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Global captive centers have been growing and changing at an astounding rate over the years. Global captive units have become a popular offshoring strategy in the Middle East. These divisions mainly provide IT support and back-office functions to their parent companies.
For many multinational firms, outsourcing corporate operations to captive centers has proven to be an economical and successful business strategy. Businesses like Apple, Standard Chartered, General Electric, UBS, and American Express have been able to reduce costs associated with their back offices and concentrate more on their core competencies by taking advantage of lower-cost locations. Captive centers provide companies aiming to optimize their operations with opportunities for innovation and technological advancements, in addition to cost savings.
Before putting captive centers into practice, it’s critical to comprehend their various forms, including basic, shared, and divested models. Kimco Realty Corporation, for example, has a wholly-owned captive company called Kimco Insurance Company, Inc. that has shown to be successful in minimizing costs and risk. To make sure that this approach doesn’t turn into a major administrative burden or a fixed cost with minimal returns, it is imperative to thoroughly analyze and evaluate it beforehand.
The real estate sector has also taken advantage of the opportunity presented by captive units, particularly in the Middle East, where the retail and hospitality industries are adjusting to shifting consumer behavior and the post-pandemic world has witnessed a phenomenal growth in demand for flexible workspaces. High-end and luxury real estate is also in greater demand, and the UAE’s retail sector has helped to lessen the country’s reliance on the oil industry for GDP. The real estate sector has seen a 52% increase in captive premium growth, according to Marsh’s 2023 Captive Landscape Report. Growing captive unit categories include auto liability, cyber, property TRIA, and property NCBR.
The Middle East: The potential and expansion of international captive centers in this area.
Middle Eastern oil and gas companies are no longer the only ones using captive units. In fact, between 2015 and 2020, the number of captive units in this region increased significantly—by almost 20%.
The GCC countries—Qatar, KSA, and UAE—have developed into strategic hubs for multinational corporations (MNCs) because of their cutting-edge infrastructure, supportive government policies, and conducive business climates. Because of this, they have become very desirable locations for captive center businesses, and businesses ought to take advantage of these prospects.
For a variety of reasons, several Middle Eastern nations have become well-liked travel destinations for captive units. It is well known that Bahrain, Qatar, Dubai, and Abu Dhabi follow global best practices. There is a financial free zone that permits foreign ownership, especially in Abu Dhabi. The DIFC has updated its regulations, making them more precise and tailored to well-known locations like Bermuda and Guernsey. The government is not just targeting oil and gas companies; it is aggressively enticing multinational corporations to establish captive centers.
Furthermore, favorable government policies like Saudi Vision 2030 are fostering the expansion of the region’s tourism industry. Future international investments have been made possible by the establishment of four Special Economic Zones (SEZs) in Saudi Arabia: King Abdullah Economic City, Jazan, Ras Al Khair, and Cloud Computing in the King Abdulaziz City for Science and Technology.
Additionally, the UAE has a large number of free zones that offer a very functional and appealing environment. Double taxation agreements are encouraging foreign investment, and the region is more accessible to foreign investors due to its easy accessibility and proximity to Western nations.
In addition, the Middle East is renowned for its cutting-edge technology, cheap labor costs, rapid economic expansion, and superior infrastructure. The residential sector of the real estate market is expected to see an increase in apartment prices, while the hotel sector is anticipated to see positive growth as a result of increased visitor traffic. Developments with an infrastructure focus will be dominant in 2024. The real estate industry has expanded as a result of structural changes and consistent expansion in non-oil sectors. The Middle East’s real estate market is exhibiting resilience despite worldwide uncertainties.
In recent years, there has been an increase in the number of real estate companies establishing captive units in the Middle East. Gaining access to the reinsurance market and having more control over their insurance programs are two of the main drivers of this trend. Furthermore, by making this change, these businesses can improve their cost effectiveness, which is essential in the competitive economy of today.
According to recent reports from the Dubai International Financial Centre (DIFC), the number of insurance and reinsurance companies establishing captives has significantly increased, with a projected annual growth rate of 20% by 2023. This expansion demonstrates the advantages that businesses can have from setting up captive centers in the Middle East, especially in Dubai.
One such business is Integritas Property Group (IPG), a quickly growing property developer from the North West of England, which recently opened a captive office in Dubai. With the new facility in Business Bay, Dubai, IPG will be able to increase its footprint in the Middle East and look for investment opportunities from regional investors.
Establishing a captive center has many important advantages. One benefit is that it gives the parent company a competitive edge by allowing them to access a diverse talent pool, lower labor costs, enable round-the-clock working by allowing access to multiple time zones, and expedite mergers and acquisitions. Furthermore, intellectual property is better protected in a captive center than it is when work is outsourced.
The local economy gains a great deal from the establishment of a captive center in addition to the parent company. It encourages innovation and generates employment opportunities, opening doors for the local market to enter emerging markets. It also boosts the local economy’s standing internationally and encourages technological advancement and research and development.
In terms of the future, captive centers everywhere are seeing improvement. The most recent report from Everest Group predicts that 2024 will be a year of expansion and positive growth. The same group (5) recorded an astounding 452 new setups last year. It appears that businesses are becoming more at ease with creating offshore divisions as opposed to outsourcing their work.
Of course, before making a decision this significant, there are still a lot of things to think about. For assistance navigating the political and regulatory implications of investing in a foreign country, many multinational corporations are resorting to consulting firms.
Where can we anticipate the greatest growth, then? Without a doubt, the Middle East is a region to watch. A highly favorable environment for captive centers is being created by regulatory reforms, creative new ideas, and a significant investment in cutting-edge infrastructure. In addition, the market is concentrating on its non-oil sectors to lessen reliance and boost growth prospects. All things considered, it’s safe to say that captive centers in the real estate industry have a bright future!
In terms of the future, captive centers everywhere are seeing improvement! The most recent report from Everest Group predicts that 2024 will be a year of expansion and positive growth. The same group (5) recorded an astounding 452 new setups last year. It appears that businesses are becoming more at ease with creating offshore divisions as opposed to outsourcing their work.
Of course, before making a decision this significant, there are still a lot of things to think about. For assistance navigating the political and regulatory ramifications of investing in a foreign country, many multinational corporations are resorting to consulting firms.
Where can we anticipate the greatest growth, then? Without a doubt, the Middle East is a region to watch. A highly favorable environment for captive centers is being created by regulatory reforms, creative new ideas, and a significant investment in cutting-edge infrastructure. In addition, the market is concentrating on its non-oil sectors to lessen reliance and boost growth prospects. All things considered, it’s safe to say that captive centers in the real estate sector have a bright future.
Chairman and MD of Colliers’ India and CMD Middle East Project Leaders is Sankey Prasad.
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