Since July 2008, stock prices of real estate companies have plunged continuously. This is especially true in the UAE where investors fled the stock market due to bad expectations, the need for liquidity to cover losses in foreign markets, or because they were simply following the crowd. Yazan Abdeen, portfolio manager equities at ING Investment Management thinks “markets are smart in their nature. They have the ability to discount future expectations and the fears of investors.” In this case, investors began to expect the burst of a real estate bubble that would result in a plunge in property prices and lower valuations for real estate companies. “Regardless of the size of the company, I think that the market was taking into consideration some trends of action will take place that will yield in the deleveraging that has happened to these companies,” says Abdeen.
At first, investors started to sell their real estate stocks irrespective of the company’s fundamentals, relying solely on the sector’s outlook and the overall macroeconomic situation. However, since concerns started to emerge about the financial status of these companies due to tighter liquidity and expectations of weaker earnings results, doubts about their fundamentals have grown. “Progressively, it would appear that people began to question the fundamentals and the overall features of some of the [real estate] companies in tighter liquidity conditions,” explains Sana Kapadia, vice president of equity research at EFG-Hermes. “What started as a more technical sell off [seems] to have become a questioning of long-term sustainability,” she adds.
Emaar’s stock price
Emaar properties’ stocks for last half year
Emaar properties, the largest property developer in the region hit its lowest share value of $0.48 on February 3 and as Executive went to print, stood at $0.75 after the Dubai government launched a $20 billion sovereign bond program to ease liquidity conditions. At the same time, other real estate companies in Dubai, like Union Properties and Deyaar, stood at $0.23 and $0.15, respectively. Even though these companies have witnessed a small increase in their stock prices, likely due to the $20 billion bond program, it is still too soon to tell if this indicates a trend toward market recovery
Since the beginning of the crisis, Emaar stocks have been the most affected in the sector as they have lost more than 80 percent of their value in 2008 and around 37 percent in the last three months. Thomas Schellen, publishing editor at Zawya Dow Jones, explains that even though Emaar’s stock price has suffered the greatest loss, that does not necessarily indicate that it has worse market fundamentals than other companies in the UAE or the region. In Schellen’s view, Dubai was the worst hit by the crisis because the relative importance of its the real estate sector in the economy is higher than in other GCC countries. Consequently, Emaar, being the biggest company on Dubai’s financial market and with a high trading activity, was affected the most. Kapadia also believes that the impact on Dubai’s stock market is more significant since “a distinction continues to be made between Dubai and Abu Dhabi, with more risk being perceived in Dubai companies in the property market… the property market crash [is] expected to be much worse in Dubai than Abu Dhabi.”
Emaar’s financial situation
On February 12, Emaar released the long awaited 2008 fourth quarter report announcing a 54 percent decrease in net profit, mainly blamed on the $480 million write-down in its US subsidiary John Laing Homes, which weighed down the company’s net profit. Emaar recorded a net operating profit of $1.519 billion in 2008, 15 percent lower than its net profit of $1.79 billion in 2007. It also announced that its revenue dropped by 10 percent, from $4.865 billion in 2007 to $4.360 billion in 2008. A week after the report was released, Emaar announced that it will not be paying a dividend in 2008.
Additionally, it seems that liquidity problems at Emaar are starting to emerge since the company revealed in January its plan to secure financing by raising up to $4 billion through Eurobonds and Islamic sukuk. It has announced the establishment of a $2 billion Euro Medium Term Note (EMTN) program and a simultaneous sharia-compliant $2 billion sukuk program, already listed on the London Stock Exchange. These programs are issued “as a part of the company’s global growth strategy,” said Emaar in a statement.
U.A.E. Property prices have fallen 40 percent and are expected to drop 20 percent more in 2009
Emaar’s possible downgrading
In mid-December 2008, Standard and Poor’s (S&P) rating service revised its outlook for the company from stable to negative, while keeping its ‘A-’ long-term corporate credit ratings. “A prolonged downturn could negatively impact our view of Emaar’s business risk, and it could also lead to deterioration of Emaar’s currently healthy financial position,” said S&P’s credit analyst Alf Stenqivist in a recent press release. Even though Emaar’s rating is still high, the fact that S&P’s outlook was downgraded is not a positive sign for the company. Moreover, Moody’s Investor Service said at the beginning of February that it is reviewing six leading Dubai companies, including Emaar, for rating downgrades due to Dubai’s macroeconomic outlook. Moody’s anticipates that the downgrade would be lowered by not more than two notches, still leaving these companies with investment grade ratings. Schellen explains, “the outlook forecast might influence negotiations between the debt issuer and the bond buyers. The bond buyers might demand a higher yield because the outlook is negative, but unless the actual rating changes, it is unlikely that there is going to be any change in the direct interest situation.”
Abdeen explains that the share prices of a company do not affect its operations from a financial perspective. “The movement of the share price is neither loss nor gain for the company. The price does not affect its performance,” but there is very much a link between the company’s performance and its share price. Therefore, any bad news for Emaar or the market in general might affect the company’s share performance.
