Real estate

GCC – Development hits the wall

by Executive Staff
written by Executive Staff

While the global economic uncertainty is increasingly trimming down investors’ confidence and consequently, leading to panic selling and the pulling out of millions of dollars worth of foreign investments, the stock market is bearing harsh consequences with share prices suffering precipitous fall. This drop in share value is also due to the sharp fall in oil prices, which has made investors increasingly concerned about the future of Gulf economies. All seven GCC markets fell in the past three months and $150 billion of their market capitalization has been lost since the end of 2007.

Since the beginning of the crisis, banks and mortgage houses have become very conscientious about lending and even though most GCC governments like Bahrain, UAE and Saudi Arabia are injecting liquidity into the banking sector to keep work going on major projects and to ease liquidity pressure, the real estate market has not shown any improvements yet. Moreover, amidst the increased government regulations and the corruption scandals in the UAE, the demand for real estate is slowing down and consequently causing real estate companies’ shares to experience heavy falls.

Emaar
Since the beginning of the year, Emaar, the Gulf’s largest property developer by market value, has lost more than 80% of its share value. To overcome this crisis, the company bought back 200,000 of its shares in October, aiming to restore investors’ confidence in the real estate sector and the entire UAE market. Mohamed Ali Alabbar, Emaar’s chairman, told Arabian Business that, “at Emaar, we firmly believe that there is no better investment we can make than in our own future. The decision taken by the board of directors to buy back Emaar shares reflects our firm belief that those shares are currently undervalued.” Apparently, this attempt was not effective since the company is now preparing to cut jobs by reviewing its 5,000-strong workforce. No details about how many employees will be fired have yet been announced. Moreover, Emaar — as well as Union Properties and ETA Star — has also started offering easy payment options to attract buyers.
Other companies have also started to cut jobs. DAMAC fired 200 employees in the beginning of November in response to the continuing global slowdown. Omniyat has also announced job cuts. No number has been publicized as yet, but it is estimated that around 60 jobs will be cut. Jean Pierre Nammour, managing director of Al Nahda Real Estate, remarked that this cut in budget could have a negative effect on the UAE economy. He explained that companies, after they lay off staff, will first begin to cut back on their advertising budgets, since they have already advertised previous projects and no new projects are currently initiated. Consequently, the advertising agencies will lose a large amount of revenue and will also let people go. Therefore, the effect will be extended to include other companies and thus hurt other sectors in the economy.

Dar al-Arkan
Dar al-Arkan, the largest Saudi developer by market value, has lost around 64% of its share value since the beginning of the year, despite announcing a 44.9% jump in second quarter profits. It seems that Dar Al-Arkan is not slowing down its business since it has already set up a mortgage finance company targeting the middle-class sector of Saudi Arabia’s growing population. The managing director of the company, Abdullatif bin Abdullah al- Shelash, showed upbeat expectations and told Arabian Business that with the measures that the kingdom has taken to increase liquidity, the market will not face any mortgage crisis. However, the company’s reputation was damaged when the Saudi bourse regulator imposed a SAR100,000 ($26,667) fine in early November, for violating disclosure regulations.
“Any problems faced by local real estate companies are a consequence of the global financial crisis, but as soon as the global financial markets begin to improve and the local real estate market starts to take shape again, companies on the stock market are definitely going to improve their current situation,” said Hayan Merchant, CEO of Ruwaad Holdings LLC.

Corruption in the UAE
A major corruption investigation in Dubai has lead to the arrest of dozens of executives in state-backed companies linked to the property sector. This is the most extensive anti-corruption exercise in the emirate’s history, as Sheikh Mohammed made it clear that Dubai will not tolerate any officials abusing their authority for personal gain.
The investigation began in April when the former CEO of Deeyar, Zack Shahin, two company executives and two company suppliers were arrested. Since then, the company’s shares started to lose their value, which have declined by 73% to date. Moreover, Mohammed Khalfan bin Kharbash, former chairman of Dubai Islamic Bank and its real-estate affiliate Deyaar, as well as Minister of State for Finance and Industry, was implicated in November in connection with allegations of financial wrongdoing at Deyaar. Many of the company’s ex-employees might also face trial.
In late August, four employees of Dubai Holding Subsidiary real estate developers Sama Dubai were taken into custody following accusations of bribery. A few days before that, two men from the sales department of Nakheel were also arrested.
In October, Abdullah Nasser Abdullah, the deputy CEO of Tamweel and CEO of Tamweel Properties and Investment LLC was arrested on charges of embezzlement. Additionally, the company’s former chief executive and the former head of investment were also arrested on embezzlement charges. In the same month, the former CEO of real estate developer Mizin was questioned over irregularities in selling lands.
This anti-corruption probe reduced investors’ confidence and was one of the main reasons for the freefall of stock prices. However, these developments should benefit the economy in the long-run by increasing transparency in the real estate market and creating a healthy environment for investors.

Scaling back activity
Currently, Dubai’s largest developers are reviewing their projects in response to the economic climate. For example, Nakheel announced that it is reassessing its business objectives and will scale back activity on some projects. Union Properties said it would not announce any new projects until the status of the credit market becomes clear. Sama Dubai, which has already unveiled projects worth almost $55.2 billion, is reviewing these to adapt to the current economic situation. DAMAC is following suit by reviewing its construction timetable and is planning to reschedule some of its latest projects. Additionally, Mohamed Al Zarah, CEO of Great Properties, announced that, “we will not be launching new projects this year as we feel it is a good time for us to reassess our projects and improve the company internally. This is key for us to successfully operate in the market alongside the credit crisis recovery phase.” He added that, “We will wait to see what January 2009 will bring.”

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Economy & Finance

Inflation – Price bubble spring leak

by Executive Staff
written by Executive Staff

Inflation was the biggest economic story in the Middle East for 2008, before the global financial system almost completely self-destructed. While inflation was a global problem due to a sharp rise in oil and food prices, levels in the Middle East were exceptionally high. The GCC’s average inflation rate was estimated to be 11.5%, according to Global Research. Inflation exerted significant pressure on much of the region’s population and civil unrest occurred from the UAE to Egypt. The causes for these high levels were largely related to the same underlying issues fuelling global inflation, but in the region they were further exasperated by the dollar peg, strong domestic demand and supply bottlenecks, especially in the GCC. Not surprisingly, the debate over the pegging of currencies to the dollar re-ignited, especially in the GCC.

