Comment

Gold’s glorious 2010

by Paul Cochrane
written by Paul Cochrane

 

It’s been a glittering year for gold globally, with a Troy ounce (37.1 grams) rising $300 to a record $1,424.60 in November, before backing down slightly into the high $1,300s as Executive went to print. And it’s been just as bright a year for the precious metal in the Middle East. The Saudi Arabian Monetary Agency (SAMA) re-checked its accounts to find it had 180 tons more than it originally thought, Lebanon’s central bank reserves appreciated by more than $2 billion to close on $13 billion, and gold bugs in the United Arab Emirates were given the novel option to buy 24 karat bars from vending machines.

For individuals and governments alike, gold has been the go-to “alternative monetary asset,” as World Bank President Robert Zoellick put it in November.

Bullion took on a new allure as the United States dollar and the euro continued to weaken amid ongoing concerns about the financial markets, and central banks sought to hedge against inflationary pressure. Driving demand even higher was the inability of institutions and currency hawks to buy Chinese renminbi, as its exchange is restricted, leaving few options to hedge against further drops in the world’s two leading currencies. Gold’s surge has raised debate about whether the precious metal should have a monetary role four decades after the US ended the gold standard. A return to the gold standard is not likely, or indeed necessarily wanted, but any country that sold off a good chunk of its gold, like Britain did a decade ago, is today regretting not having hard assets tucked away in the vaults.

For dollar-pegged currencies, which includes Lebanon and most of the Gulf Cooperation Council (GCC) countries, holding sizeable gold reserves has been a real boon. Five Middle Eastern and North African (MENA) states are in the top 30 countries in the World Gold Council’s (WGC) World Official Gold Holdings rankings. But it is not the usual suspects of the oil-rich Gulf states taking the titles: Lebanon ranked 18th globally — just behind Britain and ahead of Spain — with 286.8 tons, equivalent to 25.2 percent of the central bank’s total reserves. Algeria, ranked 23rd, has 173.6 tons, Libya is right behind with 143.8 tons, and Turkey is in 29th place with 116.1 tons,

Out of the GCC nations, only Saudi Arabia makes it into the top ranking, leaping from 24th to 16th place in March when SAMA announced that, incredibly, due to “a difference in accounting” rather than new gold purchases, the kingdom had 322.9 tons instead of the earlier announced 143 tons. One can only wonder how much unaccounted-for gold there may be still hidden under the tiled floors of the Saudi central bank when such a staggering discrepancy is revealed. Furthermore, such holdings are only the reserves of SAMA, not the private stash of the estimated 7,000 members of the Saudi royal family, nor of Saudi citizens. Then there is the vast amount of gold ore lying under the kingdom’s sands, estimated at 20 million tons, according to Australian government statistics. The Saudi Arabian Mining Company (Ma’aden) has five operating gold mines, with proven gold ore deposits of 1.3 million ounces and current exploration suggests deposits of more than 8 million ounces elsewhere on its acreage. This year British and Australian gold mining companies obtained exploration licenses.

With gold production having peaked in 2011 at 2,645 tons, and the output of the four traditional producers — South Africa, the United States, Canada and Australia — on a downward curve, Saudi Arabia, in addition to its gushing black gold, appears to be experiencing a gold rush of the more traditional type.

The big question now is whether gold will continue to rally in 2011. Gold bugs are dreaming of an ounce hitting $2,000, while other pundits suggest the rally may be over and it is better to buy silver.

MENA central banks holding gold appear to have no desire to sell. As Riad Salameh, the governor of Lebanon’s central bank, told Reuters in October: “Lebanon will sit on its gold… In a world where you could see major crises, the payment instrument of last resort is gold — especially for a country like Lebanon that doesn’t have natural resources.” The same could be applied to individuals. Personally, as a gold bug myself, I’m hoping for another glittering year in 2011.

PAUL COCHRANE is the Middle East

correspondent for International News Services

0 comments
0 FacebookTwitterPinterestEmail
Real Estate

Towering profits

by Rayya Salem
written by Rayya Salem

 

A remarkable 2010 witnessed the wholesale destruction of records in the real estate sector. Soaring tower heights were matched by booming construction activity, high-profile conventions, more sales than ever (and of higher values) and the launching of unprecedented mega-developments. With foreign investment steadily increasing and excess liquidity at local banks, the property sector enjoyed a healthy stock of both cash and confidence.        

Lending for new homeowners has never been more varied, as banks competed this year to offer housing loans across the market with rates tailored to various requirements. Some lending facilities allow residents to borrow 80 percent of a home’s value and have raised the maximum value of loans in parallel with the climbing real estate prices seen across the country, though especially in central Beirut.

As the supply of free plots runs thin and the cost of land climbs ever higher, experts agree that prices, though they have stabilized, will remain at levels too high for most local Lebanese. Bilal Alayli, president of the Order of Engineers and Architects, said there were around 100 plots left in Beirut, covering some 400,000 square meters. He added that owners are holding on to their land, hoping prices will continue to soar.

The ubiquitous cacophony of construction that has been Beirut’s soundtrack all year is scored in the statistics: figures from the Order of Engineers and Architects of Beirut and Tripoli show that construction permits, one of the major indicators of real estate activity, covered an area of 14.4 million square meters in the first ten months of 2010, compared to 10.19 million square meters in the same period last year, a 41.4 percent increase. Cement deliveries reached 3.8 million tons in the first nine months of 2010, an increase of 5.3 percent from 3.7 million tons in the same period last year, according to the Banque du Liban (BDL), Lebanon’s central bank.

