Geneva is no longer on the inter-national itineraries of the super-rich investors of the Gulf, who are turning to local bourses, where returns on equity and alternative investments outstrip their European rivals.

The super-rich are among the fastest-growing segments of the population, with high net worth individuals being valued in excess of $1m and ultras having more than $30m in accumulated wealth.

There are now 300,000 such individuals in the region, according to Bank Sarasin-Alpen in Dubai. In 2006 alone, GCC investors held $1.5trillion in real estate, offshore securities and bank deposits, according to the IMF.

GDP growth rates helped to expand the Gulf’s high net worth pop-ulation by 11.9 per cent in 2006, up from a 9.8 per cent growth rate in 2005, according to the Capgemini World Wealth Report. But negative market capital-isation rates helped to slow their total wealth accumulation. Total wealth held by high net worth individuals grew by 11.7 per cent in 2006, down from a 19.7 per cent advance in 2005, suggesting a dispersion of wealth among the region’s wealthiest individuals.

Growing competition

To capitalise on wealth management oppor-tunities, increasing numbers of European and US banks are establishing offices in the region. “The days of dealing with customers from off-shore centres are completely over,” says Jean Patrick Thiriet, chief executive officer of France’s Societe Generale (SG) Bank & Trust (Middle East). “It is not just that places such as Geneva are becoming irrelevant, it is more to do with competition from local institutions and higher returns on offer locally. Like most institutions, we had to adapt to our clients’ demands.”

Other banks agree regional investment is increasing. “I would say that our Gulf clients now invest one-third of their assets in the region, which is a significant readjustment from the past,” says Serge Janowski, head of private banking in the Middle East for French-owned BNP Paribas.

He has seen his bank adjust dramatically to cater to the desires of local investors. BNP Paribas has branches with private banking teams in Dubai, Abu Dhabi, Qatar, Kuwait, Riyadh and Bahrain. Some of the asset classes offered include equities, fixed income, real estate and private equity, as well as regionally focused private equity management.

“Depending on the risk profile the client desires, we can offer returns of 5-25 per cent in our European portfolio,” says Janowski. “That is not near the returns they can get on local investments, particularly real estate, in the region. It is not just the Gulf that GCC investors are looking at. We offer investment vehicles focused on Syria and Turkey, and all over the region.”

Regional differences

The type of portfolio that high net worth Gulf investors seek has always differed from European investors, say bankers. American Express Bank, which has consistently profited from its private client foreign exchange
dealing, is one example of a financial institution offering investments that carry high risk/return profiles.

But it is not just high net worth individuals in GCC states who are driving the private banking and asset management markets in the region. What makes the Gulf even more interesting to international banks is that financial centres such as Dubai and Bahrain are increasingly attracting high net worth individuals from India and Southeast Asia.

“In my view, Dubai is an Indian city,” says Iqbal Jumabhoy, chief executive officer of Singapore-based Wire Commercial Partners. “Where once I might have felt comfortable having my assets managed in Mauritius or London, I now rely on local and international banks in the Emirates. What draws me to the region are the returns that can be made locally. They far outstrip what I could make in Europe.”

Jumabhoy, who is of Indian descent, is just one of an increasing number of ultra high net worth individuals from the Indian subcontinent who bank in Dubai.

All this activity means competition for the region’s wealth is increasing between international and local banks, as is the underlying competition between financial centres in the region. In response to the emerging dominance of Dubai as a financial centre, Bahrain set up a private banking licence in November to give a boost to its wealth management industry. Among other things, it is liable to increase competition for staff, who are highly valued in the current investment climate.

Sophisticated services

“The licence is aimed at encouraging international and leading regional banks to offer sophi-sticated wealth management services,” says Ahmed Abdulaziz al-Bassam, director of licensing and policy at the Central Bank of Bahrain.

Part of the reason Dubai has been so successful is the government’s decision to provide infrastructure to international banks. The Dubai International Financial Centre (DIFC) has attracted dozens of international firms.

There is a reason so much private banking activity takes place in Dubai. The UAE has the highest penetration rate of millionaires (in the region) as a percentage of population, with 6.1 per cent, according to a report issued in October by the Boston Consulting Group.

Qatar, Kuwait, Bahrain and Saudi Arabia also feature in the top 15 countries. The report also claims it is becoming increasingly difficult to attract money to European or US equity and fixed-income investments as the Gulf real estate boom continues.

It is here that local banks are beating international competition by attracting investors seeking to capitalise on the real estate boom. “The merger between National Bank of Dubai and Emirates Bank is going to create a private banking powerhouse,” says Janowski. “Another major local competitor is National Commercial Bank in Saudi Arabia.”

Both institutions are heavily involved in financing commercial real estate projects in the region and offer clients opportunities to participate in individual transactions.

While local and regional banks are reaping millions in real estate arrangement fees, European banks are more likely to encourage clients to diversify their assets, which is a challenge when alternative investments in the Gulf continue to offer such high returns.

“It is very difficult to convince our clients to spread their risks when they are getting huge returns on real estate,” says Janowski. “We recommend asset class allocation across a broad range of products.”

In a bid to reclaim market share, international banks are attempting to get closer to their clients. “A decade ago, some banks had local representative offices here with very minimal staff,” says Janowksi. “BNP Paribas ran the Middle East out of Paris, London, Luxembourg and Geneva. Now we have to have greater proximity to our clients.

Increasing wealth

“That, and offering local investment vehicles, is the key to success. The type of investor we are serving now wants to see his money work onshore and wants to see his asset manager face-to-face on a regular basis. The Gulf region and the greater Middle East are increasingly important to us as an institution. They are a major driver of profits for the bank.”

In the longer term, banks are expecting the opportunity, and hence the competition, to increase. “The global proportion of high net worth wealth in the Middle East is projected to rise as high as 8.4 per cent from its current level of 7.6 per cent,” says Thiriet.

“That means opportunities will only get greater for all banks. If, as we expect, an increasing share of offshore wealth in Indian hands is managed in the Gulf region, the expanse and scope of our coverage will grow exponentially.

“With high oil prices and GDP growth more than 8 per cent in India, most private banks view centres such as Dubai with favour. I see no reason for this upward spiral to stop. Global high net worth will grow by a further $1.6trillion in the coming year.”

Key fact

$1.5 trillion is the value of investment assets held by GCC investors

Source: IMF

TABLE: High net worth individuals by region (%)

2004 2005 2006
Africa 0.7 0.8 0.9
Middle East 1 1.3 1.4
Latin America 3.7 4.2 5.1
Asia-Pacific 7.1 7.6 8.4
Europe 8.9 9.4 10.1
North America 9.3 10.2 11.3

Source: Merrill Lynch and Capgemini

Millionaire households (%)

  1. UAE: 6.1

  2. Switzerland: 6.1

  3. Qatar: 5.2

  4. Kuwait: 4.8

  5. US: 4.1

  6. Singapore: 3.8

  7. Taiwan: 3

  8. Belgium: 3

  9. Israel: 2.7

  10. UK: 2.4

  11. Ireland: 2.4

  12. Bahrain: 2.2

  13. Hong Kong: 2.1

  14. Saudi Arabia: 2.1

  15. Netherlands: 2

Source: Boston Consulting Group