Property prices
The fact that property prices are still on a downward trend — especially in Dubai — and that projects are being shelved, is not improving the confidence of investors who would rather stay out until the market starts to show some signs of recovery. Analysts at the UAE investment bank Shuaa Capital said in mid-January that property prices have fallen 40 percent so far and are expected to lose an additional 20 percent by the end of 2009. Collier International’s analysts were more optimistic since their fourth quarter House Price Index (HPI) revealed a drop of only eight percent in Dubai between October and December of last year. “If you come to the market here and see what is happening, [Collier’s numbers] are underestimated. I know that some major places in Dubai, like the Burj Dubai area, have gone back to the price of the third quarter of 2007. It seems they have dropped around 45 percent,” says Abdeen.
Forging into the future
Abdeen believes that any company should now have four key factors in mind to withstand the difficulties in 2009. These four elements are “visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand, and if you have them, you will be immune,” he adds.
Kapadia believes “this is the time for companies to have strong corporate governance and corporate communication.” Everyone knows these are difficult times and companies are struggling to deal with changing market dynamics. Therefore, “if a company communicates and discusses how it is dealing with the current market challenges, it would help people believe that management is focused on dealing with the new dynamics,” she explains.
With the current chaos in the UAE real estate market, it seems that Emaar and others have a lot to do to revive investor’s confidence in their company, as well as the market in general. People are starting to suspect that Emaar is currently facing much more trouble than expected and they would rather stay out of the stock, even if it is priced at half a dollar. “I think there is high risk-averseness and a general desire not to spend on any kind of investment right now. Even if the stock may look cheap on P/E [price to earning ratio] basis, the earning is in question, given limited visibility regarding how the current cycle will play out,” explains Kapadia. “It has become challenging for companies to maintain the sustainability of their earnings.”
It certainly seems people are not expecting any improvements in the short run, however, with the fast changing market conditions and the complexity of the market mechanism, experts agree that the stock markets are very volatile and only a wait-and-see strategy should be adopted at this time. “Right now it would be pretty stupid for an analyst to claim that he or she knows what is going to happen in 2009 and what the scenario is most likely to look like,” concludes Schellen.
“Visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand”
Obama orders arrest of three four-star generals. Air Force and Marine chiefs accused of trying to overthrow the administration.” If these headlines were splashed across the front pages of the American press, worries in the United States about healthcare, stimulus packages and budget deficits would pale into afterthoughts. Yet life in Turkey continues as normal, at least for the moment, despite last month’s arrests of 49 former and active military officers. Those held include two former commanders of naval operations, two admirals, three vice-generals and one vice-admiral, as well as two rear admirals and two brigadier generals still on active duty.
On the surface, the arrests are an extension of the round-up over the past two years of nearly 300 people who are alleged to have been plotting to overthrow the government of the Justice and Development Party (AKP). The bizarre schemes in the latest charges included planning for a mosque to be bombed and a Turkish fighter jet to be shot down, so the armed forces could step in to rescue the country from chaos, conveniently deposing a democratically elected government perceived by some to be hell-bent on turning Turkey into an Islamic state.
The latest skirmish between the AKP and the military prompted President Abdullah Gul to arrange a meeting between Prime Minister Recep Tayyip Erdogan and armed forces chief General Ilker Basbug. After three hours of talks, Gul’s office said that any “current problems would be solved within the framework of the constitution.”
So, no joy for those fearing (or others hoping for) a military coup. In fact, the prospect is highly unlikely since the whole world has changed since the military last flexed its muscles that way in 1980. Turkey is no longer the last outpost before the start of the evil Soviet empire, and there is less incentive for foreign states to sanction military coups. The current charges stem from 2003 and a war game codenamed Sledgehammer, which included steps to unseat the Erdogan government by creating chaos in the country with the help of terrorist attacks, according to press reports. The AKP says it was for real; the army says it was part of a normal exercise.
Erdogan has distanced himself from the arrests by saying that the judiciary is in charge of the investigation and technically he is correct.
What may be just as intriguing as the alleged plot is the role in its revelation played by the Taraf newspaper, which has revealed many of the stories about the equally alleged coup attempt. The paper is only two years old, and its inception coincided with widespread arrests in relation to the “Ergenekon conspiracy” case, in which well over 200 people are still under arrest for conspiracy to overthrow the government. Taraf claims to have received material from military officers who are opposed to the plots. The fledgling daily has scooped its better-established rivals with lurid tales. The inherent conflict between the AKP and self-styled staunch secularists is rife with conjecture but not replete with facts. Each time the AKP uses its legitimate powers of patronage to appoint supporters into various establishment jobs, it risks the charge of adding yet another brick to the Islamist state it is supposedly building. There is never a mention that the secularists had been appointing their own favorites for more half a century before the AKP came into power in 2002. Predecessors of the AKP presided over rampant inflation — some lottery prizes are still advertised as offering prize money of trillions of liras — and wholesale corruption. The AKP has reduced inflation to single digits, expanded the economy at a rate never seen in modern Turkey’s history and stabilized the currency.
Some financial analysts warn the very public spat between the army and the government will destroy all these economic gains. One report said the lira would quickly lose 8 percent. More sanguine (and cynical) observers recall the results of the so-called ‘e-coup’ in April 2007, when the army warned the AKP not to pose a threat to secularism, and the attempt to close down the party in 2008. In both cases the markets and the currency quickly recovered.