Total revenue from property sales in Lebanon reached a record-breaking $6.96 billion in the first nine months of this year, an increase of 60.6 percent compared to the same period last year, according to the General Directorate of Land Registry and Cadastre (GDLRC). The number of total transactions increased by 25.3 percent to 69,501, also the highest recorded in that category. The average value of all the property sales in the nine-month period increased 28.2 percent compared to the same period in 2009.

According to the Ministry of Finance, property registration fees in 2009 made up 1.2 percent of gross domestic product, which translates into $417 million. In the first quarter of 2010 alone, registration fees jumped 87 percent year-on-year, reaching $128 million.

Investment

According to the Investment Development Authority of Lebanon (IDAL), 70 percent of total foreign direct investment in 2009 was funneled into the property sector, which translates into more than $3.3 billion. Hawlo Tleiss, executive vice president of IDAL, conceded that while some foreigners may be put off by Lebanon’s shaky national security situation, the group pointed potential investors toward the low crime and robbery rates in Beirut compared to other major cities.

A World Bank report also suggested that a growing proportion of remittances, estimated to reach up to $8.2 billion by the end of this year, are being used to buy land and housing.

Those in the sector say that the administrative red tape involved in property development — a major drawback for investors — has been more burdensome than usual in 2010, which was borne out in the “Doing Business 2011” report issued by the World Bank/International Finance Corporation in November. Lebanon was ranked 142nd globally out of 183 countries and in 16th place in the Middle East and North Africa (MENA) region for ease of obtaining construction permits. It also ranked 111th place globally and 16th regionally for time it takes to register a property.

Lending

This year, banks were more willing than ever to offer tempting mortgage deals to homebuyers, thanks to the excess liquidity on their books, courtesy of the influx of funds that flowed into Lebanon’s banking sector after the financial crisis.

Nassib Ghobril, chief economist at Byblos Bank, told the Development and Real Estate Annual Meeting (DREAM) conference in November that mortgages increased in value by nearly 50 percent in the year ending June 2010. As of that same month, mortgages accounted for 13 percent of Lebanese banks’ private sector lending, according to Executive calculations based on BDL data.

Despite easier access to credit, one of the major topics this year in real estate was the fact that most locally employed Lebanese have been priced out of the Beirut property market due to the growing disparity between prices and income. Few Lebanese can afford a home in Beirut when first floor prices in new buildings start at $6,000 per square meter. However, despite the financial crisis, wealthy Lebanese expats and Arabs living in the Gulf continued to spend on Lebanese property, sustaining the high prices.

Downsized demand

While the real estate sector in general has experienced sustained growth and momentum, the stagnation in the upper end of the market that started in 2009 extended throughout this year. Sales of ultra-luxury apartments slowed, and sky-high prices began to — if not come down to earth — at least plateau.

“It’s probably healthy that it did [slow down],” said Karim Makarem, director of Ramco real estate advisory firm. “We were seeing 25 percent growth in prices per year for five years, which is unsustainable.”

Faris Smadi, chief executive officer of SV Properties & Construction, agrees: “After the surge of real estate prices in the last three years, we did reach something of a plateau this year, mainly due to the fact that developers put prices that weren’t achieved.”

The let-up in the market seems to be focused on prices of large apartments, which have been stagnant for the last year and a half, with some prices even falling as sales slowed. According to Joe Kanaan, president of brokerage firm Sodeco Gestion, “there is a shortage of what is really in demand — small apartments.”

Faris Smadi of SV Properties and Construction, the firm behind 3Beirut

Demand has clearly shifted toward 80 to 200 square meter apartments, especially on the outskirts of downtown. High-end areas such as Sursock, where developers usually build larger apartments, are also experiencing the shift.

“The mentality has changed,” said Smadi of SV properties. “Before, the traditional buyer in downtown wanted a large apartment, particularly with large traditional living rooms, and the sea view was more important to him. Now, buyers are happy to have smaller apartments in the right location with the right infrastructure and amenities. We took that into account in our new project [3 Beirut] where approximately 50 percent of the apartments are between 200-240 square meters.”

Land going through the roof

Construction prices and the price of labor remained stable in 2010 (as opposed to a slight rise in 2009), but finding reasonably priced land in Beirut was a major headache for many developers. The Beirut Central District (BCD) does have available plots, but is too over-priced to be a feasible option for most. As such, many developers have started construction — even of high-end residences — on the outskirts of Beirut. Houssam Batal, founder and CEO of Premium Projects, said that the “market noise” created by some of these developments is confusing clients, as they are marketed as luxury residences in “prime areas.”

Construction area authorized by building permits (million square meters)

“Developers buy relatively cheap lots [in areas such as Badaro, Zkak El Blat, Tehouita, or Sioufi] and claim that the location is prime, but they are at risk because sophisticated clients will realize that these residences are not worth the higher prices and are resistant to pay for the more expensive units,” he said.

Mohamad Chamseddine of Information International, a Beirut-based research consultancy said: “This year, land prices in villages rose because more people want to build homes there, seeing that Beirut prices and rents are too high. Tens of thousands of Beiruti families have moved to suburbs like Damour, Meshref, Khalde and Aramoun. We even saw [during the 2009 elections] that politicians who want to appease the Beirut voters visit these areas heavily because those families can’t afford to live in Beirut anymore.”

The average price per property on sale in Beirut grew 22 percent year-on-year in the first nine months of 2010, while the figure stood at 28 percent for Lebanon as a whole in the same period, according to Bank Audi. As land became scarce, prices had no place to go except up, although a period of stabilization is expected in the immediate future.

