Page 109 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Here to Stay: GCC Market Attractiveness and Risks 93

One such sector is real estate: after a sustained boom, there is a real
risk that the market is overpriced and will need to adjust. In Dubai,
as of mid 2007, there were already signs of such a market correction.
Another GCC sector that may be privatized is that of infrastructure
and utility firms, which are overvalued today far above their peers
in other emerging markets.
Such a burst in key sectors is likely to occur, in the same way
that a correction in the GCC stock markets was needed in 2006 to
make valuations more reasonable. Unlike that stock market
correction, however, it is unlikely that the value of real assets will
plummet 60 to 80 percent the way many listed securities did then.
The fundamental drivers of real asset values—economic growth,
business activity, and consumer demand—all seem to be in place.
One can therefore expect some short-term decrease in value but
long-term appreciation as the underlying economies develop.

Dangerous Neighbors: Political Risk
Although the GCC states have been remarkably stable, there is no
doubt that they have some dangerous neighbors. One of them is Iraq,
whose invasion of Kuwait sparked the first Gulf War in 1991 and
whose ongoing occupation and reconstruction brings significant
instability to the Middle East. Another troubling neighbor, which
shares the very Gulf from which the GCC takes its name, is Iran.
Should war break out in Iran, mixed effects can be expected in
the GCC. Oil prices would again go up, bringing increased short-
term wealth (assuming that the oil could be safely transported out
during the conflict). The multiple US bases in the GCC countries
would likely be sprung into action, the political impact of which
would depend on whether Iran was seen as a threat to the Gulf
world or as merely a target of Western aggression. If Iran was seen
as a threat to Arab states, supporting an American or Western attack
would be considered more reasonable. If not, GCC regimes would
be in the delicate position of being seen as a party to outside aggres-
sion in the region. The GCC states would likely try to dissuade the
West from an attack on Iran, but if war broke out they would have
extreme difficulty siding against the United States or the West.
While the Gulf states are well fortified, there is some risk of
their being targeted for attack if they are seen as US or Western allies.