The strong growth in both the GDP and the money supply in the GCC should have been accompanied by a tight monetary policy in which short-term interest rates would have been raised gradually, but because of the dollar peg this could not occur. “Very low interest rates coupled with high growth precipitated speculation and aggressive buying of real estate and financial instruments led to major bubbles in almost all asset classes,” said Ziad Abou Jamra, director of the trading desk at FIDUS. “Add to that the imported inflation that was due to a very weak dollar and high emerging market demand in China and India, and you had all the ingredients for spiraling inflation levels. In addition, this peg forced the Gulf central banks to print dinars, riyals and dirhams with which to buy dollars, and that money printing is inflationary.”
Subsequently, the big debate as to whether the GCC should move away from the dollar peg to a basket of currencies was taken up again. Kuwait was the first country to de-peg but its inflation still remained above 10% for much of 2008. Given this example, the idea of de-pegging from the dollar met much resistance and governments across the region had to look for other solutions. Amjad Ahmad, CEO of Investment and Merchant Banking at NBK Capital, stated that, “Although the dollar peg had some impact on inflation, ultimately it was the local economic realities of huge liquidity amounts, the high demand and small capacity, that were the underlying causes of inflation.”
To combat the effects of high inflation, many governments implemented broad-based wage increases but this risked second-round inflation effects. The IMF issued a warning to regional governments that broad-based wage increases should be avoided as it was only exacerbating the situation. Governments throughout the region were finding that their options in dealing with inflation and its effects were reduced. Tax cuts on food staples, consumption subsidies, price controls, trade restrictions to protect domestic supplies of food, boosting of social safety nets and supply side measures were all attempted yet none of these successfully mitigated rising inflation or its effects. Everything governments in the region have attempted in order to control inflation was ultimately fruitless. Zaid Maalouf, vice-president of MENA Capital, confirmed that, “Inflation is the most challenging problem for central governments and there are not many financial tools that the central banks in the GCC can use as the money markets here are not as well developed as in Europe.”

Inflation in Lebanon
Lebanon 2008’s inflationary trend was especially acute because of the dire political situation for the first six months of the year and the heavy dependence on imports. Estimated to be between 10-11.5%, depending on whose figures are taken, inflation is now at its highest point in 15 years. At the worst point during the political crisis, it was estimated to be at 13%. Jad Chaaban, acting president of the Lebanese Economic Association, noted another major problem in Lebanon that made inflation even worse: oligopolies. “Lebanese markets are very concentrated, so the importers have a tendency to shift prices immediately to consumers because they have the power to do so due to the fact that there is an oligopoly system in Lebanon. This also leads to an asymmetry of transmission, which means that when costs increase the retailer passes it on to the consumer but when those costs go down the prices to the consumer remain static,” he said.
Getting accurate figures for Lebanese inflation levels is a major problem. Chaaban claimed that the government figures are not correct and that there has not been enough of a concerted effort to reduce inflation. “The central bank does not have an active target for inflation so the government responds with measures that are ad hoc. You don’t see inflation as a top priority for the government and this is bad because in an open economy such as Lebanon, inflation is a major issue,” Chaaban said.
However, Jihad Azour, the then-finance minister, said in an interview in Executive’s April issue that attention is being shifted to fine tune inflation figures with efforts being made by the IMF and the Central Bank of Lebanon. Further to this, Azour noted that the government has a good record when it comes to controlling inflation and in 2008 took several measures to control it. “The first measure was to make sure the increase in the oil price was not passed onto the consumers and this has cost the government $1.1-1.2 billon. The government has lost more than $500 million of revenue per year and additional costs of more than $600 million due to the increase in oil prices in terms of deficit or subsidy to Électricité du Liban. In addition the government provided a 60% subsidy to the wheat that it is importing,” he explained. Nonetheless, despite all these various subsidies for much of 2008 inflation was at record levels.

From inflation to deflation?
Record inflation now appears to be confined to the history books due to the effects of the global financial crisis. “This latest crisis reversed all inflationary stimulators. The real estate bubble is popping, equities and other financial instruments are on sale, crude oil prices are dropping, down 63% from their July 2008 peak. In addition, the dollar is strengthening against all major currencies, paving the way for much lower import prices and halting the printing presses of the regions’ central banks. Lower liquidity means lower speculation and lower inflation,” said Abou Jamra. Subsequently, in 2009 inflation will not be a significant issue. In Europe and the US, where the reversal of inflationary stimulators are more severe, there is even worry of deflation. With the huge budget surpluses in the GCC, however, this is not a significant threat to the region. Yet, Abou Jamra warned, “If history is any guide, real estate and stock prices will continue their downward trend in 2009, notwithstanding a short-term rally for the coming three to six months and this will put a brake on the consumers’ purchases. The only offset to lower consumption is government spending by a lot. With crude oil prices at $55, we doubt that they can do that aggressively.”