To keep prices from escalating further, Alayli of the Order of Engineers and Architects suggests higher taxation on property sales, noting that the registration tax is a lowly 6 percent. Currently there is also no capital gains tax. Kanaan, of Sodeco Gestion, also suggested axing the old rental law, in gradual phases, to allow old buildings to be demolished, freeing up new lots for new developments.

FDI inflow to the real estate sector + Arab FDI inflow to the real estate sector

Higher price tags are causing property shoppers and potential clients to become savvier, focusing on the construction specifications, negotiating harder and taking longer to seal the deal.

Due to limited space, rising prices, and a more competitive market in general, developers are spending less time analyzing their bottom line to focus on staying ahead of the pack. To entice clients with a prestigious address, Premium Projects spent about two years buying out the old residents and combining properties to put together a 1,800 square meter plot for Sursock Yards in Ashrafieh, an 18-story complex that is already 65 percent sold. Premium Projects’ Batal said, “We are willing to consume time and cost to get these prime locations.”

The “non-professional” scourge

Many developers and brokers have complained that there have been a rising number of non-professionals in the business, attracted by what they perceive as opportunities to get rich quick in Lebanon’s booming real estate market. They say the negative side effects have affected the whole industry.

“Since 2007, we have been seeing more people developing buildings that are really not professionals in the field. If they don’t take into account the urban planning, they are harming the area around them,” said Alayli, adding that there needs to be more regulation of urban development. 

Property forecast

Lebanon’s real estate market is predicted to grow 10 to 15 percent in the next three years, Fuad Fleifel, director general of the Ministry of Economy, said in November at the Beirut International Property Fair.

Apartment permits issued - Beirut, Lebanon

Experts agree that such growth is normal and expected for a country with so much demand, both local and foreign.

“From now until 2013 in Beirut, 90 percent of available land will be built up,” said Alayli, who adds that local demand is rising. “We have around 35,000 marriage contracts and 5,000 divorces per year; thus you can say we need at least 40,000 new apartments.”

Developers predict that even the roughly 350 projects underway in downtown will be fully absorbed, though it may take more time than usual.

Some suggest that as the Lebanese have become relatively more affluent in the past few years, more Lebanese (as opposed to Arab nationals) will be buying than before. Smadi said in earlier projects, such as Beirut Tower, 50 percent of buyers were Gulf clients and expatriates. The more recent Bay Tower is 90 percent Lebanese-occupied and most are local residents, attributing the change to the fact that the latter apartments were smaller.

Cement deliveries (First nine months of each year - in 1,000 </p> </div> </div> <div class=

0 comments
0 FacebookTwitterPinterestEmail
Comment

Turkey’s EU report card

by Peter Grimsditch
written by Peter Grimsditch

 

The 104 pages on Turkey’s European Union progress (or lack thereof) from EU Enlargement Commissioner Stefan Füle represent the kind of school report which children would rather not show their parents. Its examination of the 35 “chapters” Ankara needs to reach agreement on to join the EU was a damning indictment of its failure to meet European standards in almost every area.

The document, published in late October, detailed deficiencies in freedom of speech and religion, minority rights, constitutional reform, questionable behavior by the police and an attitude toward women’s equality that talked the talk but failed to halt the rise in honor killings and forced marriages of girls in their early teens, especially in the east and southeast.

Perhaps conscious of the need to throw in a few sentences that could be shown to mum and dad with a smile, many of the most savage sections conclude with the somewhat bizarre observation that “overall some progress is being made.”

The report’s most positive part concerned the economic environment, which Füle’s team acknowledged had vastly improved. But at a time when Greece, Ireland, Portugal and Spain (and maybe soon Italy) are in deep financial and economic trouble, the report could come to no other conclusion. Despite a proud history that includes Euclid and Archimedes, the Greeks have shown they can’t add up — estimating the size of the budget deficit is one of the country’s bigger growth industries. Dublin’s initial insistence that everything was under control now looks like a Guinness-fuelled Irish joke. The governments of Portugal and Spain are paying more to raise money than at any time since the eurozone was founded.

With an economy looking at 11 percent growth this year and a banking sector immune to the catastrophes suffered by reckless American and European banks these past two years, little wonder the Turks can afford to feel superior. Ankara feels justifiably aggrieved that countries like Romania and Bulgaria (where corruption is a national sport) have been positively dragged into the EU club. The truth, of course, is that the major reason for accelerating their entry was to prevent them from falling back into Moscow’s sphere of influence.

For Turkey, failure to resolve the Cyprus issue is blocking talks on 18 of the 35 EU accession chapters, while France has unilaterally stalled another five. There are rumblings that a hint of movement may be imminent on Cyprus. The European Commission is said to have proposed talks on the energy and justice chapters in exchange for Ankara’s opening one of its ports and airspace to Cypriot shipping and aviation by the first week of December. Turkey’s acceptance of the secret deal is allegedly conditional on allowing international flights into Northern Cyprus, as well as direct trade with the self-declared republic. Officially in Turkey, the proposal doesn’t exist. While implementation of such an agreement could be trumpeted as success, the fallout of a failure could hurt the government’s chances in next June’s elections.

What the leadership is very happy to assert, however, is that keeping Turkey out of the EU is Europe’s loss. “As long as we are not a member of the EU, the EU will not become a global actor,” was Prime Minister Recep Tayyip Erdo?an’s assessment of the EU report. To President Abdullah Gül, speaking to the Chatham House think tank in London, membership was not a matter of domestic Turkish politics. Turkey is taking a strategic view, looking 20, 30, even 50 years ahead, he said. Lower down the political food chain, Egemen Bagis, Turkey’s chief negotiator, claimed grandiosely that the EU needs Turkey more than Turkey needs the EU.

