Consumer Society

Low-cost carriers – Taking off

by Executive Staff
written by Executive Staff

As a part of its “23 new destinations in 22 months,” Kuwait-based discount carrier, Jazeera Airways will start with four flights weekly between Beirut and its second hub in Dubai beginning on October 27 and increasing the flights by January 2009 to seven. The airline already flies between Beirut and Kuwait.

As with the new Beirut service, the carrier will offer six other new destinations out of Dubai that includes Kuwait, Bahrain, Muscat, Salalah, Riyadh, and Jeddah. Jazeera also flies to other cities outside the region including Delhi, Mumbai, and Kochi and is adding a vacation destination to the Maldives.

“We broke one barrier after another,” said Marwan Boodai, chairman and chief executive officer of Jazeera Airways. He explained that at first, Jazeera faced difficulties in gaining trust and support in the investment community as well as securing access to some airports.

After this initial success, Jazeera now has ambitious expansion plans — doubling their routes by 2010 — and placed a $2.4 billion order in July for 40 new Airbus A320s, complete with leather seats.

For added services to customers, Jazeera also entered into two new service partnerships. The first is with American International Group (AIG) that will give passengers a travel insurance option to cover lost baggage, missed flights and other mishaps. “This is an added service to give comfort, ease, and peace of mind to travelers that when they leave home an international organization is giving them support for all of their insurance needs and services,” said Boodai.

The second new service is partnered with Dnata, a flight services company created by the Dubai government to assist the travel industry, which will link the airline’s booking system directly to Dnata. This new alliance gives customers a third booking outlet and the ability to walk into any Dnata office in the region to reserve a flight. Other ticketing options include their own online booking system which accounts for 62% of all transactions and their call center.

Trimming down overhead

Fewer booking outlets is part of how low-cost carriers save money. By relying on direct booking through their own online systems and cutting out third parties such as the global distribution system (GDS) and other leased databases used by travel agents, low-cost carriers (LCCs) are able to circumvent high costs in selling tickets. E-tickets and online services also help to cut costs and commissions ordinarily passed on to consumers. “It saves the customer around $11 by not having a paper ticket,” according to Joe Chamoun, general manager for Air Arabia in Beirut.

Other ways LCCs trim costs are by cutting overhead such as complementary food and beverage services offered in-flight. Rather than providing meals, LCCs make available sandwiches and beverages as well as entertainment for a low fee.

Another way they cut costs is by standardizing their fleets using the same model aircraft. Both Jazeera and Air Arabia fly Airbus 320s which is the most economical on the market. This streamlines the needs of aircrafts by concentrating their efforts on maintaining only one model.

Turnaround time is also a huge cost-saver. As full-service airlines park their planes for extended periods and pay for overnight accommodations for their flight crews, LCCs have a turnaround time of 45 minutes. They fly to their destination, unload, clean, and take off again with passengers all in less than an hour.

However, to distinguish itself from competitors, Jazeera offers more than just a cheap ticket. “We use a different model, we have brand-new aircraft with fitted leather seats, through the services like Jazeera Plus and technology we offer our passengers we are different,” according to Boodai. Jazeera Plus is designed for the business class and offers extra services such as complementary food, drinks, entertainment and lounge access.

Boodai is excited at what his company can offer: “We were on time 93% of the time. I missed my flight on Jazeera because I wasn’t at the airport on time — they didn’t even wait for me,” he cooed.

The major hurdle for Jazeera has been convincing the market that low cost does not equal low quality. For Chamoun, the entry of Jazeera on the market was more of a support for Air Arabia. “In the beginning, we had a tough time getting people to understand the concept of low-cost airlines. But when Jazeera came on as well, we were no longer alone.”

Sharjah-based Air Arabia began its operations in 2003 with five flights. They started with one leased aircraft and now have 10 fully-owned planes. They too will be unveiling new destinations very soon

The entry of low-cost carriers on the regional market has forced prices of other airlines to be more competitive. According to Chamoun, “three years back, a ticket from Beirut to Dubai would have cost a minimum of $600 for major airlines, today the ticket price has gone down to $400 even though the price of fuel has increased. This is due to the conditions caused by low-cost airlines.” Furthermore, the arrival of LCCs in the region grew the market by tapping into a segment that was not serviced before — those unable to afford full service carriers.