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By Invitation

A thinner glass ceiling, yet still limits for workforce women

by Nada Tarraf
written by Nada Tarraf

For the last several decades, women have increased their participation in business, the economy and politics. But this revolution remains incomplete, not only in the Arab world as many might think, but also in Europe and the United States. For instance, while women are highly active participants in US and European businesses and political life, their representation in the parliaments remains relatively low. Furthermore, gender discrimination remains an issue when it comes to decision-making executive positions in the workplace.
According to existing statistics and data conducted by several organizations and analyzed by the Lebanese League for Women in Business (LLWB), most working women in Lebanon have attained high degrees of education from universities (29.1%) or high schools (26.8%), compared to 13.7% of working males with a university degree and a further 5.7% with a high school degree. In terms of economic activity, the labor force participation of Lebanese women is estimated at only 21.7% of the total labor force and thus remains very low. Furthermore, while the number of women qualified for top management positions continues to increase, they still do not have equal opportunities when it comes to senior positions. According to ESCWA statistics from 2002, women employers are only 1.5% of the female workforce, while some other statistics cited in the National Report about the Situation of Women in Lebanon for the Year 2000 demonstrate women’s limited participation in decision-making at different levels.
In Lebanon, civil laws do not prohibit women from practicing most jobs, but widespread stereotypical notions about women and men determine “appropriate” specializations and professions for women.
In most technical and production fields, women are denied social security benefits and have also been discriminated when it comes to health care, hospitalization and other social benefits for family members. Moreover, Lebanese labor law prohibits mechanical and manual industries from hiring women at all.
In terms of rural employment, the Committee for the Elimination of Discrimination against Women released a report noting that, “women agricultural workers are excluded from Lebanese laws and that no development grants have been allocated to rural areas to improve women’s opportunities.” It also observes that women’s contribution to agriculture (11.8%) has been shrinking due to competition, stagnation, decline in incomes, weak incentives and narrow frameworks of participation.
As for political participation, Lebanese women have gained the right to vote, hold public office, elect and be elected in municipal councils. However, the pervasive chauvinistic mentality in the country hinders their efforts at leadership. At the international level, regulations stipulate that female candidates for third category foreign-service posts must be unmarried and forbids wives of foreign-service employees to work. Women have the right to participate in diplomatic delegations, but representation is actually given to men, even if a conference theme concerns women.
What explains this phenomenon and what are the barriers to the full and effective participation of Lebanese women in the local economy and in the decision-making and planning spheres? Can we think of women as the unexploited workforce and leaders’ capital for the future of the country?
In the early 1970s, working women were mainly found in limited sectors such as education, nursing, trading, handicrafts and agriculture. Between then and the 1990s, the country witnessed a small yet noticeable movement of women to new and less traditional sectors, mainly due to a new trend in the female enrollment rate into new choice of specializations in post-secondary and university education. The number of women who graduated and started working in liberal professions such as lawyers, judges, engineers, doctors, physicians, bank managers, university teachers — just to name a few — increased considerably during this period.
On another hand, the heavy migration of males to Arab countries (1970s-80s), then to Europe and North America (1980s-90s), followed by the worsening economic living conditions after the war (1990s) and finally the latest political turmoil and the aftermaths of the recent war, necessitated that women participate more proactively in various economic sectors and even in the less traditional ones.
We at LLWB believe that women are a vital element in the Lebanese society’s development and prosperity. A woman should have the opportunity to achieve her full civic, social and professional rights and potential through equal opportunities, unrestricted access to resources, entrepreneurship and leadership.

Nada Tarraf is founding member and treasurer of the LLWB

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Real estate

UAE – How the bull went bear

by Executive Staff
written by Executive Staff

Up until the second quarter of this year, “growth” was the only word that would come to one’s mind when referring to the UAE’s real estate market. Surging demand, accompanied by a high level of liquidity and top market performance were a perfect combination to rank Dubai and Abu Dhabi as two of the fastest growing cities in the world. Additionally, the population growth triggered an ever rising demand on property. According to the Ministry of Economy, the UAE population is projected to grow by 6.12% in 2008, reaching 4.76 million people, compared to 4.48 million in 2007. Next year, the growth rate is expected to rise to 6.31%, causing the population to cross the 5- million mark.
According to Future Brand’s Gulf Real Estate 2008 report, the UAE currently claims 5% of worldwide real estate sales, increasing by 1.35% since 2007. The report also stated that 25,000 people per month are taking up residence in Dubai. In other words, every two minutes someone is choosing to make Dubai their new home. Moreover, the increase in the UAE’s transparency has encouraged foreign investors to further enter the market on a speculative basis, driving growth and prices upward at an excessive rate.

Before the Crisis
Ever since Dubai’s real estate boom began, demand was on a steady increase, as all kinds of projects were being launched in an attempt to keep up. “Developers in the UAE have been exploring all possible avenues in terms of developments, ranging from condominium units to hotels, villas, shopping malls, etc. As the market has a dearth in all of the above, there has been huge motivation for developers to consider building a mixture of all of them,” said Hayan Merchant, CEO of Ruwaad Holdings LLC.
Despite the developers’ attempts, supply remained short and prices were escalating accordingly. According to a Future Brand’s report, since last year alone property prices in Dubai rose by approximately 40%. Sheikh Zayed Road, being one of the most popular residential areas, recorded the highest annual rental growth of 51%. Bur Dubai and Ghusais followed suit registering 40% and 42%, respectively.
Abu Dhabi experienced a 200% increase in the commercial real estate rental sector, the highest in the world. Colliers International reported that in the Emirates’ capital, price growth of residential units reached 54% in 2007/08, compared to 18% in 2006/07. “Until the crisis occurred, demand was on a continuous increase and projects were unable to keep up. You would have a launching of a project of 500 villas that would be sold off within a day or two,” said Jean Pierre Nammour, managing director of Al Nahda Real Estate. “You could have anything on sale and people would buy it,” he added. Nammour also explained that even prices in Sharjah increased, the price of one square foot of property going up from $150 to $230.
“With more expatriates flocking to the UAE, whether as a result of the natural growth of the country as a business hub or as a result of the financial crisis, the focus is to build residential units to fill the demand gap,” said Mohamed Al Zarah, CEO of Great Properties. Oxford Business Group (OBG) reported that supply shortage in residential units reached 50,000 units in Abu Dhabi and 21,000 units in Dubai.
Additionally, Colliers International reported that office supply is expected to increase to 5.6 million square meters by 2010 and 160,000 units are expected to be delivered to the market in the same year. Although no projects were canceled, increased governmental regulations and the liquidity squeeze that gripped the banking sector recently raise doubts about the capability of developers to meet the demand.
Since late last year, developers had to worry about the rise in construction and labor costs which lead to the delay of some projects and to a further increase in property prices. According to OBG, this shortage resulted in a monthly inflation of around 1%, leading to an increase of 20% in construction costs since November 2007. Also, because of the high demand suppliers of construction materials could not fulfill more than 45% of their orders despite their efforts to increase capacity. Furthermore, finding better living conditions at home than in Dubai caused laborers to turn up their nose at low wages. This shortage did not only present itself in construction, but in any type of labor. “There was also a shortage of office staff, you could not find a secretary or accountant in town,” said Nammour.
Currently, the cost of material has dropped, but real estate companies are not initiating any new projects since the global financial crisis hit, not to mention that some have also started firing their staff. “Supply that was supposed to hit the market over the decade will definitely slow down as projects and plans are being reviewed,” averred Merchant.