With the exception of comments on press freedom (Gül would like more of it, Erdo?an says it is not limitless and Bagis thinks it already exists), much of the reaction from Ankara to the EU report has been in similar-sounding generalizations. The report itself was packed with specific accusations in many areas, citing examples, although it too occasionally threw in unsupported generalities similar to those trotted out by the Turkish political establishment. Füle concluded that “despite overall progress in 2009, we are concerned that Turkey’s accession process is losing its momentum. The key to changing this is primarily with Turkey.” Ah, that word ‘overall’ again. Despite the sugar coating, mum and dad are unlikely to be fooled.

PETER GRIMSDITCH is Executive’s

Istanbul correspondent

0 comments
0 FacebookTwitterPinterestEmail
Society

The souk of splendor

by Emma Cosgrove
written by Emma Cosgrove

 

Consumption is keeping Lebanon alive. As a major contributor to gross domestic product, the Lebanese penchant for luxury puts the shine on the country’s numbers, financially precarious as it may be for the individual. At the close of 2010, after years of waiting and false starts, the highlife has found a true home in the revived downtown Beirut. Still, the current conditions, which have the potential to carve Beirut a place among the world’s great retail cities, are not assured. 

With Beirut Souks — Solidere’s consumerist dream — at the center of it all, downtown Beirut rivals, at least in names, the great shopping districts of Paris or New York. The 200-outlet complex began its very soft opening in October of 2009 and has now seen its first full year of operation. Persistent delays and mismanagement of initial space allotment, especially in the Gold Souks section, made for a rocky start, but on the whole, retailers have been keen to move into one of the final puzzle pieces of downtown Beirut’s rebirth.

“Of course the companies were thrilled when we proposed to them the mono-brand boutique concept in Lebanon, especially in Beirut Souks, which is the ideal place to be, in the heart of the city,” said Barkev Atamian, business manager for local luxury watch empire Atamian. His company now dominates an entire corner of the Gold Souks with IWC Schaffhausen, Jaeger-LeCoultre and TAG Heuer mono-brands and a multi-brand boutique containing watches from Breguet, Blancpain, Glashütte Original and Ulysse Nardin.

Despite congratulations from many foreign brands happy to have a centralized home of luxury in a desirable market, the Souks still stand as a disappointment to some.

“To be quite honest the souk is not up to our expectations yet, but we think that there is a future for it,” said Izzat Traboulsi, managing director of Hugo Boss for the Middle East.

The Souks ‘value-added’ features such as a cinema complex and many of its promised dining locations and cafes are conspicuously absent. Solidere’s General Manager and Chief Financial Officer Mounir Douaidy told Executive last September that the northern section of the souks, set to contain a 14-screen cinema and a department store, would be completed by the end of 2011 — one year to go.

“It’s still a mess because there are some missing cafes,” said Traboulsi. “The cafes [that do exist] are on the edge of the souks… we don’t have any cafes as a stop in the middle.”

In addition to the lack of patron-enticing entertainment venues among the retail spaces, the mixed price tag of retailers within the complex makes luxury retailers less willing to choose locations in the thick of it. This means that some truly top-end retailers are still looking for a presence outside of the souks on the outlying streets of Foch, Allenby and Park Avenue.

But these streets pose yet another challenge for the retailers who want to keep company with their contemporaries; each building and sometimes each space has a different owner, whose interests and ideas do not necessarily tally with the vision for the area. So, the new challenge with the growing presence of luxury retailers downtown is keeping the area on message.

“If somebody is going to be paid $1,400 per square meter they don’t care if it’s a high end place or a shwarma place,” said Traboulsi.

The cafe culture of Maarad Street is yet to be successfully replicated in Beirut Souks

Although a hefty per-square-meter price tag should keep the falafel stands from downtown for now, a lack of a central unified plan means that at any given moment these top-end retailers could find themselves with a neighbor not of the rarefied company they would usually keep.

Furthermore, rising rent prices in an area with a finite amount of attractively located, ground floor space could jeopardize the future health of Beirut’s luxury center.

“The only issue we are facing now is, since the demand is a little bit big, the prices are tending to go high also. Today [rent] is representing a very big part of the turnover, which is not normal,” said Antoine Eid, chairman and chief executive officer of Joseph Eid & Co. — which owns the Alberta Ferretti, Faconnable and Lanvin Men’s boutiques downtown — to Executive in July.

Eid said that today, rent for a boutique in the Beirut Central District (BCD) represents 7 to 10 percent of revenue. This in itself is a bit too high for comfort and, with rents increasing, Eid is worried.

“We think that this is dangerous because maybe some of the companies will not be able to sustain these rents for a long period of time and it would be a pity to see some of them closing,” he said.

And on top of the geographical and spatial dynamics of downtown, political dynamics, as ever, have their role to play.

Hotel occupancy rates in August dropped from 75 percent in 2009 to 43 percent in 2010. Likewise, rates in September dropped from 62 percent in 2009 to 53 percent in 2010, according to international consulting firm Ernst and Young.

Though Ramadan’s August arrival this year was partly to blame, Traboulsi believes that inflammatory rhetoric from various political leaders and trepidation regarding the uncertainty of reactions to the United Nations’ Special Tribunal for Lebanon (STL) scared away some prime tourist dollars. He estimates that Hugo Boss saw a 10 to 15 percent drop in sales in August and September from last year, when development and tourism trends predicted growth.

It’s not just complicated forces like politics that impact luxury sales; even simple forces like weather can, and have, hindered retail sales this year.

