“Many investors have been prompted to consider investing offshore by rand weakness. But anyone tempted to jump on the bandwagon would do well to remember the sharp depreciation and rapid recovery of the rand in 2001, which left many investors badly burned,” wrote TREVOR GARVIN, head of Multi Management at BoE Private Clients in Business Report, October 2007 last year.

This view is held by most investment experts, and few offshore destinations presently come with stronger recommendations than the city state of Dubai in the United Arab Emirates.

South Africans are allowed to invest up to R2 million offshore, in any product or market, at the investor’s discretion. Garvin says, “In truth, there is never a bad time to consider investing overseas, and most financial advisers recommend the inclusion of an offshore element in an investment portfolio.”

By spreading a portfolio across asset classes (equities, bonds, property, cash and alternative investments), diversifying across different foreign markets can help to limit downside risk while providing exposure to top-performing companies, industries or assets that may not be available domestically.

“Offshore investment also offers a hedge against the political and economic risk associated with an emerging market such as South Africa.

“On the other hand, the costs of investing offshore can be very high, and should always be a factor in the investment decision.

“It is important to consider the total expense ratio, which takes into account both the cost of investing in multi-fund products and any fees associated with the underlying assets,” Garvin wrote.

It is against this background that offshore investment opportunities in Dubai should be judged.

Dubai has grown into the one of the most exciting offshore destinations since the city state decided to head off an economic crisis in the event that its oil ran out. It did so by making itself a regional business, property and tourist destination on an unprecedented scale.

About R250bn is already committed to creating four giant, man-made islands with hundreds of hotel villas, doubling the city state’s tiny 40-km coastline. Dubai is a geopolitical play, built on funds flowing out of the US and Europe as wealthy Arab and Eastern investors move away from a war on terror that increasingly targets them.

A mere 33 years ago, Dubai was a coastal town with a small harbour run by the Maktoum brothers, descendants of a powerful Bedouin tribe called the Bani Yas.

Their father, Sheikh Rashid bin Said al Maktoum, was instrumental in reuniting Abu Dhabi and Dubai in 1971, a move that created the United Arab Emirates. He ruled until his death in 1990. His sons have created modern Dubai, a city that hopes to attract 15 million tourists a year by 2010.But it is General Sheikh Mohammed bin Rashid al Maktoum who is credited with driving the tourist and trade economy, to such an extent that it has overtaken oil as the country’s primary source of income. He is regarded almost as an omniscient visionary.

Dubai’s imports have more than doubled since 1989; regional economic growth and liberalisation is set to continue boosting demand. The city state is strategically located at the heart of one of the world’s richest regions and highly accessible – among others served by more than 170 shipping lines and 86 airlines. It has an open market with no exchange controls, quotas or trade barriers.

The city state, based on a free enterprise system, offers:

 Highly developed transport infrastructure;

• State-of-the-art telecommunications;

• A sophisticated financial and services sector;

• Top international exhibition and conference venue;

 High quality office and residential accommodation;

• Reliable power, utilities, etc.;

• First-class hotels, hospitals, schools, shops, etc.; and

• A cosmopolitan lifestyle;

Dubai has made itself very attractive in terms of a business climate based on:

• No personal income and capital taxes;

• No corporate taxation;

• 100% repatriation of capital and profits;

• Competitive import duties (5% with many exemptions);

• Modern efficient communication facilities;

• Abundant and inexpensive energy supply;

• Simple staff recruitment procedures;

• Competitive freight charges;

• Competitive real estate costs; and

Easy access to both sea and airports.

There is no corporate tax or personal tax in the UAE. The only exceptions to this are oil-producing companies and branches of foreign banks. Direct taxation is against the traditions of the UAE and is highly unlikely to be introduced in the near future.

The basic requirement for all business activity in UAE is one of the following three categories of licenses:

• Commercial licenses covering all kinds of trading activity;

• Professional licenses covering professions, services, craftsmen and artisans; or

Industrial licenses for establishing industrial or manufacturing activity.

The ownership requirement is 51% participation by UAE nationals for UAE-established companies. There are, however, some exceptions:

• Where the law requires 100% local ownership;

• In the Free Trade Zones where 100% foreign ownership is permitted;

• In activities open to 100% AGCC ownership;

• Where wholly owned AGCC companies enter into partnership with UAE nationals;

• In respect of foreign companies registering branches or a representative office in Dubai; and
• In professional or artisan companies where 100% foreign ownership is permitted.

The Free Trade Zones have been set up with the specific purpose of facilitating investment. The procedures for investing in the zones are relatively simple.

The companies operating in the free zones are treated as being offshore, or outside the UAE for legal purposes.

The free zones are suitable for companies intending to use the UAE as a regional manufacturing or distribution base, with the bulk of their business outside the country.

Free zone incentives include:

• 100% foreign ownership;

• Exemption from all import duties;

• 100% repatriation of capital and profits;

• Freedom from corporate taxation for 50 year;

• Inexpensive energy;

 Efficient recruitment procedures ensuring the availability of a skilled and experienced workforce; and

 A high level of administrative support.

The Financial Mail’s Property Handbook 2006 wrote: “It was bound to happen: As the South African housing market nears its peak after exceptional growth of more than 120% over the past four years, real estate groups and investment consultants are back riding the offshore property bandwagon.

“But unlike the late Nineties, when wealthy South Africans were encouraged to pour millions into rental apartments in London, Sydney and Madrid, this time round investors are being lured to less developed markets such as Dubai, China and Mauritius.

“Dubai in particular is being punted as the ‘next big thing’. The country only recently started to attract offshore investors, with restrictions on foreign property ownership still in place until 2003.”

That being said, one would do well to heed Garvin’s advice: “Given the wide range of offshore options available, it is important that investment strategies should be based on the investment manager’s personal knowledge, in each case, of the fund, the underlying assets, the fund manager and the geographic market.”

Piet Coetzer
(In collating this article, the following sources, amongst others, were consulted: www.busrep.co.za; www.ioltravel.co.za; www.property24.com; secure.financialmail.co.za; www.the propertymag.co.za; www.ibn.co.za; www.commitbiz.com; and www.hamtdubai.com)