There is no particular reason to believe that this trial of strength will have any different consequence, and a military coup in Turkey these days is as likely as Obama arresting four-star generals.
Peter Grimsditch is Executive Magazine’s Istanbul-based correspondent
The majority of enterprises around the world are small and medium-sized enterprises (SMEs). According to the European Union, a small enterprise has a headcount of less than 50, and less than $12.5 million in turnover. A medium- sized enterprise has 50 to 249 employees, and a turnover below $62 million. There is a lot of attention given by international organizations, government agencies and donor institutions to the development of SMEs. SMEs are the backbone of economies, especially since they easily constitute more than 90 percent of the businesses in a given country. In fact, small businesses alone tend to make up more than 90 percent of all businesses and they typically come to mind when SMEs are mentioned. SME development ends up being the main component of economic development. SME development programs should typically focus on:
Better business environment: Policy makers should take the interests and input of SMEs into account when changing existing policies, rules, and regulations, or when setting new ones. Cutting red tape and streamlining processes are crucial to helping all companies grow. Starting a business, closing a business, hiring employees, letting them go, and enforcing contracts are just some aspects of the business environment that need to be evaluated and improved.
Improved access to finance: Capital is the lifeblood of a company. Small businesses are usually at a disadvantage when it comes to accessing finance to operate and grow. Creating and strengthening a variety of financing mechanisms (e.g. loan guarantees) are important to providing SMEs with required capital. Governments can make much longer-term investments than private investors, and can reap rewards in different forms, from higher employment and taxes to capital returns and productivity.
Greater access to services: SMEs typically need services and resources that they cannot afford or cannot pursue on their own. Providing business skills and entrepreneurship training, improving access to new markets, encouraging import substitution and enhancing coordination between companies in one economic sector are a few examples of SME assistance that can be offered.
Those who are planning, funding, and running SME development programs, and other types of programs too, should realize that many factors affect the success of their efforts. They include:
Commitment to success: The various players who are in charge of the SME development programs need to be committed to these programs, their stated goals, and their success. While this seems self- evident and intuitive, many programs do not really succeed because the people in charge do not care enough about the results.
Backing for the right time: Institutions need to back or support programs for the necessary length of time. So, if a program needs six years to achieve its goals and become sustainable, funding should not be cut after four years.
Knowledge and expertise: The people managing SME programs must know how development works. Consultants and employees should also have experience working with SMEs in a region, and expertise in the sectors targeted for assistance, as well as the functional help being offered.
Market-driven approach: It is important to listen to SMEs and understand what they need rather than come with a predetermined view of what they require. A short survey can shed light on what SMEs want. If SMEs are not willing to even partially pay for certain services, even when they can afford them, then those services are probably not needed.
Tailored programs: While “what” should be included in a SME development program at a very high level can be similar between two countries, “how” to proceed and “who” should drive can certainly vary from one country to the next. A tailored program will yield better results than one that is pre- packaged and imported from another country.
Overall coordination: Typically, there are many programs running at the same time in a country or a region. To avoid overlap, it is important to understand what other programs are doing to properly coordinate between them. That way, the SME program can have maximum effectiveness.
Flexibility: Finally, the programs need to be flexible and respond to changing needs as they arise. The implementation phase can reveal issues that were not apparent at program inception. The ability to respond to new data or changing conditions is important to the overall success of these programs.
Setting policies with SMEs in mind and having programs targeting their development and growth is good for the entire economy, and can benefit larger and more capable companies. Large companies benefit from a vibrant SME sector that can provide them with needed products and services. At the end of the day, SME development is critical to overall economic development.
ZIAD FERZLY is managing director at Cedarwood Advisors, which provides strategic, financial, and investment management services to companies, investment firms, institutions and governments around the globe.
Solidere is a Lebanese real estate development company established in 1994 and listed on the Beirut Stock Exchange. Solidere is a single purpose company exclusively responsible for the reconstruction and the development of the Beirut Central District.
The company is also engaged in real estate development outside of Lebanon through its associate Solidere International. In 2006, Solidere management obtained shareholder approval to venture into urban planning and real estate development outside Lebanon, in an effort to expand master development activities overseas. As a result, Solidere founded Solidere International (SI), becoming managing shareholder with 37.2 percent ownership.
Solidere’s long-term strategic objective is to diversify its revenue mix to compensate for the erosion of its finite land bank in Beirut City Center. Therefore, since 2007, Solidere has embarked on a bold expansion plan with a view to securing new revenue streams. The core aspects of Solidere’s long-term strategic objective encompasses the following:
• International growth strategy with SI
• Increasing rental income up to $100 million
• Increasing revenues generated from consulting services
We have performed an estimation of land and property prices per square meter of built-up area (BUA), based on management data and independently collected recent land sales figures. In order to be on the conservative side, we have adjusted the data. The resulting estimated net asset value per share is $48.55.
Solidere’s recognized revenues in 2007 amounted to $310 million resulting mainly from land sales, most of which came from contracts signed in previous years. Total revenues grew by 33 percent, eight percent and 12 percent in 2005, 2006 and 2007 respectively to reach $310 million by the end of 2007. This increase in total revenues was primarily driven by a surge in land sales. We believe this trend can be sustainably driven by the projected revenues from land sales, expected to increase drastically with the near completion of the infrastructure in the reclaimed area (1.4 million square meters of BUA) and the depletion of the traditional area (0.45 million square meters of BUA). Solidere’s total revenues are expected to steadily increase from $310 million in 2007 to $630 million by end 2012.