Low cost does not mean low profit and growth for the LCCs is expected to be much higher than their higher cost competitors. Air Arabia’s net profits for the first six months of this year increased 342% compared to the same period in 2006. The carrier managed to break even the first year and recorded $9 million in profit the second year and $30 million for their third year of operations.

Jazeera had the most successful IPO in Kuwait history bringing in $34 million and set to sell more shares again in November — doubling the number of shares. They have offered to sell one new share for every share held by their existing 36,500 shareholders and plan to raise another $450 million through banks.

Growth higher than global average

Growth for air traffic in the region has grown three times the global average. Passenger demand has grown this year by 20%. The Center for Asia Pacific Aviation (CAPA) recorded the growth rate in terms of revenue passenger kilometers during the first seven months of 2007 to 16.8%.

This region, especially Dubai and other Gulf airports are competing for international hub status. Dubai is marketing itself into an international hub as a natural stopping point between Europe and East Asia.

Regional governments are investing massively in new systems and infrastructure to handle the growth. For the industry at large, Booz, Allen Hamilton in a recent report cited liberalization, deregulation and regional cooperation as the biggest obstacles facing the Middle East. Access restrictions are still limiting some airports in the region from expanding service.

There are currently over 65 airlines operating out of Rafic Hariri International Airport with Air Arabia and Jazeera among the top ten. The most popular destinations from Beirut is the UAE (19.11%), France (11.54%), Saudi Arabia (8.93%), Kuwait (7.3%) and Egypt (5.1%).

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Editorial

Value before reality

by Yasser Akkaoui
written by Yasser Akkaoui

I recently witnessed at the house of a Polish friend a card game that went on for hours and during which 20 players around the same table had to wait longish periods for their turn to play. I noticed that when the players were not “in” the game, they were deep in furious discussion. “What are they doing,” I asked. “They are making money,” my friend beamed.

He explained the scenario: Let us assume player A has a container of jeans he bought for $100,000. He will sell it to player B for $110,000. Although player B was warned that the jeans only had one leg. Player B still goes with the deal and wastes no time in palming the lot off on player C for $120,000, who also doesn’t hold onto it for too long before making his margin with the next buyer.

And so it goes round and round adding profit to profit, it all ends when one owner decides to actually open the container. He is faced with the reality not the perception, but for as long as it took for the container to sail from Bangladesh to Lodz, the jeans were a commodity whose value was left to the free-floating market forces.

The same thing is happening with Gulf property — that is not to say I must add that there is anything wrong with them structurally or that the bathroom tiles aren’t what they appear. It is just that there is so much development and so much liquidity that people are snapping up the option to buy even at the drawing board stage and the ownership of a home may change hands several times before the first human takes a shower or hosts the first dinner party. If the faucet explodes, the parquet floor warps or the landfill subsides, it will have had no bearing on the profits made in the previous couple of years it has taken to build the residence.

After that the commodity — for that is what it has effectively become — will slip into the mainstream property market and be subject to a different type of value and be more slave to the usual real estate checklist.

Like diamonds, if we can persuade enough people that a rock, or anything for that matter, has value and beauty and is desirable, we can then control supply keeping demand and prices high enough. In the UAE, the challenge is for the state to ensure that this new diamond, in the shape of a vibrant and shiny and exciting property boom, does not become tarnished. But seeing what the Emirates have achieved so far, it is fair to assume that the cities built out of the sand and the sea will not loose their luster.

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Lebanon

Jordan – Is Amman the next Beirut?

by Executive Staff
written by Executive Staff

Lebanese companies are taking Jordan by storm, hoping to reap some of the fruits of the country’s recent economic growth. Lebanese fashion outlets — Aishti, ABC, GS, K-Lynn, Mario Bruni —, restaurants — Diwan Al Sultan, Casper and Gambini’s, Zaatar w Zeit, Eight, Abdel Wahab and Kabab-ji — and banks — Audi Saradar, BLOM Bank — are setting up shop in the capital Amman.

“Jordan has positioned itself as the new regional business center and a main gateway to Iraq,” says Nassib Ghobril, head economist at Byblos Bank, which itself is rumored to have increased its stake in the Jordanian Al-Ahli United Bank.

