ADIA launches new funds
The Abu Dhabi Investment Company (ADIC), an investment arm of the world’s largest sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), recently announced it is opening up four new funds that will operate in the Middle East and North Africa region. The move comes on the heels of a recent lull in investment activity that was spurred by the ongoing global economic downturn. The company is also rebranding itself through the adoption of a new name, Invest AD. Apart from having the world’s largest wealth fund behind it, Invest AD’s investments will focus on the region as opposed to investing in western financial institutions where the fund’s mother ship suffered huge losses after buying up large chunks of Citigroup, Blackstone and Merrill Lynch. The announcement also comes at a time when most private equity firms are still in a ‘wait-and-see’ mode, despite the market offering interesting valuations across the board.
Mideast airlines expand
The global airline industry looks set to continue its downward spiral for the remainder of the year. Last month the International Air Transport Association (IATA) announced that the global airline industry is likely to lose $9 billion this year, a sizable chunk of which is made up by Middle Eastern airlines. According to IATA, the Middle East’s carriers are set to lose $1.5 billion over the course of the year, up from a previous estimate of $900 million in loses made in March. Despite the bad news, the region’s carriers seem unfazed in their expansion plans, ostensibly betting that the industry will pick up sooner in the region than in other global markets. The Dubai-based Emirates Airlines plans to add 18 new aircraft to its fleet in 2009 and increase its number of flights by 14 percent. The airline has said that it is committed to standing by its order of 160 Boeing and Airbus planes, valued at $62 billion, to be delivered right through to 2018.
“We got sufficient cash and we made profits for the last 24 years,” said Emirates Airlines president Tim Clark to the Associated Press last month. “We can afford to take a hit because we haven’t squandered that money and we have a cash mountain that allows us to tough it through.”
Not to be outdone by its local competitor, Etihad Airways, the other large Emirates-based airline, announced it would spend up to $14 billion on engines and maintenance contracts to complement the 100 aircraft it ordered in 2008. The region’s other big sluggers also got in on the game with Qatar Airways announcing that it would acquire 24 Airbus A320s worth $1.9 billion, while the Bahrain-based Gulf Air signed a $1.5 billion deal with Rolls-Royce PLC to supply engines to the airline’s new Airbus A330 long-haul aircraft.
Abu Dhabi, Riyadh property development
The Abu Dhabi-based private equity firm Gulf Capital will work with New York-based Related Companies, the largest mixed-use developer in the US, to build mixed-use development projects in both Abu Dhabi and Riyadh, valued between $817 million and $1.36 billion each. The venture will be called Gulf Related and headquartered in Abu Dhabi. The deal is set to capitalize on the lack of housing in both cities and low land prices prevalent in the two capitals.
“Our entry into the regional real estate market is a timely one given the considerable drop in both land prices and construction costs, as well as the surging demand in select areas of the GCC,” Karim el-Solh, chief executive officer of Gulf Capital, told Zawya Dow Jones.
Half of the venture’s capital is expected to be capitalized through investors, while the other half will be leveraged by bank loans. The initial capitalization of Gulf Related is expected to reach almost $50 million and increase to $273 million by 2012. Solh hopes that the first project will be announced in mid-2010, according to Zawya Dow Jones. The mixed-use development project will offer both luxury villas as well as high-rise buildings.
GCC bank consolidation
A wave of consolidations in the Gulf Cooperation Council banking industry is expected soon, according to a June report by consulting firm AT Kearney. The firm believes that the fragmented nature of the GCC banking sector provides the perfect platform for mergers and acquisitions among the region’s banks.
“We see great potential for regional banks to consolidate and grow regionally,” said Alexander von Pock, a senior manager at AT Kearney Middle East, in a statement. “While the region has witnessed very few banking mergers and acquisitions over the past years, there will be more activity in the future. GCC banks are still small compared to the big international banks and eventually will need to grow externally to compete. Banks need to proceed carefully, though, as most mergers fail to meet their objectives due to poor planning or execution.”
The United Arab Emirates, in particular, is over-banked and consolidation could prove healthy for the economy. Market capitalization of banks in the UAE has reportedly declined by almost 60 percent recently.
Raj Madha, director of equity research at EFG-Hermes in Dubai, is not a fan of consolidation in the banking sector. “I am not a believer that current issues can be resolved by mergers, although a limited number of cross-border mergers may be appropriate,” he said.
“This is not the kind of market to be combining banks. The suspicion would be that any bank willing to be bought would have a loan portfolio not worth buying.”
UAE banking sector health
The United Arab Emirates government is continuing to try and dampen both the economic and psychological impacts of the financial crisis. In mid-June, the UAE Ministerial Committee released a statement on the current status of the Emirates’ banking sector.
“The UAE banking sector is stable and firmly on the growth path. The liquidity status of the UAE’s national banks is excellent,” it stated.
UAE banks were hit hard when the crisis first arrived in the Gulf. UAE banks were highly overleveraged and as the economy faltered, tightened lending conditions, causing the government to try to boost liquidity and credit facilities in the country. Now, data from the UAE Central Bank (UAECB) suggests that the gap between national banks’ loan-to-deposit ratios has improved. The loan to deposit ratio has declined by almost one third since the beginning of 2009, a huge improvement from the end of last year. In 2008, UAE banks lent $30 billion more than their deposit base, well exceeding the lending ceiling set by the UAECB, according to Standard Chartered bank research.