Solidere is expected to record an increasing net income, which is projected to reach $237 million in 2009 and $435 million in 2011. The resulting compounded average growth rate (CAGR) of net income from end 2007 until end 2012 should be equal to 16.8 percent.
Solidere has adequate cash reserves. The company’s cash position at end 2004 stood at $116 million, rising to $328 million at end 2007. Its accounts and notes receivables grew in parallel from $211 million at end 2004 to $319 million during the same period. All in all, the company has increased its liquid assets/total assets ratio from 16 percent by end 2004, up to 27 percent by end 2007, implying a good liquidity position.
We have decided to pursue a DCF valuation for Solidere (standalone) and have assumed the NPV of Solidere’s share in SI to be equal to its book value.
We believe this methodology properly reflects the fair value of Solidere as it is too early to envisage accurate future cash flows for SI due to its nascent status and the unstable regional real estate scene.
Our fair value estimate, derived from the discounted cash flow of solidere standalone projections, in addition to the book value of SI, amounts to $29 per share, resulting in an important upside potential. It is worthwhile to note that any positive outcome from Solidere International would have an important impact on the Solidere share price.
Marwan Salem is head of research & advisory and Raya Freyha is financial analyst at FFA Private Bank
How a country is perceived on the world stage by its own people or by other nations is crucial to its survival and success in the new globalized model. Nation branding and country positioning is an untapped concept in Lebanon and what it has to offer. While the notion of nation branding is not new on an international scale, on a regional scale it represents a hidden opportunity for Lebanon. Whether based on individual national objectives of trade, investment, travel and tourism, or through NGOs, positioning a country’s brand is more important than ever for small countries like Lebanon.
As a brand, so far Lebanon has been most successful at manufacturing human talent. This talent has demonstrated that it is cultured, competent and cost efficient. It mainly resides in the diaspora, a large pool of potential that has not yet been linked back to the ‘mother brand.’
Arab nation brands
Some Arab localities have made serious attempts to style their countries as brands, according to the national agenda of their governments and international interests. Examples of this include Dubai, Doha, Abu Dhabi and Manama. Dubai was sought after for its transit and service qualities; Doha as an international sports and education destination; Abu Dhabi for its culture and Manama as a smart business choice.
We have seen other attempts via one-off campaigns by the ministries of tourism in places like Turkey and Egypt. Yet such campaigns fell short of promoting their country brand under one unifying umbrella. India, China and Australia could serve as good examples of exploiting nation branding by building one unifying brand.
What does it take?
Today, the world we live in has no geographic boundaries when it comes to conducting business, especially when it comes to communication. If we are to shift our mindset and think of Lebanon as a ‘creative nation’ brand, we must first define the key performance indicators. Second, we must identify the industries that are considered ‘creative’ and see what it takes to execute them.
Thinking of Lebanon as a creative nation brand, we must be able to define our brand promise: For what do we stand? What is our cutting edge offering? What is the content that we will offer on the international market? How we will deliver it? What is our target market? Who are our customers and what do we know about them?
The ‘attention age’
Welcome to the ‘attention age’, where before delivering a message in a cluttered environment, countries must rise to the challenge of grabbing attention. Then, they must deliver a promise, live up to it and earn the respect and trust of investors, consumers, media and other nations.
The information age is over. We have officially entered the attention age, whereby attention is won and credibility through creative talent is the only sustainer. Lebanon is an ideal platform for a creative nation brand, as more and more products and businesses export ideas instead of tangible commodities. If we are to think of Lebanon as a cultural product, then this could be a start. The demand for creative products and industries is growing as consumers are more into cultural exchange and social media. In fact, consumers today are using creative products and selling them in order to connect with specific dreams and lifestyles.
Lebanon’s success in creative sectors
Lebanon has made some interesting breakthroughs in various sectors, which could easily be labeled as creative industries or creative sectors driven by talent. Examples of this include advertising, architecture, design, arts, media, film, music, tourism and gastronomy. All these creative industries have as their nucleus the work, ideas, energy and creativity of a small team. Positioning Lebanon as a creative nation brand takes much more than designing just a nice logo with an appealing tag line. It takes having the human talent, the energy, the will and a common vision. The biggest problem with branding a nation like Lebanon is there are many different organizations that operate in a sporadic and slow manner. They do not liaise with other entities such as the ministries of tourism, trade or export organizations. Essentially, everyone does their own thing. It’s nearly impossible to get everything together and host it all under the country’s umbrella. Thus comes the need to define a common vision as to what Lebanon should stand for as a creative brand.
Nation brand assessment measures
The Anholt nation brands index offers a systematic approach to measuring nations’ brand equities in an index that he sets for national assets, characteristics and competencies. These include exports, people, governance, tourism, culture and heritage, immigration and investment.