In spite of the highly-charged regional political environment and the country’s lack of resources, Jordanians enjoy a high per capita disposable income. According to the IMF, Jordan’s GNI per capita was $2,660 in 2006, up from $1,790 in 2000. “The comfortable economic situation can be credited to the Jordanian’s government ability to maintain social and political stability, beefed up by a high inflow of remittances,” adds Gobril. The kingdom’s fiscal deficit reached 4.4% of GDP in 2006 and is estimated at 4.3% for 2007. Its currency, which is pegged to the dollar, has remained relatively stable despite increasing regional tensions. In addition, Jordan has graduated from a strict IMF program. Public debt amounts to $10.6 billion and 72% of GDP while external debt remains at 50% of GDP, below its target range, through swap and repayment agreements.

“This positive environment has also prompted Lebanese banks to reconsider the Jordanian market,” explains Ghobril. “There is a gap in Jordan’s banking sector when it comes to retail products, which can be filled easily by Lebanese banks.”

Lebanon falls behind Jordan

Lebanese companies seeking a more favorable business environment are looking to Jordan. According to the Doing Business in 2007 report released this year by the IMF, Lebanon falls behind Jordan in terms of the ease of doing business, starting a business, dealing with licenses, employing workers, registering properties, getting credit, registering properties, protecting investors, paying taxes, trading across borders and closing a business.

This positive business environment as well as several other factors such as the Lebanese political situation, companies’ overall expansion plan and the kingdom’s high economic growth has encouraged Lebanese companies to look into the Jordanian market. Pierre Iskandar, managing partner of GHIA Holding, whose brands include Abdel Wahab, El Paladar, Duo, Al Saraya and Shah, cites the negative impact the Lebanese current political situation has on the tourist sector. This is a concern also voiced by others such as Khaled Ramy, managing partner of Diwan Al Sultan and its subsidiary Sultan Brahim, who admitted the chain had to shut down its Aley operation due to the unstable situation and withering tourists figures.

Toufic Hayek, manager of Mandaloun, the up-market Lebanese nightclub, announced the company had started operating in Jordan four months ago. “Different factors played in our decision to open in Amman — the obvious lack of stability in Lebanon, our broader expansion plan, the country’s cultural proximity as well as logistics concerns in relation to alcohol procurement and distribution, which is relatively easy in Jordan in comparison to other MENA countries.”

As for companies’ expansion plan, Robert Fadel, ABC’s manager, explained at a recent Business Opportunities in Lebanon conference that, “the rapid regional growth offers unique opportunities, provided something new is brought to the market. ABC’s positioning fills a current gap in the regional market.” He also observed a high demand in retail business for anchor stores in new malls. ABC, which occupies a 4,184 square meter ground floor of Al-Baraka Mall located in the Al-Sweifiah District, west of Amman, will open in February 2008, and will be the first department store to be featured in Jordan.

Jordan’s economic growth has played a major part in the decision making process adopted by Lebanese companies, attributed in part to the Iraqi exodus and the regional oil riches. Over the last years, Jordan’s economy has shown robust growth rates, leaping from 4.25% in 2003 to 8.4% in 2004, before settling at around 6.5% for the last two consecutive years. By creating large economic free zones processing Asian merchandise on their way to the US, where they benefit of duty free status, Jordan has managed to increase its export level as a percentage of GDP from 41.8% in 2000 to 50.7% in 2006, according to IMF figures. Ghobril also pointed out the kingdom’s special status when it came to economic freedom, rating higher than China, Brazil and Bulgaria, among the lower level income countries.

In their quest for the Jordanian market, Lebanese companies have decided to either partner up with locals or franchise their operation. Diwan Al Sultan opted for the first business option by opening three new outlets in Jordan in partnership with a local businessman. “The chain is launching its first two branches in the Al-Wadi Dead Sea resort. The first restaurant, which can host up to 150 people, corresponds to our popular ‘Diwan El Sultan’ concept, while the other is a snack restaurant that can accommodate up to 800 people. A third restaurant is scheduled to open in Amman as of June 2008,” said Ramy.

Branching out

Other Lebanese companies have opted for a franchising approach, considered by some as a more rapid and cost efficient mean of expansion. Casper & Gambini’s regional operations manager Maroun al-Hajj perceives Jordan’s development as a natural outcome of the exponential growth and demand for the restaurant’s high-quality dishes, home-blended coffee and friendly service, which was made possible through franchisee Al Amer Touristic restaurants. Another of Lebanon’s heavy weights in terms of the restaurant industry, Kabab-ji has two dine-in and three express restaurants scheduled to open over a four year period in Jordan announced Ola Saghir, the company’s franchising manager.