“We got the fall merchandise and we are still having summer. There is no appetite from the clients,” said Traboulsi.

Missing out

The seemingly constant openings and events celebrating fashion in the BCD in 2010 encourage the idea that it is the only place for luxury in Beirut. But this centralization of luxury downtown has taken focus away from other areas of the city and frustrated some established proprietors.

Grace Sehnaoui, brand manager at E and E group which runs TOD’s, Hogan and multi-brand boutique Kamishibai, said when Beirut was beginning to re-establish itself in terms of a luxury retail destination after the civil war, development was haphazard and scattered around the city. With the new centralization of luxury, many of the high-end retailers who appeared early on now find themselves somewhat isolated among the riffraff.

Clever marketing with a gigantic shop-sized travel case ensured Louis Vuitton was one of the more hotly anticipated luxury openings seen in BCD this year

“Outside of [ABC Ashrafieh] it’s quite dead now,” said Traboulsi. “Joseph Eid and Via Spiga had luxury stores [near Sassine], today they don’t function as before because all of the luxury [brands] have moved downtown where it is done in a proper way. Now whenever a premium brand wants to open a shop, the only destination they have is downtown Beirut.”

Sehnaoui’s Kamishibai sits down the block from Joseph Eid near Sassine and is surrounded by a random smattering of salons, cell phone shops and, most frustrating to her, banks.

“When it’s a shopping area it should be a shopping area,” she said. “The banks here have beautiful [locations]. They are huge and on the ground floor because they are the best paying.” 

Luxury brand managers and owners have little hope for the success of any other ground level, open air shopping districts in Beirut, as a coordinated effort to create shopping streets is unlikely. The very fact that there are far more players in the game today than there were five years ago is a testament to Lebanon’s flourishing luxury retail sector.

But the forces threatening sales still dictate success and the concerns of the industry’s leaders suggest that this is no time to sit back and relax. With the resolution of the STL pending, Traboulsi said: “In Lebanon I don’t see any growth [for 2011]; we see it as a stable market for the moment.”

0 comments
0 FacebookTwitterPinterestEmail
Finance

Sounding the alarm

by Emma Cosgrove
written by Emma Cosgrove

 

Common sense is the currency of rational minds — in this respect Dubai may be short on change. On November 25, Dubai World, the wholly owned subsidiary of the Dubai government, announced that it would request a 6-month standstill on all payments and debt servicing of some $11 billion due to creditors in December — effectively giving notice that the further $49 billion the company has outstanding may also be beyond its means.

The announcement came after the markets closed for the four-day Eid al Adha holiday, during which time the company maintained complete silence while the news shook the financial world, prompting panicked investors to line up at the doors of Gulf markets to dump exposed portfolios when bourses reopened on November 30. As they waited in the Gulf, financial markets from London to Beijing shed share value in fear of their own exposure.

Dubai and Abu Dhabi markets dropped instantly at the opening bell, followed closely by other regional markets. The next day, Dubai World released a statement confirming it was in talks with United Arab Emirates banks to restructure $26 billion in debt. The company said restructuring could consist of “deleveraging options,” “asset sales,” and “formulation of restructuring proposals.”

“We would expect a decision to come out of [the discussions]  on what assets underlay the liabilities, and what the plan is for liquidizing those assets so that bondholders get some partial repayments,” said Raj Madha, director of equity research at EFG-Hermes.

Dubai has hedged its future on booming demand to fill some of the biggest malls in the world

As executives and Dubai authorities prioritize Dubai World’s obligations behind locked doors, the rest of the financial world can do nothing but wait and watch the markets.

The markets react

By the middle of November 2009, the financial world seemed optimistic — and with some justification. The Morgan Stanley Capital International (MSCI) index had recovered 48.9 percent of losses incurred during the downturn, while the MSCI Emerging Markets index had fared even better, recovering 58.13 percent. The MSCI Arabian Markets index — Gulf Cooperation Council, Egypt, Jordan, Morocco, Tunisia and Lebanon — also followed suit, albeit with a little less vigor, recovering 30.89 percent of their losses.

After the announcement that Dubai World could effectively not pay its debt on time, that recovery quickly went into regression. In just two days of trading the Dubai Financial Market (DFM) dropped 12.5 percent and the Abu Dhabi Stock Exchange fell by 11.6 percent. Dubai’s indices for real estate, as well as investment and finance, saw some of the worse losses, down 18.1 percent and 15.5 percent respectively.

Question marks hang over the prospects of Dubai </p> </div> </div> <div class=

0 comments
0 FacebookTwitterPinterestEmail
Finance

The vocabulary of the recovery – Recurring profitability

by Emma Cosgrove
written by Emma Cosgrove

Recurring profitability

The repeated act of earning more than is spent.

“Banks have been hit by loan losses as well as investment losses due to the financial crisis. Recovering from the crisis effectively means returning to stable profitability,” said Moody analyst John Tofarides when asked what indicators are the most important to watch.

GCC Banking universe 2010 profit growth by region

Profitability is perhaps the most obvious indicator, but can also be the most misleading. Banks in the UAE, for example, saw a healthier first quarter of 2010 than second quarter, due mainly to an edict from the Central Bank to stop provisions for the first quarter. When a let up of bad loans did not materialize, they then had go into provisioning overdrive, which is why most saw smaller profits growth in the second quarter of 2010 than the first. Aggregate profits of the entire GCC banking sector declined 5 percent year-on-year at the end of June, and more tellingly, 10 percent quarter-on-quarter, according to Global Investment House, reversing the upward blip if the first three months of 2010.