In essence, countries are a lot like humans. Therefore it is important to consider the emotional attributes of these nations as they are perceived by others in the world. Despite all the chaos that Lebanon is witnessing and the instability that surrounds it, we have no excuse not to think in this untapped strategic and essential direction. As chaotic as our nation is, we have a trilingual culture, competency and cost efficiency. Hence, we stand a real chance to succeed in the emerging new world order where geographic boundaries no longer apply. As for the present and the future, Lebanon as a creative brand must focus all its efforts on harboring, developing and retaining its own creative talent.
PAUL BOULOS is business development director — Middle East & North Africa, at Drive Communication
Given the ongoing weakness in regional equity markets right now, it’s no surprise that the IPO market is still on the ropes. Many financial analysts from Ernest & Young, UBS, Gulf Capital, Global Invest and others maintain that 2009 will experience slow growth in IPO opportunities, and equity capital markets desks from Dubai to Saudi Arabia are sitting on their hands.
But some market observers are optimistic about the ice jam breaking for IPOs in the near-term, especially sometime in the second half of 2009. “The IPO window is closed for the moment due to prevailing market sentiments,” Ali Khan, executive director of capital markets at Arqaam Capital says. “However, six or nine months is a long time in capital markets, especially these days… once there is a better understanding of pricing trends, stock markets may rally well before house prices actually reach bottom, as investors will take a 12 to 18 month view ahead,” he adds.
The region’s IPO market is nowhere near recovery, but it looks like investors will have several offerings to choose from in the coming months. Saudi Arabia’s Mawarid Holding has appointed Saudi Hollandi Capital as lead manager for the planned IPO of its unit, Meed Trading Company. Although the company did not provide the details of the offering, the IPO is expected to be launched by the end of the 2009 after regulatory approvals. Meed Trading, which operates more than 200 retail outlets across the kingdom, “will be restructured prior to the IPO to make it a majority stake holder in seven other subsidiaries of the Mawarid Group,” the company said in a statement.
Also in Saudi Arabia, Abdul Mohsen Al Hokair Tourism & Development Group, announced plans for an IPO to raise funds to develop tourism projects on the Saudi coast and further develop plans to construct over 30 hotels across the Arab world. The company did not provide details as to the size of the offering and possible launch date, but Abdul Mohsen Al Hokair, the group’s chairman, said the launching is very much dependent “on the performance of the local stock market.”
In the region’s most battered economy due to the global financial crisis, one announcement came out of Dubai. Private charter Silver Air, said it will launch an IPO as part of its strategy to raise capital to expand its fleet with three additional Boeing aircraft. “This acquisition would be funded by an IPO in two to three years time with a listing in Dubai,” Steffen Harpoth, chief executive of Silver Air, told the press.
Meanwhile, the IPO of Etihad Atheeb Telecommunication or Atheeb, Saudi Arabia’s second fixed-line operator, was 3.5 times covered with subscriptions totaling more than $282 million. Atheeb launched its IPO in early February and the float was closely watched by market observers to assess investors’ appetite for IPOs. The company expects to list on the local stock market before mid-March and will begin its commercial operations by mid-2009.
Syrian markets
In the Levant, the Damascus Securities Exchange gave the go ahead to Bank Audi Syria and the United Group for Publishing, Advertising and Marketing, to list their shares. Bank Audi Syria is a subsidiary of Lebanon’s Bank Audi. Bank Audi Syria’s capital stood at $54.3 million at the end of 2007, according to available data. While Damascus-based United Group’s capital stood at $6.51 million at the end of last September.
Some analysts believe that individual and institutional investors remain in defensive mode, and in light of the current economic fundamentals and overall valuations, investors are more likely to buy shares in undervalued companies than in an IPO. “Investors’ reluctance regarding IPOs is understandable,” Samer Shaheene, senior analyst at Bloomberg says. “Many have been stung by stock market declines and a risk-tolerance level for IPOs is on the low end,” he adds. This has forced companies to seek out new sources of capital, where possible.
However, precedence shows that investors will always seek and find good investment opportunities in any market conditions. “When there is a period of lower-than-normal IPO issuance, bounce back is possible,” Jad Hawali, analyst at Zawya.com says. “The bounce back can happen without a solid overall equity market simply because there is pent-up demand for capital by private companies,” he added.
According to available data from Zawya.com, there are close to 60 IPOs planned for 2009 so far. Although there are alternative means to raising capital, the IPO is a favorite course for regional investors. Given the swiftness with which investors and companies respond to changing financial and economic conditions, this scenario may be what will play out at the end of the first quarter.
Enough for now with giving attention solely to the limitations imposed by this financial crisis — instead take a break and concentrate on the coming opportunities. There is an immeasurable potential to grow your business, but it requires a market shift.
This market shift can be summarized by the term ‘peopleization’ — meaning the ‘massive people markets’. Never before in history have there been markets with the size and density of today’s. Three realities define peopleization and they are having a remarkable influence on the future of business.
The world is growing — huge
The current population of the world is nearing seven billion and growing by 135 people per minute. To put this in perspective, note that it took from the beginning of history until the early 1800s for the world’s population to reach one billion. Then, in 1927, more than 125 years later, it passed two billion. In 1987, the world population was five billion; 12 years later, in October 1999, it passed six billion.
Now every 14 years the world will grow by another one billion people. It’s no wonder that so many people are concerned about what this means for our future. You also need to be attentive to what this means for your business.