On their way to regional stardom, Lebanese companies have been faced with different obstacles. For Hayek, the main difficulty resided in shifting preferences and consumer behavior. “Contrary to Lebanon, where people go out every night, Jordanians tend to party two nights a week only. This has affected our estimated break-even period, even if Jordanians are on average less price conscious than Lebanese,” he states. On the other hand, Ramy did not notice any major differences in consumer behavior exhibited by Jordanians. The small divergences have, however, affected to a certain extent the company’s choice of concept. The popular oriental food eatery “Diwan al Sultan” concept was exported to Jordan, while its famous “Sultan Brahim” fish concept was not deemed suitable for the kingdom’s market where room for growth lies mostly in oriental food delivery services.

Other Lebanese restaurants have also integrated an express restaurant concept into their original framework such as GHIA’s Abdel Wahab. “The eatery is opening very soon at Villa Toscana but we have scheduled to open around four to five expresses, over the next few years,” says Iskandar. Besides the two Casper and Gambini’s branches scheduled to open in Amman, and a minimum of five branches in other Jordanian cities, al-Hajj is planning to launch a catering Service in the next coming months.

Jordanians love all things Lebanese

Jordan’s appeal to Lebanese businesses, in addition to geographic and cultural proximity, is attributed to the kingdom’s liking of all things Lebanese. “We are blessed, Jordanians simply love Lebanese brands, products and food,” said Saghir, smiling. An opinion shared by most Lebanese companies, as Jordanians believe there is a definite added value to Lebanese products, according to Iskandar.

So is Lebanon doomed ad infinitum to export its talent and innovative concepts abroad, falling behind other countries in region embracing the 21st century riches? “Business is driven by profits. At the end of the day and as much as Lebanese are survivors in the business sense of the word, investors can’t be blamed for looking into more predictable returns on their investments. Jordan’s stability is a determining factor to any expansion plan,” admits Saghir. On a more positive note, some entrepreneurs underscore that Lebanon will remain a leader in terms of handsome and innovative concepts, which because of the situation will be further developed and perfected, away from its gleaming Mediterranean shores.

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Real estate

Housing loans – Still coming of age

by Executive Staff
written by Executive Staff

The adage is old but it only underscores the importance of the matter: Home acquisition and finance is for most people the largest single personal purchase transaction in their life, whether it is the building of a new house, or buying of a house or an apartment.

In a time where mortgage lending has become the byword for confidence worries in America and Europe, the importance of sound and equitable housing finance in the Middle East cannot be emphasized enough. Until the turn of the century, new supply of residential dwellings was realized at slow rates even in Dubai, the emirate that pioneered the idea of the economic surge in the GCC. Recently, however, the UAE market is changing fast, as more banks have started offering home loans in addition to two housing finance specialist firms, which analysts estimated at various times this year to have up to 70%, but at least 50%, in market share.

Modern mortgage and home loan provision in the entire region is very young, measuring about five years of any significant market presence in the UAE — which, however, is still a longer existence than in other countries of the Middle East, such as Egypt and Saudi Arabia, where legal frameworks for the housing finance sector are being phased in or are, in case of the Saudi mortgage law, expected to come into force in the near future.

Housing finance companies expand abroad

For this reason, the housing finance companies of the UAE have been on the path of expansion into neighboring markets, while their home market is still in a phase of very rapid and uneven development. The two firms that dominate the UAE mortgage market are Amlak, founded in 2000, and Tamweel, which started operations in 2004. Both have initially been capitalized by strong parent companies — Emaar Properties for Amlak, Dubai Islamic Bank and state-owned investment firm Istithmar for Tamweel.

In the years 2004 to 2006, the two companies expanded their business — first Amlak and then Tamweel — by multiples in turnover and profits, as the UAE mortgage market grew exponentially from 2003 to 2006, increasing tenfold according to some experts.

Both firms were looking to expand their capital basis beyond the funding supplied by the parent companies and listed on the Dubai Financial Market, beginning with a $112 million IPO by Amlak in January 2004. Tamweel’s $153 million IPO in March 2006 was, from the company’s perspective, fortuitously timed and met with incredible demand and an epochal oversubscription rate of almost 500 times.

In recent months, the stocks of both firms lagged behind the — largely unexciting — development of the DFM general index. Amlak fared markedly weaker of the two and recorded a share price drop of 57% between end of September 2006 and end of last month. Tamweel’s share scored a drop of 18%, within reasonable range of the DFM index whose loss amounted to 13% over the past 12 months.