When crisis hits
Although experts agree that the UAE real estate market is not as affected as the North American or European markets, it cannot be denied that it is suffering from severe turbulence that led to increased government regulations and put developers and buyers on guard.
Since the beginning of the global financial crisis, the real estate sector in the UAE has been experiencing a slowdown in demand and even some “panic selling,” stated Nammour. “I think that what is happening is a correction in the market, but there is an overreaction by investors, there was no need to go to the extreme of panic selling,” he added. Nammour also explained that panic is contagious, since if one person started selling property, many others would quickly follow.
Since May 2008 the availability of property in the UAE market has increased 150%. Real estate agents have been very busy listing properties for sale — during October, 100 to 200 properties were added to the market every day. For example, between September 10 and the end of October, availabilities at Palm Jumeirah increased by 52%. Availability at the Dubai Maritime City increased by 250%, while at Al Barari availability jumped by 117%. Moreover, the number of properties for sale also increased in Sharjah by 50% in the Al Khan area and by 151% in Ajman’s Emirates City.
Consequently, prices have started to decrease. HSBC reported that in October prices fell by 4% in Dubai and 5% in Abu Dhabi. Prices of villas recorded a 19% decrease in the same month. Additionally, the average advertised price for some ready properties decreased by 32% in Dubai Marina and 38% for off-plan properties in the same area.
Since the UAE market is known to be driven by speculation, it seems that these investors are the ones who are slowing demand and leading prices to drop. “The first effect is obviously that the investor and speculative buyers are not in the scene anymore. It is the end user who is still there,” said Isseb Rehman, managing director of Sherwoods Independent Property Consultants. He explained that big investors are now trying to cover their position. “They have exposure to lots of big projects that were released during the year. Their exposure is so large that they are now trying to cover their position or sell short, even at a loss,” he said.
Merchant stated that off-plan sales were the worst hit in the market. “The last 18 months have seen exceptional growth in the sector and this has led to prices being inflated for off-plan sales, price corrections were imminent in these areas. Even now, the biggest corrections are starting to take place in the areas where speculation was at its highest,” he said.
Rehman explained that this stage is natural in every growing market. “When the market is booming at the rate it has, it had to reach a phase where it started to mature. Right now Dubai is in a transition period from a very young market to a semi-mature one. And this transition period is where you find people refocusing on what they are doing.”

Banks
Until June 2008, mortgage lending in the UAE doubled, reaching $23.84 billion compared to $12.5 billion a year earlier, according to UAE central bank numbers. However, since the beginning of the crisis, the banking sector started to tighten lending due to global market conditions and in the fear that developers’ staff could default on their payments, since more job cuts are announced. For example, Lloyds TSB has stopped offering home loans to people wanting to buy apartments in the UAE and offered only 50% of the value of villas. Overall, banks used to offer up to 90% financing, but now have reduced that to 50- 60% only. This has further led to a slowdown in sales. “People are waiting for liquidity to fall in and lending needs to come back,” said Rehman. Even though lending has been cut, developers like Emaar, ETA Star Property and Union Properties are announcing easy payment plans to attract and hold on to buyers. “While this will certainly affect the developers’ progress on the projects and payment to contractors, it will give everybody a chance to reassess their plans and understand how the market will recover from this crisis,” commented Al Zarah.

Expectations
Looking at the current state of the UAE property market, “growth” is certainly not the word one would use anymore, or at least not before things get clearer. The market is experiencing a correction and it is difficult to say if the situation will get worse. A survey conducted by Arabian Business showed that 85% of its readers believe that the real estate market will get worse before recovery comes, while only 10% stated that the worst is over. Additionally, 63% stated that investors need to be prepared for a major price correction and 22% believed that more companies will be forced to make further cut jobs.
“At the end of the day, everything corrects itself. But as long as the market thinks that the bottom has not been reached yet, there will always be speculators and investors that will dump their properties,” said Nammour. Therefore, all stakeholders should be optimistic as it will be their expectations that will drive the market upwards again.
Al Zarah believes that the situation will be clearer in January 2009. “At the moment we are running into the holiday season and the New Year, so it is difficult to predict. January 2009 will witness a new US president and we will also understand his plans to relieve the US and the world from this situation,” he said. His advice to investors is that, “those who already invested earlier this year or last year should hold on until we know what 2009 will bring. They should remain optimistic.”
Merchant said that the long-term effect of the crisis will be rather good to the whole market, since “investors and developers will have a more realistic and end-user focused approach to the development of the real estate and will reduce expected returns to those that are more reasonable in any given market,” adding that: “as an investor in the UAE and across four other continents, I am confident that towards the end of 2009, the markets should start showing signs of recovery, stability and improvement.”

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Economy & Finance

IPOs – Waiting game

by Executive Staff
written by Executive Staff

The Initial Public Offering (IPO) market in 2008 was vibrant in the region before investor confidence was sapped by the global financial disaster. The Bahrain Tribune reported that after specific instructions from the Central Bank of Bahrain, an IPO that was tipped to be one of the country’s biggest, that of real estate and construction supervisor Naseej, was postponed due to the instability caused by the financial crisis. Other major IPOs have also been delayed due to the uncertain market conditions, including Vodafone Qatar and Gulf Capital. Last year Q4 saw 17 IPOs raise $7.54 billion but this year, at the end of October only three IPOs had occurred raising $22.4 million. This is further compounded by the announcement that in Saudi Arabia, 80 companies have postponed IPO plans. Nonetheless, the IPO news for 2008 was significant including for Q3, which bucked global trends. “Six of the largest 20 IPOs in the world took place in the Middle East in the third quarter of 2008,” said Phil Gandier, managing partner at Ernst and Young Middle East. “The largest IPO in the world in the third quarter was Ma’aden [raising $2.47 billion] that was listed in Saudi Arabia.”