When we talk about world population, we may be distracted by the magnitude of the number. So, let’s break down what it means for the population to grow by one billion every 14 years. That means the world grows by approximately 71.5 million people each year, or close to 196,000 people per day. In other words, every eight days or so the world’s population increases enough to add a city the size of Beirut.
The world is becoming eastern
Think about this: while the West is sleeping, the entire rest of the world is working — literally and figuratively. The focus of the world is no longer on the West. Success is and will continue to come when you turn to the East. At one point, if you wanted to make it big, you had to succeed in Europe and then it moved to the US. Now if you want to make it big you must succeed in China and India.
The world is now an Asian World. The picture is changing; the developed world is growing at a measly rate of two people per minute and the developing world at an astonishing rate of 151 people per minute.
In terms of economic size, China will soon by-pass Japan and the United States. China is today’s powerhouse. The power of the market shift comes alive when you add together GDP growth and population growth. For example, China is growing at a rate of at least two times that of the US, and they are four times as big. Make this calculation and determine the impact it will have on business.
Asia is becoming the anchor economy of the world. They are the leading global importer; in addition, they are now a leading exporter and trendsetter. They not only dominate the region, they have a controlling interest in the world. This is the location of future business.
The world is urban
In 2007, the world reached the invisible, but momentous milestone of becoming an urban world with more than 52 percent of the world living in densely populated, high- rise cities. And the growth of the urban world is not showing any signs of slowing down as every second two people make the dream-fulfilling journey from the rural world to the urban world.
While the world’s urban population grew very rapidly over the 20th century (from 220 million to 2.8 billion), the next few decades will see an unprecedented scale of urban growth in the developing world. The cities of the emerging markets will comprise 81 percent of the urban footprint and be home to more than five billion people. The cities in the East are exploding compared to the snail’s paced growth of the cities in the developed world.
In order to make the market shift, you need to be able to answer a couple of questions: “What does the market shift mean for my business?” and “How can I make the shift?”
How can you succeed if you are not there?
Tommy Weir, Ph.D., is executive director of the EM Leadership Center, specializing in strategic leadership development for fast-growth and emerging markets.
Currently the managing director and chief investment officer of Merrill Lynch Global Wealth Management in Europe, the Middle East and Africa (EMEA), Gary Dugan has been in the financial business for more than 25 years — previous positions include managing director and global markets strategist at JPMorgan Institutional Investment Management and the Private Bank, and managing director and head of research and investment strategy at Barclays Wealth. Executive had the pleasure of a candid, one-on-one interview with Dugan after his ‘Year Ahead 2009’ presentation in Beirut, to discuss the effects of the global financial crisis on the region’s markets.
E How has the global financial crisis affected your operations in the Middle East? How have your clients been affected?
We found that clients have moved from being quite aggressive risk takers — so they were prepared to buy in emerging markets and local equities — and now they’re much more risk averse. If you look at the kind of marginal investment they are now making, it’s more in cash and gold — very, very safe investments. So I think their whole appetite for risk has changed and dropped quite dramatically. I would say that both the revenues and the scale of the assets that are available there for our business has dropped quite dramatically. But I think people in the past might have wanted to do it themselves, because it just seemed so easy — you went and bought a building one week and the next week you went and made 15 percent. They now realize that it’s not that easy and they need more advice. We’ve never seen so many people come into our presentations, we’ve never had so many phone calls, as people want to talk through what’s going on — they need advice, greater advice then we’ve seen for some time.
E Has the Bank of America acquisition of Merrill Lynch affected your operations?
I can’t comment, sorry.
E Where do you see the greatest opportunities for growth in the MENA region?
I suppose by country, in terms of the robustness of the business, it’s countries like Saudi Arabia and Kuwait in particular. Purely because the economies there have got even greater support from their governments, they’re holding on to their GDP, the local economies are more insulated from the outside world and if they do have internal problems there is sufficient government resources in order to stimulate the economy. I suppose the one disappoint we’re seeing at the moment — but it was coming — is Dubai, because you see this heavy reliance on cash flows from the central bank and from Abu Dhabi, which have a question mark over them. Also, because people have been so heavily leveraged into property, once property collapses they really have no wealth or free cash flow left. So the opportunities are going to be difficult in the future, but there are still some stronger markets that we’re seeing elsewhere in our franchise.
E So how do you think markets like Dubai can recover? With the economy of Dubai so dependent on its property sector, what are the key components to help them recover in the future?
Well, you hope that people have learned a lesson — that the kind of one single asset that they were playing, they realize that they need diversification and a more international perspective in the way in which they invest. So we’re hoping that when they come to us they’ll be thinking, “If I’m going to stay in property, maybe I’ll look at London, New York, or other places. Maybe I’ll think about buying bonds to settle offside my very high risk asset in property.” So we’re getting a greater diversification of assets, we’re talking to our clients about more asset classes and more vehicles than we’ve ever done before. We’ve already had a massive pick-up in interest in commodities just from this visit as people see that as the opportunity — not to make huge amounts of money, but to provide some diversification against the risk they still have in their illiquid investments.
E What do you foresee as the most difficult challenges in the next 12 to 18 months?
