)


Table 2: Regression result

4. Conclusion
The last decade has witnessed a strong growth in Iranian investment in Dubai. One of the main and remarkable categories of Iranian investment in Dubai is investment in different types of real estate. The purpose of this paper has been to discuss and analyze the determinants of Iranian investment in Dubai's real estate sector (IIDRE) over the period 2000:Q1-2008:Q1. Using a time series model, the empirical results reveal that Iran's external conflicts, and bilateral trade between Dubai and Iran and Iranian wealth could contribute positively to the expansion of IIDRE.
The empirical result presented in this paper suggests an important implication for Iranian policymakers. Since higher external conflicts do facilitate the occurrence of IIDRE, Iranian policy makers are required to create favorable foreign policies and try to settle external conflicts to lower risks and uncertainty for Iranian entrepreneurs and investors in order to reduce capital outflow. Creating favorable international relations and keeping capital at home would help finance industrialization that facilitates employment opportunities and increases productive capacity.
Ultimately, the results of the study should be considered in light of its limitations, which also point to some issues for future research. Firstly, given the data constraints, results should be viewed with caution and hence data from a longer period is needed to fully investigate these relationships and to improve our understanding. Secondly, the present study only considered the aggregate real estate investment by Iranians for analysis. For future research, it may be useful to examine the relationship between the explanatory variables and IIDRE by using disaggregated data from various types of real estate such as residential and commercial real estate.

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Footnotes:
(1) Dubai is an emirate of the United Arab Emirates (UAE). UAE lies in the heart of the Middle East (ME) and is one of the world's fastest growing economies. By 2008, the UAE's second largest constituent emirate, Dubai, was drawing over 97 per cent of its GDP from non-oil sectors, including a real estate industry, a world class luxury tourism industry, an international financial centre, and a range of re-exporting and other commercial activities based out of international 'free zones' (cited in Davidson, 2009).
(2) Dubai has historically enjoyed fairly warm relations with Iran, given that many of its immigrant merchants are of Persian origin. Iran has also long been the emirate's principal regional trading partner and Dubai chose to remain neutral in the Iran-Iraq War (cited in Davidson, 2009).
(3)It should be noted that one-third of Iranian investors in Dubai have returned to Iran due to the economic crisis and the housing recession in the United Arab Emirates (Iran Daily, 2009).
(4) Dubai's economic growth over the last decade has been remarkable with double digit growth in many years. Dubai's real GDP growth rate has been much higher than that of Hong Kong and Singapore, the other two major global city economies for most of the last decade (Dubai Chamber, 2010).
(5) For more elaborate reviews, see Torbat (2005)
(6) REIDIN.com-DUBAIFocus delivers all property deals and transactions in Dubai. For more information on REIDIN please go to: www.REIDIN.com.

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