Gandier is bullish about the prospects of IPOs in the region and even pointed to the postponement of the Naseej IPO as positive because it shows that “regulators are keen to maintain confidence in the capital markets in general and IPO transactions in particular. They do not want to see any IPOs fail because of poor investor sentiment, therefore regulators would not be keen to see IPOs take place in such turbulent times.”
Faisal Hasan, head of research at Global Investment House, also sees 2008 as a positive year for IPOs in the region, saying “IPO activity was high in the MENA region in the first nine months of 2008 with a record $13 billion raised in 50 IPOs, as compared to 54 IPOs worth $6.9 billion in the same period last year. The average oversubscription was 15.7x compared to 10.2x last year.” Nonetheless, the regulators’ precautions no doubt are also due to the saga of Dubai Port World (DP World) that was launched in November 2007 and had major consequences on the IPO market throughout 2008.

The DP World debacle
DP World was launched by pricing through a book-building process, the first time this had been done in the region, which allows a company to maximize their share price. Thus, when DP World was launched its share value was $1.30.
Ziad Maalouf, vice-president of MENA Capital, stated that DP World was the first example in the region of “how IPOs can do badly in the secondary market and the importance of pricing. Despite DP World having good fundamentals and having a good business structure the price was too high.” Maalouf believes that DP World was a wake-up call to investors. “What happened to DP World has made people more astute about the investments that they are making and a lot more research is being done now in making sure that the pricing of the IPO is correct and that the fundamentals are there,” he said.
However, the DP World saga shook investor confidence in IPOs fundamentally, stated Mahmoud Ezzedine, director of the private banking department at FIDUS. “IPOs did not have a positive environment in 2008 because DP World really hit confidence, I think we are passed this IPO craze,” he said. Maalouf disagreed, saying “The IPO market in the region has been very strong in 2008 [before the financial crisis] due to the real estate boom and the liquidity in the region. Investors have been encouraged to tap into capital markets and there have been many successful IPOs in 2008. There is great enthusiasm in the Gulf about IPOs and a well established IPO culture has now been set up.”
The IPO market had a good year in 2008, according to Gandier. “The number and value of IPOs in the Middle East has been growing steadily and there was a solid pipeline of announced and rumored IPOs … the challenges for those companies looking to do an IPO in 2009 will center around uncertainty and volatility regarding pricing and potential new capital market regulations,” he said.
Sentiment among analysts is the IPO market will pick up again in 2009 and those that prepared during the downturn will be the most successful on the upswing. Gandier explained the confidence the market will pick up is based on the fact that “all the strategic reasons why companies planned to embark on an IPO are still valid, i.e. institutionalize the business, enhance the brand and image, monetize part of the shareholders equity and provide finance.”

 

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Society

Telecoms‘ towering potential for MENA investors – By Hashim Omran

by Executive Staff
written by Executive Staff

As Middle Eastern and African economies witness a period of unprecedented economic development that is fuelling governmental and consumer spending, the telecom industry presents investors with a unique opportunity to capture this growth. With mobile penetration rates in the region well below the global average, it is no surprise that the Middle East and Africa are commonly referred to as “frontier markets”. As well as being relatively untapped, the unique blend of growth and profitability that the markets in the region offer adds impetus to the investment case.

As the industry matures, and as greenfield opportunities become increasingly limited, many operators are taking advantage of their solid financial standing to fund acquisitions to capture growth beyond their national borders, resulting in a re-rating of valuations across the sector. The sector’s underperformance so far this year compared to other areas has resulted in it trading at a discount. The underperformance, coupled with the high financial outlook for the second half of 2008, has led to an increase in performance expectations. With a unique opportunity set that combines value and growth, the telecom sector is well positioned to exhibit robust growth in the medium term.
Africa is the world’s single fastest-growing mobile market. According to ITU’s African Telecommunications ICT Indicators 2008 Report, the continent has the highest annual growth rate in mobile subscribers and added approximately 65 million new subscribers during 2007. At the beginning of 2008, there were over a quarter of a billion mobile subscribers on the continent and it is forecasted to pass the magic 50% mobile penetration mark in 2009. Analysts predict there will be more than 690 million mobile subscribers in Africa by 2013 — highlighting the unique market opportunity. If we examine the MENA region, it underscores the opportunity that exists. Morgan Stanley predicts that MENA subscribers will increase by 24% in 2008 to 240 million and a further 17% in 2009.
Increased subscriber numbers are not the only indicator for significant growth to come. Analysts are also predicting an increase in the already high average revenues per user (ARPU) rates across the region and in particular the GCC. High ARPU is a catalyst for telecom companies to invest in other markets like Africa, in turn creating growth opportunities in those countries. The UAE’s leading telecom operator, Etisalat, is not only investing in cash-rich companies in the GCC, but has also acquired stakes in telecom companies in Egypt, Nigeria and Sudan.
The era of the monopoly has come to end with a wave of liberalization across the region. There are at least two telecom operators in all countries across the MENA region, and in some places three. Greenfield licenses are not being issued and the value of an existing license has therefore vastly increased. This scarcity premium is re- rating the value of existing telecom assets which is in turn fuelling an increasing number of mergers and acquisitions. Zain obtained the most expensive GSM license ever globally, by spending $6.1 billion for KSA’s third mobile license. South Africa’s MTN bought Dubai-based Investcom for $5.5 billion in 2006 — becoming the largest operating group in the Middle East and Africa with 40.75 million subscriptions by June 2008 through its operations in 21 countries in the region. MTN also launched Iran’s second network, Irancell, in the third quarter of 2006 and is now in talks with India’s Reliance Communications ltd. to forge a partnership.
Regional regulators are demanding that telecom operators awarded new licenses issue an initial public offering (IPO) on the local exchange — most recently evidenced by Vodafone in Qatar. This brings with it higher profit margins for not only the telecom operator, but also investors.
March 2008 also saw the launch of the much anticipated Kenyan Safaricom IPO — East Africa’s largest ever listing with 10 billion shares on offer to investors. The IPO was oversubscribed by 532% in the first two days and on the first day of trading (June 9, 2008) shares soared as much as 60%, illustrating strong appetite for the sector.
In the last eight months, telecom indices in African & Middle Eastern markets have significantly underperformed indices for the respective markets. For example, telecom indices in Saudi Arabia, Egypt and South Africa have lost 17.9%, 8.59% and 5.1% respectively during this period, while their overall markets have gained 10.3%, 3.3% and 10.2%. With telecom companies reporting strong earnings growth across the board, a reversal of this trend is expected in the second half of 2008.
In a July report titled ‘Be Brave and Buy’, Merrill Lynch analyzed the global telecom sector and concluded that strong fundamentals and continuing growth make the sector extremely appealing. Moreover, the Middle East and Africa were highlighted as the fastest growing regions in the world. The report also highlighted the significant underperformance of telecom indices relative to MSCI World and MSCI Emerging Markets. In terms of valuations, the report emphasized the attractive multiples across the industry as a compelling reason to invest.
As global investors seek a way to tap into the MENA’s frontier markets, the telecom industry presents a unique proxy to capture the regional growth. The industry offers a chance to invest in a growth market that trades at a deep discount to other sectors and markets.