I think in the immediate term the biggest disappointment will be a sense that 2010 is not going to be that much better. The growth in that year will be around the world only about one to 1.5 percent, whereas people had hoped we’re going to go back to the four and five percent numbers we’d had before. The second thing is — and this is a dramatic shift from where we’ve been for the last 20 to 30 years — so much less inflation around the world, even here in Lebanon you may be talking about inflation rates that get down close to zero — in the developed world, numbers that are negative, and again, whilst Japan has been the one country that has suffered that and struggled with it, we could see the whole world struggling with it. So it means a different environment for the way people live their lives — you have to go and ask for a discount everywhere, you’re going to have businesses that are unfortunately going to have to lay-off more staff to take down their cost base — so it is a very big change that needs to be underway in 2009.
E What strategy will Merrill Lynch be using in 2009 to increase risk and investment appetite amongst their clients?
I think there’s a wholesale change inside the banking industry. Clearly mergers mean companies need to get to know each other again and change is inevitable. I think what we’re going to have to work very hard to do is: one, you’ve got to start to re-invent the investment proposition for clients, because people will be less certain about the future, they’ll be more nervous about the investments they make. So we’re going to have to focus more on, what I call, the safer, traditional investments of bonds, be more prudent and away from investments that were made in the past in things like structured products and derivative instruments. The second thing is — and this will come in two ways in the sense that in the past it was fairly easy to sell something — in the future you’re going to need to do a great deal more work with the clients providing very strong guidance. That to me is much healthier as the clients will be more aware of the risks they take on in certain investments and they are more involved that way.
E Do you think it will be easier now to identify toxic assets or risky investments since the fallout of the global markets?
My secret hope is that… regulation saves the clients themselves. I’ll be honest with you, in my whole career there [were] many times where you advise clients not to do things but unfortunately people get so excited with the tops of markets — like the Dubai property marketing doubling. As we saw back in 2000, people thought technology stocks were going to give 30 percent returns every year for the next 100 years and it didn’t matter what you said to clients, you couldn’t stop them from doing it. I say we’ve got our own role to play in saving humans from their own faults — call it greed or whatever you want — but we’ve got to try and stop these bubbles from forming in the future. It can’t just be done by investment banks, it’s got to be done by heavy regulation.
E So would you say that global investors are in need of a reality check?
A desperate reality check! But as I said, I think there should have been a reality check after the huge losses in the tech bust. Yet, just five years later people were making even bigger mistakes with more money. So I just sense that we’ll get more bubbles in the future and we’ll go through some of the cycles again. I just hope that the next cycle doesn’t take the financial system down as it has done at this stage — this is a very dramatic deterioration and it will take many years to repair.
E Do you think a major mistake made by investors in the past is that they were only thinking on a short-term, profit basis?
I think it was simpler than that. I think what we had over the last 15 years — because of central bank policy and principal in the US — was that any time the markets got into difficulties, they were bailed out. If you were patient enough to wait one or two years, whatever you bought would have gone up to the price you paid and beyond it again. It wasn’t quite the case in the technology sector, but that was the insurance policy you had and then they realized this time around there was no insurance policy. The insurance policy would have had to have been so big that it would have been bigger than this planet, quite honestly. So I think that is the wake-up call, that the huge speculative booms we had are the past and that the insurance policy is no longer there. People require higher return from things but they’re also going to have to be far more patient. The other important point is that in the past, the saving that went on was very, very modest. Around the world, in the future the saving has got to be greater because the available returns are going to be smaller. That’s good news for our industry — we should see more cash inflows — but clients have got to reset what they hoped for.
Knowing that Dubai’s Palm islands have dominated real estate headlines for the last couple of years, developer Noor International Holding has directed its attention to Lebanon with its newly announced 3.3 million square meter “Cedar Island” development off the Lebanese coast. The estimated $7.4 billion development will host residential villas and apartments, commercial space, as well as recreational and touristic elements like gardens, a golf course, a sailing club and a water park. Moreover, the Cedar will be divided into commercial, public and private zones, each having specific components.
Why an island?
Noor International aims to create a comprehensive development, encompassing all elements essential to a community. Dr. Mohammed Saleh, chairman and owner of Noor International Holdings explains, “the problem is that we have not been able to find any piece of land on shore that would enable us to develop such a project.” He says if a piece of land with only 60 percent of the proposed island’s area had been found, they would have created the cedar shaped development on a mountainside or seashore, which would have been much easier. “Our project includes villas, chalets, gardens, a school… and that cannot be done on a 10,000 to 20,000 square meter piece of land on the shore,” he elaborates.
Additionally, the developer’s idea is to attract Lebanese expatriates and immigrants who have long been waiting for such a project in order to come back to Lebanon. “Lebanese expatriates and immigrants cannot be attracted to Lebanon by a small scale project including a couple of villas. A mega-project is needed to induce them to come back to their country and invest in it,” says Saleh. Noor International claims it is already receiving emails from potential buyers the world over interested in the project.
Furthermore, the island aims to create 50,000 jobs during the construction phase and even more jobs upon completion, since thousands of people will be working in the project’s restaurants and facilities.
