The controversy surrounding the "Ground Zero mosque" is driving away some Middle-Eastern investors from New York real estate, The Real Deal reports. The article recounts a recent apartment deal with a Saudi investor that fell through and quotes experts who say Middle-Eastern investors have plenty of reason to flee, even if they have long preferred New York real estate because of the legal protections and freedom. 

The Real Estate desk flagged the danger a couple of months ago, quoting former Pakistani ambassador Akbar Ahmed: “I think the genie is out of the bottle,” said Mr. Ahmed when asked if he thought the damage done to the Muslim world’s perceptions of America could be walked back. “Because it is not just about one mosque, and it is not just now.”

Of course, it's early to tell if this unease will actually translate into fewer deals, and brokers are adamant that it won't. 

But consider that Middle Easterners did stop investing in U.S. real estate due to rising intolerance after 9/11. Moreover, it's worth noting that wealthy Middle-Eastern oil tycoons aren't the only ones turned off by perceived intolerance. Investment by Europeans--who plunk down the most money in New York real estate--also dropped off after 9/11 and the subsequent Iraq war. 

New York recently shot ahead of London as the top place for foreign real estate investment. Not coincidentally, that corresponded with the growing perception that the U.S. is the most "stable" and "secure" place to invest. It might take more than the mosque controversy to erode that, but we do also have a national debt the size of the Atlantic and an election that, whichever way it falls, will likely only fuel the fires of intolerance in the country. 

Of course, there's a good chance that even if Middle Easterners and Europeans flee, Chinese investors won't be turned off by a mere human rights spat.

lkusisto@observer.com