“We are following a clear path that encourages and supports national banks to move forward with confidence,” said Obaid Humaid al-Tayer, minister of state for financial affairs. “We have also observed that the liquidity status of the UAE’s national banks is excellent.”
Other measures are being taken by the Emirates as well. Younis Al Khoori, the UAE Ministry of Finance’s director general, said in mid-June the UAE will sell federal bonds to help fund budgetary spending on infrastructure and seek, for the first time, a sovereign rating.
“The government is moving to a long term budgeting process and whatever we need will be done through a bond issuance,” Khoori told Zawya Dow Jones in an interview. “The federal government mandated the Ministry of Finance to start issuing a bond for a few purposes.”
Qatar banking status
In June, ratings agency Fitch Ratings issued a special report attributing the health of Qatar’s banking sector to continuous government support. At the end of March, the government purchased $1.8 billion worth of local banks’ investment portfolios, in order to revive lending, boost liquidity and support the economy. In early June, the government announced plans to spend an additional $4.1 billion to buy domestic real estate portfolios of banks, due to the swelling risks associated with the property sector.
Even with the government assistance, the near future looks challenging for Qatar’s banks. Fitch notes that profitability amongst local banks will be challenged by sluggish loan growth. Also, profitability will be tested by “funding constraints and increasing impairment charges.”
Robert Thursfield, a director in the financial institutions group at Fitch Ratings, said that “asset quality remains the biggest issue facing Qatari banks in 2009. Fitch expects loan defaults to rise given the rapid growth in lending during the boom.”
Fortunately, quashing most of these risks is the support the government is willing, and capable, of giving. The bailouts were welcomed with arms wide open by all banks in the country, of which the government has part ownership. In such uncertain times, these vigorous measures have boosted confidence while also improving Qatari banks’ risk profiles.
Real miscommunication
On June 13, Kingdom Holding Company announced that Emaar properties, the Gulf’s largest real estate company, would handle the development of its $26 billion Kingdom City project, including construction of the world’s tallest tower. The next day Emaar’s stock jumped more than 7 percent. But the increase was short lived — Emaar denied the deal two days later, saying it will only provide management services for the project for a fee. Consequently, the stock price of Emaar fell 5 percent a day later, and Kingdom Holdings’ stock also fell 2.7 percent. Since the rumor had a significant effect on the stock market, United Arab Emirates bourse regulator asked Emaar to give a detailed clarification about the deal, including its nature, value and possible impact on the company’s earnings.
“As the project is currently at the feasibility and master plan review stage, the level of income currently cannot be envisaged,” was the company’s written response to the regulator. Emaar added that it was too soon for Kingdom Holding to announce such a deal since many agreements were not finalized yet.
“In view of all the required agreements not having been finalised as yet, no announcement was made by Emaar in respect of this agreement. However, Kingdom Holding Company announced the transaction on [June 13] without informing Emaar,” the company’s response read.
Kingdom Holding, owned by Saudi billionaire Prince Alwaleed bin Talal, replied by saying that Emaar is not investing in the Jeddah project, and that the agreement between the two included only management services.
Property predictions
Several recent reports in Dubai have offered estimates on how low property prices in the Emirate might sink. Dubai property prices have fallen as much as 50 percent since their peak in August 2008, and 30 percent in Abu Dhabi. Some predict that prices will continue falling for the next one to two years; others say that the market will bottom out by the end of 2009, and a few have optimistic expectations that the market will actually be in the first stages of recovery by year’s end.
For example, the global financial firm UBS predicts real estate prices will fall another 40 percent by the end of 2010. EFG-Hermes said that the second half of 2009 will see 70,000 fewer new units coming online than last year, and the cumulative decrease in prices would reach 15 to 20 percent by 2011. Aldar’s CEO, one of the biggest real estate companies in Abu Dhabi, did not predict how much prices will decrease, but said that the market will stay depressed for at least the next 12 months.
Other analysts see the market nearing the bottom. Deutsche Bank expects prices to decrease 10 to 20 percent in 2009 and the market to bottom out by the end of the year, as expatriates are still exiting the Emirate and new supply is still entering the market. Georges Makhoul, head of Morgan Stanley’s Middle Eastern and North African operations has the same opinion on prices, but a different analysis. He says market prices will hit bottom and start too rebound by the end of 2009 as international investors start buying distressed assets in the market.
“Once you see distressed funds coming to the market and picking up whole portfolios from developers and banks, then you know we are on the mend,” he told The National. “That is the way bubbles clear themselves. I am waiting to see that.”
Ali Khan, managing director of Arqaam Capital, was perhaps the most optimistic of all. He predicted real estate prices will show some recovery in the fourth quarter of this year, and that prices will be higher than they are today.
UAE lending
Dubai Islamic Bank , the largest Islamic bank in the UAE, announced that it is offering 90 percent financing for properties across the Emirates, both for UAE nationals and expatriates. In another sign of lending returning to the UAE market, HSBC Middle East also announced in April that it is offering 75 percent financing on completed villas, 70 percent financing on completed apartments, and 50 percent on off-plan properties. Moreover, Fahd Reaz, senior product manager in personal and home finance at Noor Islamic Bank, said that mortgage activity in Dubai has improved compared to the beginning of the year.
“[Mortgage lending] is almost 40 to 50 percent higher” he told Arabian Business.
