August 15, 2012 1:07 pm

DIFC aims to benefit from power of two

The Dubai International Financial Centre has recently announced a restructuring aimed to “enhance its role as the region’s premier investment hub”.

Under the scheme, the DIFC Authority is to split its core functions – financial markets and property management – into separate units and has appointed key executives to head up the two divisions.

The DIFC Authority will be responsible for business development and legislation. DIFC Properties will manage the centre’s real estate portfolio.

The concept marks official recognition by the DIFC of its dual roles. The centre was launched in 2004 amid ambitions to become the regional financial hub for the Middle East, North Africa and India.

In building up and renting out some of Dubai’s most desirable office space, however, the primary focus of the DIFC’s management so far has been confined to property – and most of its revenues have been derived from rental income.

Given this focus, the split into separate divisions seems to make sense. The newly-independent DIFC Authority can focus on its primary role: enhancing the centre’s position as a financial hub, and developing its business offerings.

Managing a property portfolio may be profitable but it is far from the work of a financial centre authority.

The question many in Dubai’s financial community are asking, however, is not whether the separation is the right move, but whether it is really anything new.

In many ways, the DIFC has been here before.

With the inception of the centre it was known that the DIFC would need to build and operate a real estate portfolio to support its business model, which depended on attracting financial companies to shift their offices to Dubai. The real estate proposition was bound always be an important one, at least until the centre would be able to secure revenues from its core business of financial transactions.

Management of the property portfolio was, however, a sensitive issue from the start. Dubai’s property market was in the midst of an unprecedented boom, money was flowing into the system from all corners of the world and regulation of the market was limited at best. With the DIFC positioning itself as a world-class financial hub with best practices in place, management of its property portfolio needed to happen in line with the highest possible standards of governance and transparency.

With that in mind, it was proposed in the early days of the centre that the real estate portfolio should be managed by a unit separate from the DIFC Authority with its own board and executives. This was supported by the centre’s regulators with an eye toward the best governance standards.

The proposal was, however, vigorously resisted by the authority which wanted to have full control of the real estate as it saw no role for the regulators in real estate. The matter soon became a hot topic that initiated a rift that escalated and ended with firing of the regulators. This led to a saga that took years for the DIFC to fully recover from. The split proposition never saw the light of day and responsibility for the real estate portfolio was assumed by the DIFC Authority.

Ironically, it was mainly the DIFC’s real estate deals that were at the centre of government investigations and internal audits taking place since the onset of the financial crisis. These investigations led to a significant shake-up in the top-level management of the DIFC and to the installation of the centre’s current management team.

Ultimately, it has taken 10 years for the DIFC to realise that the original proposition – of splitting the real estate portfolio from the day-to-day management of the centre’s activities – was made for good reasons.

But will the recent move help the DIFC? With most of the centre’s property already leased or sold, the real estate business consists of rent collection and management of the existing portfolio. There are no new developments to be carried out. The recent move, therefore, seems to be aiming more at focusing the business rather than concerns about governance and transparency.

Regardless, it appears a healthy step that will assist the DIFC as it matures into an established organisation at the centre of regional finance.

Similar management overhauls are needed at the DIFX, the centre’s exchange, which has been struggling to survive, and at the DFSA, the centre’s regulator, which is currently chaired by a non-regulator – a matter that does not help to promote the centre’s governance image.

Habib al-Mulla is a Dubai based lawyer and the first chairman of the Dubai Financial Services Authority

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