Jan.01, 2010, 3:47 p.m. ET, From: THE ASSOCIATED PRESS

Property prices in Nairobi are soaring, and Somali pirates are getting the blame.

The hike in real estate prices in the Kenyan capital has prompted a public outcry and a government investigation this month into property owned by foreigners. The investigation follows allegations that millions of dollars in ransom money paid to Somali pirates are being invested in Kenya, Somalia's southern neighbor and East Africa's largest economy.

Even as housing prices have dropped sharply in the United States, prices in Nairobi have seen two- and three-fold increases the last half decade.

''There is suspicion that some of the money that is being collected in piracy is being laundered by purchase of property in several countries, this one being one of them,'' said government spokesman Alfred Mutua. ''Especially at this time when we are facing global challenges of security such as terrorism and others, it is very important for us to know who is where and who owns what.''

The investigation will also help the government catch tax evaders, he said.

Kenya may be the most attractive spot for pirates to launder their money because it shares a roughly 500-mile (800-kilometer) border with Somalia and has investment opportunities and a large Somali community of up to 200,000 people, Mutua said.

In a neighborhood of Nairobi now called ''Little Mogadishu'' because of its Somali community, large business and apartment buildings have sprung up. A similar explosion of real estate development can be seen in higher-income areas of the city.

Somali pirates have been paid more than $100 million in ransoms the last two years, said Roger Middleton, a piracy expert at the London-based think tank Chatham House. The average ransom is also up, from $1 million per vessel a year ago to about $2 million today.

Pirates in Somalia say they invest their ransom money outside their war-torn country, including in Kenya. One pirate who gave his name as Osman Afrah said he bought three trucks that transport goods across East Africa. A second pirate, who only gave his name as Abdulle, said he's investing in Kenya in preparation for leaving the pirate trade.

''Pirates have money not only in Nairobi but also other places like Dubai, Djibouti and others,'' said Abdulle. ''I have invested through my brother, who is representing me, in Nairobi. He's got a big shop that sells clothes and general merchandise, so my future lies there, not in the piracy industry.''

Kenya also does not have stringent laws against money laundering, though a bill to curb the practice is being debated in parliament. The U.S. State Department in its annual report by the Bureau of International Narcotics and Law Enforcement Affairs describes Kenya as major money laundering country.

The investigation has drawn angry reactions from the Somali community, and business leaders said Somalis would not cooperate with the investigation and may go to court to try to stop it.

''This is very, very unfair discrimination,'' said Hassan Guled, the chairman of the Somali business community. ''We consider this order rubbish.''

Guled said Somalis living in Kenya have acquired property by pulling resources together and borrowing from banks. Somalis here also depend on money sent by a large Somali population in Europe and America who cannot invest in those economies because of religious beliefs, Guled said.

Bellow Kerrow, a former member of parliament and a Kenyan national of Somali descent, said it is high demand, not money from piracy, that is behind the rise in property values. But Pius Khaoya, a real estate agent, said factors outside the economy are influencing property prices.

''The prices have gone through the roof and it does not tally with the performance of the country's economy,'' said Khaoya, who works for Crystal Real Estate.

Khaoya said under normal circumstances in Kenya, it would take 10 years for property values to double, but that real estate prices have tripled in the last five years.

A real estate agent who spoke only on condition he wasn't identified so as not to draw the wrath of Somali customers said some Somali businessmen pay double a property's worth just to easily and quickly complete the sale.

Such a market puts home ownership out of reach for some Kenyans. Frank Mbata said he left college 15 years ago with a plan to climb the corporate ladder and buy his dream home in Karen, a leafy up-market Nairobi suburb.

But because of a huge rise in property prices, a four-bedroom home in Karen that would have sold for $200,000 five years ago sells for $500,000 today.

''This is something I was aspiring for, but today it is not possible unless something drastically changes,'' Mbata said.