UAE banks struggled the most in the second quarter and saw profitability shrink a dramatic 42 percent quarter-on-quarter. Omani banks, which saw profit drop 4 percent, were the other losers for the quarter. Banks in Saudi Arabia, Kuwait and Qatar averaged positive profit growths of 1 percent, 6 percent and 7 percent respectively, relative to the first quarter. Saudi Arabia and the UAE, however, were the only two countries with negative profits growth year-on-year.

Standard and Poor’s (S&P) predicts that profitability will be the last indicator to stabilize and return to a steady upward trajectory.

 So, recurring profitability is the sign that the financial fever has broken, the virus killed, and the GCC patient is back on the road to recovery.

Loan growth  

The percentage by which the total value of a bank’s loans changes over a certain period of time.

Healthy lending is the only way for banks to return to normal profitability. They can and are increasing their non-interest income through upping fees and offering more paid services, but if they are to fully recover, lending must resume.

Lending Growth, H1 2010 - GCC countries

But finding viable lending opportunities is challenging when personal as well as corporate finances are under such stress. Lending growth therefore can show not only the health of a bank, but also the health of the financial environment in which it operates. But the vacuum of viable lending is not the only hurdle. In crisis, banks become exceedingly cautious and reluctant to lend.

Steady lending growth will show not only an encouraging financial trend, but a behavioral shift as well, said Peter Baltussen, CEO of Dubai Commercial Bank. “Incremental loan growth will indicate whether banks are indeed willing to reverse their risk-averse approach of the previous years and start a positive credit cycle again, which will have a direct positive impact on the economy,” he said. 

In the first quarter of 2010, lending growth was varied throughout the region with most of the bad news coming from Saudi Arabia, the United Arab Emirates and Kuwait. However, though trends exist, lending practices vary more from bank-to-bank than from country-to-country. So this is an area where banks must be scrutinized individually rather than aggregated from each country (see chart). Though most of the region’s largest banks posted positive lending growth for the first half of 2010, many growth rates were quite low, leading regional experts to be very pessimistic in the their estimates of when lending will return to normal.

Sophia el-Boury, a UAE bank analyst at Shuaa Capital, said: “We’re not very optimistic in terms of lending growth. From now until the end of the year, banks will still be prudent and cautious to lend; the current operating environment is still changing.”

Bad loans

Loans that are not bringing income to the lending institution.

“Bad and doubtful debts and provisions reflect the credit worthiness of a bank’s customers and, sometimes, a region’s overall economy,” said Chief Executive Officer at United Arab Bank Paul Trowbridge of the GCC financial press’s new favorite phrase. “While reasons for potential non-payments can include disputes over supply, delivery or conditions of goods, they in general provide a clear indication on the appearance of financial stress within customer operations.”

According to S&P, non-performing loans have been steadily climbing since 2008, increasing across the GCC from 2.7 percent at the end of that year to 5.4 percent by the end of September 2009. S&P predicted in its February Banking Industry Report Card that NPLs would peak by mid 2010.

Qatar and Saudi Arabia have seen the lowest NPL ratios of all GCC countries. Qatar’s success in avoiding bad debt is no doubt due to the government’s swift action at the onset of the financial crisis, with the government buying up loans to the real estate sector from its banks and injecting capital into the system in October 2008. Kuwait is showing the most NPL struggles due to its banks’ predilection for local investment firms and real estate, which quickly became delinquent upon the onset of the crisis.

 

“Starting the second half of 2010 and assuming the economic recovery proceeds according to our expectations, we believe that asset quality for Gulf banks will likely bottom out before slowly improving,” stated the S&P report. NPLs are an important indicator not only because they demonstrate the general economic health of borrowers, but also because they forecast the continuing fortification against them, which is a major drag on profits.

Provisioning

The setting aside of funds to allow for existing or expected bad loans.

“The level of provisions has been the single biggest swing factor for regional banks in recent years,” said Dubai Commercial Bank’s Baltussen. Provisions in the GCC as a whole jumped nearly 5 percent year-on-year in the second quarter of 2010. Amid buzzing news of recovery at the beginning of the year, provisioning slowed across the board with the UAE Central Bank actually instructing its institutions to stop provisioning for their biggest threat, Dubai World.

Provisioning, H1 2010 - GCC countries

The instructions seem to have been quickly disregarded, however, as there was a 48 percent quarter-on-quarter increase in provisioning in the GCC in the three months to July 1, with nearly half of the quarter’s provisions taken by UAE banks. Saudi banks came in second regarding provisions, representing 23 percent of the quarter’s total.

Aggregate figures show provisioning by GCC banks peaked in the fourth quarter of 2008 when it became clear that the GCC would not be shielded from the crisis, and again in the fourth quarter of 2009, when the scandal and defaults of Saad Group and Algosaibi & Brothers had come into full effect and Dubai World had faltered. The second quarter of 2010 has seen the third most provisioning of any quarter since the crisis began, reaching nearly $2 billion.

A slowdown in provisioning will be perhaps the first sign of recovery for each country’s banking sector; an event that may be already occurring in Oman, as provisions there have returned to normal levels this quarter, according to Global Investment House.

0 comments
0 FacebookTwitterPinterestEmail
Society

Abu Dhabi Grand Prix comes of age

by Nadim Mehanna
written by Nadim Mehanna

The final round of the 2010 Formula 1 Grand Prix Championship, held at Abu Dhabi’s Yas Marina Circuit, could have been pulled from the back pages of an airport novel: high stakes; skilled opponents; victory snatched from a scandal-scarred incumbent by a gifted young champion, all set against a backdrop that could have been plucked from the imagination of a science fiction writer.