The approval process
The Cedar Island is in its preliminary stages, since it has not been approved yet by the Lebanese authorities, nor have the location of the island or the construction method been determined. Noor International must submit three studies to the government for approval: an environmental impact assessment, a feasibility study and a site location study. Of four potential locations along the Lebanese coast — Damour, Amchit, Sour and Dbayye — Noor International considers Damour the most viable and will conduct the location study on this area. If not approved, the company will consider other locations.
Official responses should come from the Ministry of Works, the Civil Regulatory Administration, the prime minister, the parliament and the president of the Lebanese Republic. “We expect the process to take around six months or one year at the most,” says Saleh. After receiving the approval, the company estimates the construction work to take around four years. Noor International has already won the blessings of Elie Marouni, the Minister of Tourism and Wael Abou Faour, the Minister of State. Moreover, the developer is currently using the services of the Investment Development Authority of Lebanon (IDAL) in order to facilitate the process and benefit from the package deal that IDAL is providing in terms of tax incentives and fee reductions.
Public response
When the idea was proposed to the public, some people were terrified by its potential environmental and socio- economic impacts, while others embraced the project and held up its potential contribution to the Lebanese tourism sector and the economy in general. Environmentalists claim that the Cedar Island will cause serious water and air pollution, as well as affect the well-being of the Damour community.
Environmental consultant Lama Abdul Samad explains that, “we have a rocky ecosystem, rich with wildlife and marine habitat and dredging will kill everything there. It is too bad because Damour is one of the places on the shoreline” that has not yet been severely damaged by human development, she adds. Additionally, the immediate vicinity of the island’s area is not the only place that will be affected. Sourcing the fill for the island, whether by sea dredging or quarrying the mountains, will further harm Lebanon’s natural heritage.
Skeptics also argue that the construction, which would last for about four years, will cause serious air and noise pollution, since a lot of machinery and equipment will be used. “The air and noise pollution will be catastrophic, heavy machinery will cause traffic jams and the fumes and dust will contaminate the area’s environment,” comments Abdul Samad.
Lebanese environmentalists have started to act as 13 environmental organizations, including Greenpeace Mediterranean, Byblos Ecologia, the Society for the Protection of Nature in Lebanon and others, have formed a joint coalition hoping to keep the project from being constructed. As a first step, the coalition issued a press release stating that it categorically opposes the Cedar Island and warns the Lebanese government of the harmful impacts that the project may have on Lebanon’s environment, as well as the economic and social ramifications on the surrounding communities. Yasmin El Helwe, the oceans campaigner at Greenpeace Mediterranean, explains, “our next step is to have pre-assessment. However, we cannot do that right now because we are not aware of the project’s location or the method of construction.” Greenpeace is also working with their scientific unit at Exeter University in the United Kingdom in order to discover possible environmental impacts.
Project construction
Although the method by which the island would be constructed remains undetermined, Saleh explains that most probably the cedar trunk will be constructed by land reclamation, while the branches will be floating. “The island might be a mix of a floating structure and land reclamation. However it is too early to tell since as soon as we choose the location, we will conduct a topographic study of the surface and determine the best suited method of construction,” notes Saleh. He also emphasizes that the methods will be chosen to minimize the impact of the island on the maritime environment. “If, God forbid, we damage the environment, we will fix it,” says Saleh.
For the construction of the Cedar’s trunk, Saleh says the company has found a way to enable its creation without using sea dredging or quarrying mountains. “I heard that there is a license being issued for constructing a tunnel in the mountain leading to Shtoura [in the Bekaa valley], which would reduce the travelling time from more than an hour to 25 minutes. The idea is to use the rocks that will be taken out of the mountain to construct the island.” Saleh did not specify to whom the license is being issued, but he added that if the tunnel project is not already online, Noor International will propose and execute the idea itself. “One tunnel might not be enough, it is a plus or minus, but here we are trying to find ways to develop our project without hurting the environment. Instead of damaging the sea or the mountains, a point in which environmentalists are 100 percent right, we are developing new infrastructure,” he notes.
Experts claim that a floating island is a bad idea, not because of the construction process, but due to the costly maintenance the island will require. Adel Monsef, project manager at Archirodon, a leading international construction group, explains that, “a floating structure, whatever it is, needs maintenance every year or maximum every two years. In this case, a dry dock has to be built next to the island, which would be very costly. We are on the Mediterranean and we have rough seas, so there will have to be [lots of] maintenance, they are already facing some difficulties in the Palm,” which experiences mild seas compared to what the Cedar would face, Monsef adds.
Conservationists agree that whatever the method of construction, there is no escape from the serious environmental impact it will cause. Even if the branches are floating, the upper layer of the maritime ecosystem is very dependent on sunlight and would die. “The fish might swim out, but there are other elements in the ecosystem that will not survive,” says Abdul Samad. “If it is not going to sustain life, they might as well cover it all than have it slowly die and rot,” she highlights.
The fight continues
As Noor International works on the approval by conducting the required studies, opposing parties are on guard and trying to make their case. Saleh would like the environmentalists to open a line of communication with the company. “We are an environmentally friendly project, we are coming to build and not to destroy,” says Saleh.
Saleh also thinks that the attack on Noor International was premature, since no studies had been made on the possible impacts. He says that only when these come out will environmentalists have the right to oppose the project. Yet the environmentalists believe no study is needed to prove their case. “It is impossible to build such a thing without causing damage to the environment,” concludes El Helwe.