The Wales scrum-half is currently plying his trade in England with Sale Sharks but could well return home when his contract expires this summer.
Peel's former employers the Scarlets are considered one of the favourites to secure the 28-year-old's signature if he does decide on a Magners League return and Davies admits that the region would welcome him back with open arms.
"The move to Sale probably has been a difficult one for him," Davies told BBC Sport.
"It hasn't been an easy transition for him although I'm sure he has enjoyed it as it is a different environment and he has experienced playing rugby outside of Wales.
"But he will be keen to get back and I think Warren Gatland has made a clear statement about his Welsh squad being based in Wales and the luxury that gives him in terms of releasing players."
The Scarlets may be languishing in ninth place in the Magners League table but Davies has blooded plenty of young players whose performances have suggested there is a bright future ahead for the region.
Star fly-half Stephen Jones has recently reiterated his desire to remain a Scarlet for life and Davies says the resigning of his former Lions halfback partner would be a huge boost for the region's aspirations.
"As part of our development, we look to bring in quality year on year," added Davies.
"We took a big hit of clearing out a lot last year and, as part of our rebuilding process, we need top bring in quality players to supplement some of the development going on here.
"We look after Welsh players better here in Wales than they do outside of Wales so that will probably be an attractive proposal for Dwayne."
Peel himself has spoken of the possibility of a high-profile return to the Magners League, although he stopped short of saying a decision on his future has already been made.
Capped 72 times by his country, Peel has enjoyed life in Sale but he admits that a return home is a distinct possibility.
"There's a lot of interest from people back home seeing whether I want to go home," explained Peel.
"Both myself and my girlfriend have settled well in the north of England. People have been really welcoming. That's where I am at the moment.
"Obviously I have an option to leave Sale at the end of the year but I'm happy here at the moment. I really haven't made a decision yet."
Guinness PRO12
Suite 208, Alexandra House,
The Sweepstakes
Ballsbridge, Dublin 4, Ireland