LONDON - Gulf investors are slowing their investment in UK commercial property and are instead ploughing a greater proportion of their capital back into the Middle East, new research shows.

Middle East investors spent £460-million on UK commercial property last year, compared with a record £920-million in 2003 - the lowest share of Gulf money in total overseas investment in UK commercial property since 2000.

The slowdown is the result of three factors, the first being the falling value of the dollar, which has pushed up the price of UK and European property. "Gulf currencies are pegged to the dollar and with the dollar weak against sterling the capital cost of UK assets has increased," said Nick Edmondes, partner at Trowers & Hamlins, the international law firm that carried out the research.

Higher capital values of UK commercial properties have also meant Gulf investors are experiencing lower yields. The fall in yields comes despite the launch last year of several funds designed to invest in UK commercial property. Kuwait Finance House, the Gulf's largest Islamic investment bank, launched its £250-million Almannar fund to buy UK property in 2003.

A year earlier, Gulf Finance House, the Bahrain-registered investment bank, also moved to capture the growing interest of Gulf investors when it launched a £150-million UK property fund. A further reason for the shift in investment isa growing desire among Gulf investors to invest in property and equities in their home market.

This has been fuelled by several recent successful flotations including Etihad Etisalat, Saudi Arabia's second mobile telecommunications company now called Mobily, and Abu Dhabi's Aabar Petroleum Investments. Two forthcoming privatisations of Telecom Egypt and Kuwait's Showtime Arabia are also expected to generate huge interest.

"Gulf investors lost confidence in US and UK equities but still looked to keep a lot of their money abroad. With Gulf economies developing rapidly and with domestic land and equity values at an all-time high, money is now being invested in the Gulf and generating high returns," Edmondes said.

Financial Times