Hashim Omran is the vice president of EFG-Hermes Asset Management.

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Insurance

GCC & Levant – The fog of financial crisis

by Executive Staff
written by Executive Staff

The long-term effects of the global financial crisis have already begun to take hold of the industry as lower demand for oil, resulting from the effects of a global financial crisis, has pulled the rug from under the inflated oil revenues the region was lavishing in only a few months ago — albeit with double-digit inflation. Oil-rich governments do have a certain amount of financial cushion hoarded in their sovereign wealth funds, but individual disposable income will suffer as a result of lower cash flow in the region. Oil-poor nations will also be directly affected by less disposable income in places like the GCC, as their residents will be less able to send remittances to countries such as Lebanon, where remittances constitute around 25% of GDP. The decrease in regional disposable income will prove another substantial hurdle for a regional insurance industry already dealing with low demand and penetration.

For an industry that depends heavily on investment revenues, it comes as no surprise that Return on Investments (ROIs) have suffered greatly as a direct result of the global financial crisis. “Some of the largest players’ 2008 Q3 year-on-year income came down by 70% or more,” said Thomas Schellen, publishing editor at Zawya Dow Jones. Previous statements touting the region’s relative immunity to the effects of the financial crisis have proved to be nothing more than wishful thinking, as the Middle East’s equity markets have tumbled subsequent to the collapse of Lehman Brothers, exacerbating an already unstable market environment. As Executive went to press, the Tadawul, the largest Arab bourse by capitalization ($296 billion), had lost half its value in 2008. Other regional equity markets have followed suit creating a situation where the regional insurance industry will be hard pressed to find lucrative investment opportunities to prop up their recent profit losses in 2009. “The whole investment philosophy is changing […] what we see now is that whatever diversification you do or assets you acquire, everything is going down,” explained Farid Chedid, managing director at Chedid Re.

The bottom line dropping out
The perilous financial environment prevailing today has undoubtedly prompted regional insurers to shift their focus from investment income to technical underwriting, but they will be unable to completely retrench from the investment side of the industry, as “there will be no escape from their [insurer’s] financial dependency [and] this will affect the bottom line of insurers very directly,” Schellen said. Thus, all regional insurance companies can do to shield themselves somewhat from the effects of the global financial crisis is to change their bullish investment strategy to one that mitigates risk and, where possible, pulls out completely. “The average rate of investment income will drop heavily and become very conservative,” said Elie Nasnas, director general of AXA Middle East. According to Michael Bitzer, CEO of Daman, “People will start to reevaluate how they invest for retirement. In the past they were investing in real estate and stock markets here and in their own countries, and now I think that they will be looking for a more stable form of investment and return so this might spur more demand for such products.” Bitzer explained that risky investment products will also make up much less of a proportion of insurers portfolios as customers are less willing to embrace risks under the current financial circumstances.
Furthermore, the exposure of the American Insurance Group (AIG) to subprime losses has tarnished the image of insurance agencies in the public consciousness in the West but has yet to significantly affect the regional insurance environment. “People do not realize that this might affect their local insurer,” Bitzer said. “I think that the majority of our clients are not educated enough to understand that even AIG has a problem and maybe they should check with their own insurer.” Moreover, there is a perceived notion that the losses at AIG have aided many of their competitors in the region. “The troubles at AIG have helped their competitors; there is no doubt about that,” said Chedid. However, if the financial crisis continues to affect AIG the outlook for many regional insurance markets does not look promising, as “there are territories where if, God forbid, AIG falls you will have a crisis, like Lebanon, where their market share is huge and this would become a social problem,” Chedid concluded.
Both AIG and Alico Lebanon (a subsidiary of AIG) declined to be interviewed for this article. However, Osama Abdeen, executive vice president of AIG MEMSA released a statement to Executive saying, “AIG’s insurance companies remain financially healthy and are meeting all policyholder obligations. Insurance is a regulated business. Regulators ensure that each AIG member insurance company has adequate assets to back each policy and meet all policyholder obligations. Policyholders are protected and their policies are safe.”

Losses? What losses?
The unwillingness to divulge information to the public and press about profits and losses during a global financial meltdown is suspicious, as well as indicative, of a general industry slowdown and a loss of profit growth. “Numerous companies in the GCC have put off their announcements of their 3rd quarter results as far back as they can, to as much as 45 days, rather than 10 or 20 days” said Schellen. “This is an indicator that they are not really happy about what they will have to say.”
The lack of transparency in an industry that operates using reserves from their clients to attain ROIs seems contradictory to the interests of the industry as a whole. “The success of the insurance industry is linked to its transparency,” Chedid said. “There is definitely a need for better regulation and automatically more access to information.”
Countries like Qatar, Jordan and the UAE increased their transparency rating in 2008 according to Transparency International (TI), the global organization that monitors transparency and corruption. This, however, is not indicative of wider regional reform and the effects of the sector’s opaqueness are being felt in the regional insurance industry.
“One indicator is that there are laggards currently in announcing quarterly results,” said Schellen. “It took a lot of convincing in order for companies to tell us their breakdown figures in terms of the real benchmarks, like how much revenue comes from underwriting and how much comes from investment. In some countries, like the UAE, they won’t do it by line of business; they will give us technical results but will not announce them for each line of business,” he explained. In Lebanon this trend is proving to be a huge impediment to the growth of the local market, as current legislation is deemed inadequate and government is uncooperative in providing information to local insurers.
“Legislation only goes so far as to require companies to publish their financial statements,” said Nasnas. “We used to compile a report for the Lebanese market, but this year we still have not gotten the consolidated figures from the Ministry of Economics for us to carry on in making the report. Many reinsurers and insurers, both regional and international, as well as many international groups are asking for the figures from Lebanon for 2007 and we don’t have them.”
With the need for growth potential as high as ever, one can only hope that governments increase their efforts to increase transparency in the region for the good of the insurance industry and us all.