Sebastian Vettel’s flawless race and ultimate victory over Fernando Alonso, after overcoming the Spaniard’s 15-point lead, established Vettel as the youngest champion in F1 history and catapulted the Red Bull team into the limelight. At the same time, as Vettel completed his victory lap and Yas Island’s 100,000 guests let loose during the last of seven nights of festivities, it was clear that their host, Abu Dhabi, had enjoyed a triumph of its own.
The Emirate debuted its state-of-the-art racing facilities last year, when it hosted the final F1 race of 2009. Yet in terms of organization, planning and new infrastructure, the country’s facilities only reached maturity in 2010. Yas Island, and the Grand Prix in particular, are the most visible of a number of new touristic and cultural endeavors aimed at diversifying the country’s oil-based economy.

As Abu Dhabi’s leader Sheikh Khalifa pointed out in the early days of the “tournament,” sports are an integral part of the United Arab Emirates’ plan to strengthen its position on the regional and global stage, along with tourism and trade. At the same time, the capital is moving toward cultural development, as can be seen in the rapid pace of construction at the sites of the local branches of the Guggenheim, Louvre, Sorbonne University and the Abu Dhabi National Museum.

Prominent progress

For the guests who attended 2010’s Grand Prix, that progress was in evidence at all times during the festive week that led up to the race. High-end restaurants and hotels, concerts and clubs — among them, an outlet of the Beirut-based Skybar — were packed night and day.

Many of the most striking features of Yas Island were little more than foundations two years ago, yet an aerial view of the island today shows a glittering city of hotels, clubs and boulevards, bounded by the world’s most advanced F1 racetrack and hemmed at the edges by fleets of luxury yachts. During the week of the Grand Prix guests enjoyed top-end accommodation, round-the-clock service and a tight, though not restrictive, security network.   

The most significant of the island’s venues to be unveiled this year was undoubtedly Ferrari World, a massive 5.5 kilometer theme park rising at the edge of the island’s skyline. From the building’s architecture — modeled on the classic double curve body shell of a Ferrari GT — to the futuristic attractions housed within it, the park added a new dimension to an environment already pushed to architectural extremes. The world’s fastest roller-coaster, the heart-stopping G-Force elevator and a virtual tour through a giant four-dimensional model of the Ferrari V12 engine, were only a few of the attractions Ferrari rolled out for the auto aficionados who attended their park in the lead-up to the race.

If the Emirate was hoping for a high-intensity finale to crown the week — in addition to their achievements in boosting tourism — they were not disappointed.
 


NADIM MEHANNA is an automotive engineer and the pioneer of motoring on Middle Eastern television since 1992.

0 comments
0 FacebookTwitterPinterestEmail
Society

Drawn to the desert

by Zainab Mansoor
written by Zainab Mansoor

The United Arab Emirates hascoveted for itself an image of unrivaled opulence, with few rivals on PlanetEarth. Dubai put a massive exclamation mark on this sentiment at the beginningof 2010 with the spectacular opening ceremony of the Burj Khalifa, which boaststhe world’s highest observation deck, the highest number of stories, highestoccupied floor and the tallest service elevator in the world. Not to be left inthe shadows, Abu Dhabi has also been busy creating its own noise this year,with the capital city inaugurating Ferrari World, the Ferrari-themed amusementpark at Yas Island, home to Formula Rossa, the world’s fastest roller coaster.To add to the excitement, the prestigious Formula One race, the Abu Dhabi GrandPrix, was held at the Yas Marina Circuit, crowning champion Sebastian Vettel.

The latest figures availablefrom the Abu Dhabi Tourism Authority (ADTA) reveal that the emirate’s directtourism industry, which includes sectors directly in contact with visitors,generated AED6 billion ($1.6 billion) in 2008, or 1.1 percent of the economy.Tourism directly generated almost 40,000 jobs in the emirate that same year,accounting for 3.6 percent of the total employment. The total economic impactof tourism in Abu Dhabi, which includes direct, indirect and induced effects,amounted to $4.6 billion in 2008, or 3.2 percent of the economy. When excludingthe oil sector, the relative importance of the total economic impact of tourismrose to 10.7 percent of the emirate’s non-oil GDP.

“Global attractions like theFormula One race, Ferrari World and our events portfolio attributed to growthconsiderably.” said Lawrence Franklin, Strategy and Policy Director of ADTA,adding: “Ferrari World is important for us not just because of its massive sizeor scale but predominantly due to the aspirational quality of the Ferraribrand. It sends out a strong signal about Abu Dhabi’s leisure tourismcredentials.”

Charting the growth

Franklin said that domestictourism in Abu Dhabi showed an 8 percent increase in guest generation in thefirst 10 months of 2010. “We have seen strong domestic growth from the UAE andvibrant growth from the [United Kingdom].”

The UK market retained itstop slot amongst international markets, with 18 percent growth rate realizing94,776 guests. India, the United States and Germany were close behind,according to Franklin.

Some 1.48 million guestsstayed in the emirate’s hotels and apartments in the first 10 months of theyear with total guest nights climbing to some 4.1 million.

“We are well on our way toachieving our 2010 hotel guest target of 1.65 million,” said Franklin. “Giventhe 16 percent increase in hotel guests in the first 10 months, optimisticallywe hope to go beyond that figure. We are targeting 1.9 million hotel guests for2011, which will be an approximately 15 percent increase from what we willachieve in 2010.” In parallel, Dubai Mall, one of the world’s largest shoppingand entertainment destinations, claimed to have entertained 45 million visitorsin 2010. Traffic figures for Dubai International Airport

Dubai’s Candylicious, theworld’s largest candy shop, saw visitor traffic of 1.5 million in 2010, ofwhich approximately 40 percent were foreign and regional tourists. The shopentertains 2,500 to 3,000 walk-in customers on any given week-day, whereas onweekends the visitor numbers can go up to 10,000.