Propping up the industry
In times of crisis, the need to stay ahead of the competition is even more pertinent to a company’s operations and the insurance industry is no different. “Modernization is a necessity for local companies to be able to survive if we have an economic downturn in the region,” said Chedid.
To stay ahead, many regional organizations are making blanket investments in the modernization of business sectors and processes. One of the main areas in which the regional insurance industry is undergoing an overhaul is in the IT sector.
“Any company that wants to be significant has to beef up their IT and bring it up to global standards — this started in 2008 and will definitely continue in 2009,” Bitzer asserted. “Companies are focusing more on this, especially regional companies, because when you are of a certain size you cannot operate without a very efficient IT system,” added Nasnas.
Another area of the industry where companies are suffering is in the lack of adequate human resources for regional markets to accommodate the needs of the regional insurance industry, which is “an issue weighing heavily on the back of insurance companies in the region,” according to Schellen. Today, except for Lebanon, Egypt and Jordan, most of the insurance staffing is imported from outside the region. Furthermore, within the region itself local talent is being uprooted from countries in the region where insurance penetration and expertise is concentrated to the more lucrative areas in the region, inevitably causing a brain drain on many local markets. “In Lebanon we had a huge HR problem in 2008 because all the people we train get great offers from the Gulf and leave,” Nasnas said. Also, within the Gulf states many traditional staffers from the Indian subcontinent are moving back to their home countries, now that the opportunity cost of returning has decreased as a result of the emerging nature of these economies. The void created further exacerbates the human resource shortage in countries like Lebanon. “There is a need to replace [the workers from South Asia] and they are doing it with highly qualified human resources that mostly come from Lebanon,” Nasnas said.
At the end of the day, however, it is growth which will accommodate for any pitfalls in the insurance industry. The implications of lower oil prices will have their ramifications on growth capabilities across the region in 2009. However, the nature of the regional insurance environment has the ‘wiggle-room’, as well as the willpower to endure the effects of a global financial crisis and come out on the other end looking better off than when this whole mess began.

 

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Editorial

The silver lining of crisis

by Yasser Akkaoui
written by Yasser Akkaoui

It’s that time of year again, but this time the party hats and horns are being distributed with a bit more caution than in previous years. Depending on who you listen to, the world is sinking into an economic crisis that could match the great depression that followed the Wall Street crash of 1929.

Certainly as I sit here in Dubai, writing this last editorial for 2008, the buzzword is restructuring. Every company is doing it in preparation for a 2009 that is yielding little in terms of economic and financial outlook. This was an economic crisis that began in America and it is the ripples of this crisis that are now beginning to lap the shores of the Arabian Gulf. Whether it becomes a tidal wave remains to be seen but cautious businessmen and financiers are battening down the hatches nonetheless.

This current restructuring will be accompanied by the inevitable layoffs that will see the departure of many skilled people from countries — Lebanon, Jordan and India — with a tradition of exporting human talent, depriving those economies of much needed remittances.

The potential upside to this rather dark development is that they will no doubt eventually be deployed to areas of fresh opportunity, such as Iraq, a nation that Executive has earmarked for considerable growth in 2009. It is a country rich with oil, minerals, agriculture and an educated workforce. It is high risk, but high-risk means high reward. As companies in the Gulf try to speculate by how much revenues will drop in 2009 – 10%, 20% or even 50% — such opportunities cannot be scoffed at.

Executive knows a bit about crises. It knows that publishing is not just about the good times when the ad revenues come in thick and fast. We stood by our readers during the 2006 Lebanon war and now we do not flinch in standing by our loyal subscribers across the Levant, the Gulf, Sudan and the Maghreb in this latest test of will and character.

Executive reiterates its commitment to the private sector, be it, banking, real estate development or trade and encourages the tireless pursuit of sustainable development. It is in these areas that we will channel our own energy; for the passion of those with the vision to achieve new goals will outlast even the gloomiest economic downturn.

Yasser Akkaoui Editor-in- chief

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Comment

Off the people, buy the people

by Riad Al-Khouri
written by Riad Al-Khouri

The past year appears to have been a good one for Jordan; was the same true regarding the well-being of average Jordanians? On the positive side, the country continues opening up to the rest of the region and the world economy. This can be felt in the boardrooms of Amman — though to a lesser extent on the street — and was confirmed by Jordan ranking a phenomenal ninth globally (and first among Arab states) in the Globalization Index for 2007, released last month. Developed by Foreign Policy magazine (published by the Carnegie Endowment for International Peace) in collaboration with consultants A.T. Kearney, the index measured economic, personal, technological, and political integration in 72 countries accounting for 97% of world gross domestic product and 88% of the earth‘s population. The index looks at 12 variables in four baskets: economic integration, personal contact, technological connectivity, and political engagement. Jordan led all of the index’s Arab countries, among which Morocco was 40th worldwide, Tunisia 46th, Saudi Arabia 52nd, Egypt 55th, and Algeria 70th.

In the political dimension, Jordan topped the countries covered by the index, and did well in the personal sphere and in economic integration. A look at Jordan’s foreign partnership agreements confirms the latter element. It is the only Arab country that simultaneously has free trade with the United States, a partnership accord with the European Union, a Qualifying Industrial Zone arrangement with Israel and the US, and membership of the Agadir agreement to facilitate trade among Arab states and the EU. These arrangements put Jordan firmly inside the Western economic and political sphere, but the kingdom also boasts a widening range of links with other countries, as well as membership in international bodies such as the World Trade Organization.