“Dubai is an entertainmentdestination. So many tourists come to this market from the Middle East, Europeand elsewhere. The number of franchise requests that we get [for Candylicious]on a daily basis is illustrative of the massive influx of foreign visitors,”said Sunaina Gill, Director of Operations and Merchandising of Retail is DetailL.L.C. On top of Candylicious, Gill’s company operates eight different conceptstores in Dubai Mall.

She added: “Dubai knows howto entertain people; it has become a place where people come from across theworld to relax, shop and get entertained. From the way it is built, Dubai has along way to go for many years to come.”

Amadeus Gulf, a servicescompany that is a leading technology partner for the regional travel andtourism industry, is also confident of the region’s overall outlook.

“According to the latestUnited Nations World Tourism Organization (UNWTO) report the Middle East hasshown positive results with 16 percent growth for arrivals in the region, thehighest among all the world’s regions,” said Antoine Medawar, vice president ofAmadeus Middle East & North Africa. “Compared to the same period of thepre-crisis peak year of 2008, international tourist arrivals increased over onemillion [more than 3 percent] in the Middle East. International arrivals inDubai grew by 9 percent in the first half of the year, while its internationalairport set a new traffic record in July [4.3 million passengers].”

What is working well?

“Our strategic hub status,increased aviation capacity and future development prospects increase the scopeand potential of the tourism markets open to Abu Dhabi,” said Franklin, notingthat in addition to business tourism generating steady revenue for the country,leisure tourism has grown as well. 

Dubai has also been toutedas a global leisure tourism destination and impressive passenger figuresrevealed by Dubai Airports mirror the city’s growth in 2010.

“This unprecedented growthhas been driven by Dubai’s ideal location — within eight hours of two-thirds ofthe world’s population — an open skies policy that welcomes airlines fromacross the globe, the provision of

top-flight infrastructure atcompetitive rates and the emergence of Emirates Airline as one of the topairlines on the planet,” said Paul Griffiths, chief executive officer of DubaiAirports.

Niche tourism set to soar

Along with general tourismpromotion, many also feel there is an inherent need for focus on the nichesectors within the tourism portfolio such as health, cruise and green tourism.These niche markets, in years to come, will act as major contributing factorsto the overall tourism revenue.Dubai </p> </div> </div> <div class=

0 comments
0 FacebookTwitterPinterestEmail
Finance

Executive Insight – GVCA

by Imad Ghandour
written by Imad Ghandour

 

It is telling that the most exciting event in private equitythis year was the Celebration of Entrepreneurship event in Dubai — also knownas Wamda, the equivalent of the West’s eureka. It brought a much neededfreshness and vigor to a private equity industry that is in search ofexcitement and vision.

The private equity industry landscape has changeddramatically in the past two years as the mood has swung from celebration tohumility. Fundraising and deal-making activity shrunk in 2009 by as much as 85percent and did not recover, as many, including yours truly, hadprophesied. 

The number of funds that are active and investing has alsoshrunk to less than a dozen in the Gulf Cooperation Council from a peak of morethan 50, with many fund managers unwillingly switching from being deal makersto caretakers. Some funds have already closed down shop while others are facingup to the fact that, after their current ventures wrap up, there aren’t any tofollow.

Over the past four years, successful managers raced to raisebigger and bigger funds (as big as $4 billion) and few managers remainedfocused on the smaller opportunities, which constitute the mainstream of thecorporate landscape in the Arab world. Constrained by their current mandate,the remaining mammoth funds are now facing a new challenge: access to qualitydeal flow. These large funds are starving for new investment opportunities thatcan deliver the promised returns and are facing the grim scenarios of eitherreturning some of the cash raised to investors or investing in sub-pardeals.  

Funds raised in the MENA, by size

Going back to Wamda celebrations, the 2,000 delegates thatparticipated in the festive conference represent a renewed and revived core ofthe Gulf’s economic activity. Gone are the days when business in the region meantbetting on inflated real estate prices and skyrocketing stock markets. A muchmore sober mood of industrious entrepreneurship is setting in.

The number of people I know personally that are en-route tostarting their own businesses, despite the recessionary environment, isenormous. They come from all walks of life — from students to executives — andare setting up everywhere from Riyadh, to Jeddah, to Cairo, to Dubai, toBeirut, to Amman.

In the past 20 years working in the region, I have not seensuch a vibrant entrepreneurial environment as I do today. The benefits ofeconomic liberalization are starting to trickle in.

So what does that mean for private equity?

It means that there is a stellar increase in demand forequity funding, which is good news in principle, except that economicliberalization measures have not extended to privatizing large-scale stateenterprises. Instead they have given rise to a wave of grassrootsentrepreneurialism.

In other words, large private equity funds seeking to attract,say, a company like Gulf Air, are going to compete with each other over the fewopportunities of such scale that remain. On the other hand, smaller growthcapital funds focused on funding a company like Bateel — a successful regionalchain of date stores and cafés — will have ample opportunities from which tochoose.

Large funds are rigidly geared to do large deals; due to thehigh profile of the people they hire and the bandwidth of their fund managersit won’t be easy to switch their focus to smaller deals.

IMAD GHANDOUR is chairman of Gulf Venture Capital Assocation

 

0 comments
0 FacebookTwitterPinterestEmail