However, in the index’s technological dimension, the country ranked 50th, in stark contrast to other indicators. This combination of high marks in some areas and a dismal showing in another typifies the contradictions in Jordanian life today, which became even more apparent in 2007. For all its development, Jordan still has a way to go in assuring sustainable development, cutting unemployment, and reducing poverty. Given the continuing Jordanian real estate boom, the influx of Gulf and foreign capital into the country, and the presence in the kingdom of hundreds of thousands of Iraqis who are mainly not poor, Jordan may this year have evolved more than at any other time in the past half-century. Yet underneath, the country’s traditional core remains.

Among many other spheres, this traditionalism reflects in the country’s parliament as seen once again this year when Jordanians elected a new Chamber of Deputies, comprised of 110 members from 45 electoral districts. Although political parties and movements participated, they won few seats due to the country’s tribal fabric, and Jordan’s electoral law, which adopts the uninominal principle — voting for a single candidate only, rather than for a list, even when the electoral district (as most do) has more than one seat. Vote buying is also important and helps plutocrats win elections. (The government does not deny the existence of such a phenomenon, only saying that the media has exaggerated it.) As a result, the outcome of the November 2007 elections was similar to those of others since 1993, with tribal and traditional figures continuing to dominate, even as globalization sweeps through the country with greater force than ever.

Examples of this contradiction are apparent in Amman: In the midst of dramatic construction activity and demographic growth, the Jordanian capital is acquiring a modern veneer that hides its traditional fabric. Among many other features of globalization, branding is a feature of daily life in Amman, with massive advertising spending on new or existing brands. However, many of these products are imported, a phenomenon which, coupled with weak exports, exacerbates the country‘s chronic trade gap. In that respect, the latest figures available for the kingdom’s foreign trade are not encouraging. Although the value of exports increased by over 11% during the first nine months of the year compared to the same period in 2006, the much larger figure for imports rose close to 12%, resulting in an increase in the already yawning trade deficit by more than 12%.

In sum, given this volatile mixture of rapid but sometimes superficial development coupled with entrenched traditionalism and a shaky economic base, I predict that in 2008 many Jordanians will continue to feel left behind in the country’s surge toward globalization. The new government formed after the elections must keep the social lid on, especially with fuel price hikes coming from the elimination of subsidies. That will be tough going, but with the US and Israel underwriting the country’s stability, Jordan next year will probably stay the course. Anyway, watch this space.
 

 

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The Buzz

Surviving the downturn with intelligent branding

by Joe Ayoub
written by Joe Ayoub

With the global financial downturn impacting on all markets, everyday business challenges have become compounded by reduced customer spending power, budget constraints and more cautious investor confidence. Companies may be turning to downsizing, or outsourcing to meet these challenges yet their biggest asset — their brand — cannot be approached in the same way. True, they can choose to stop spending on their brand, but in a time of crisis, there is actually no better time to leverage their brand assets to produce greater value.

Not just a name

First, it is important to understand what exactly is a brand. With branding still a fledgling topic in terms of awareness among local businesses, many mistakenly believe it means having a strong name in the market. Companies in Lebanon often think, “I have a famous name and it is selling well so this is a brand.” But often it’s selling because there is no real competition, or the product or service is cheap. When a serious competitor appears, they lose market share. In fact, a brand is a total experience: it’s the name plus the logo plus the brand promise and the delivery of that promise — brand equals trust.

Winners and losers

Competition can quickly sort the winning brands from the losers, but a crisis is another force to reckon with. In an economic downturn, consumer spending falls and purchasing shifts away from those brands which lack a strong bond with their customers. Many Gulf real estate developers have already learned this lesson, having spent lavishly on logos and communications but overlooking the need to bond with consumers. Thus, at the first sign of economic pressure, they began to suffer as investors sold their shares.

The new market reality is that consumers are not only spending less, they are  re-examining every single purchasing decision. One global trend also emerging in Lebanon is for strong brands to reach out to consumers in a way that takes advantage of the economic climate but avoids diluting the brand value. These brands are opening new stores, often referred to as outlets, where customers have access to discounted luxury goods. This drives sales for the known brand but by using an alternative name for the outlet, it avoids diminishing the perception of the brand.

This trend is a prime example of well-positioned brands creating value by driving demand. What all successful brands require is a deep understanding of brand mechanics, how their brands influence customer behavior and choice. Understanding the process of brand value creation is vital not only to drive demand but also to improve decision-making and budget spending.

Digging for value

A successful brand strategy consists of determining the brand essence — which is what the brand stands for — and the brand promise, which is what the customer expects to be delivered when they buy the product or service. The branding process starts with an internal brand audit. Working with the company’s management, the audit sets out to discover the core strengths and fundamentals of the brand, what makes it unique and how it reached its current status. Once this is identified, strategies are devised around the brand foundations.

The corporate strategy starts with a vision, a mission, a set of beliefs and the corporate attitude or personality of the company. Once these are set they should first be shared and believed by all employees working in the company so they can deliver in their daily work.

But branding doesn’t stop there; brand management is essential for it to be effective. If you have a car, you change the oil, maintain and clean it so that it always performs. A brand is the same; you manage its image, its performance, and you keep on improving the service or product formula, so that it consistently delivers on its promise.

Sending the right message

All of these are essential before a company should think about advertising. Companies suffering from ineffective advertising shouldn’t blame the ad agency but look internally and see if they have a clear message, brand promise, employee and customer satisfaction. Only once these are really well covered should they consider advertising.

So, in times of crisis, instead of focusing purely on where and how to cut costs, companies should use the period of uncertainty to look at their brand value and strategy, look internally and question everything they have been doing: At the brand level, are your customer touch points well structured? Are your employees motivated and happy? Do they believe in your brand and your company? Then look outward at the customer: are they having a positive experience with your brand? What should you improve?

With companies increasingly focused on the bottom line, the good news is that branding drives up the brand value; the more positive a connection with customers, the more customers will remain attached to the brand and be prepared to spend money on it. Many companies may be looking to outside investors to inject funds into their business, and with a good brand strategy, they can sell at a premium. Even for companies not looking for outside investment, branding done correctly is one way to ensure that once the crisis eases, not only will they still be standing but they will also be among the first to reap the rewards. 

JOE AYOUB is CEO of BrandCell

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