Market analysts have been neutral to pessimistic on the stocks Shuaa Capital in August rated them at fair values of AED 3.90 ($1.06) for Tamweel and AED 2.30 for Amlak, representing a “hold” on the former and a “sell” on the latter. In early 2006, EFG-Hermes had issued long-term fair value estimates for the two companies that were between AED 4.50 and AED 4.75. After their share prices went lower from last October through spring of this year, EFG-Hermes said in May that both stocks could be rated “buys” if the firms achieve financial gearing levels similar to that of a commercial bank.

The ‘if’ is important in this matter, because one of the factors weighing on the profitability of the two firms has been the cost of funding. As financial companies, they could provide — shari’a-compliant — mortgage loans and home finance but they have been barred from accepting customer deposits as part of long-term financing schemes, resulting in a need to source financing through more expensive means.

Both firms applied for banking licenses and had hoped to be awarded commercial banking rights in 2007; however, UAE central bank officials told media around mid-year repeatedly that they are not eager to expand the number of banks in the country. Inquiries with the two companies and the central bank said the applications have not been decided upon, leaving the matter hanging in the air in September.

This has great implications for the strategies of the two firms. Although the UAE and other GCC property markets have not been visibly affected by the real estate financing crisis that caused valuations of a number of US mortgage companies to evaporate and led to the first run of UK depositors in ages on a bank, real estate specialist Northern Rock, market watchers cautioned that the global credit crunch could bear repercussions for the home financing industry in the UAE if fundraising through shari’a-compliant asset-backed securities becomes more difficult in the rougher global credit environment.

Forecasts are grim for mortgage

Higher costs of financing in a less vibrant global economy and absence of the freedom to build a deposit base from people who put money into savings under home finance programs would impair the ability of the mortgage companies to fill demand for their products, some fear.

The market where these companies operate is complicated by the lack of historic benchmarks and absence of property price tables on the one hand and by a fair amount of speculative building and buying during the past five years on the other hand. The common base for prediction of UAE real estate trends by analysts in the past three years has been the growth of population in general and the forecasted influx of foreign labor in specific. Yet the root assumption of these forecasts was ambiguous, as some analysts said they preferred to rely for their population estimates on older government projections from 2004 and not the result of the official census from 2006.

The high share of people in the age group of 20 to 45 years in the total population was interpreted as driver for real estate demand. Business development and the trend of high-end financial companies to obtain licenses for operating in the DIFC have been cited as demand factors, while the high costs of property and the uneven distribution of income with a heavy overweight of laborers and low-income earners are cited as factors likely to slow demand.

The high growth of the UAE economy is a massive driver of labor demand and there can be no dispute that housing needs in the emirates are immense; but the real estate demand forecasts are weakened by generalizations and analyst statements that are far from compelling, such one investment house’s assertion that migration of foreigners to the Dubai housing market is supported by selling points such as “moderate weather conditions” in the emirate.

The threadbareness of market information lets secondary sources and guesstimates play a role that is stronger than the methodologies warrant. In one example, media recently reported on a survey by an exhibition company which polled persons with household income above $55,000 per year as prospective home buyers. The survey found that 16% of 332 respondents (representing 77% non-property owners of 431 persons polled) said they were interested in considering a home purchase for the coming year. Of the 332 sample, four out of five said they would not want to spend above $550,000 on their home — or ten years of the threshold income in the survey — and about half said they were not looking into a home purchase at all because it is too expensive. What such market impressions could mean as accents that would further elucidate the going housing demand forecasts of around 50,000 units per year may be a matter of interpretation.

Spiraling rents help the buyer’s market

The creation of new ownership options has made home purchases interesting for real estate buyers without investment angle — the large group of people who want to develop their careers in the UAE over a considerable period of time. The lure of ownership under a mortgage financing model is supported by the UAE’s spiraling rents and uncertainties over lawful compliance of landlords with the new rent caps. Real estate sales agents also bait prospective customers by painting value increase scenarios of new properties of up to 40% after little more than a year from signing the purchase contract.

International market comparisons depict homes in Dubai and other UAE locations as still low-priced, but that does not negate risks for individual home buyers if they run into changing economic conditions. Financing with banks and mortgage companies in the UAE is not particularly cheap as buyers may discover when looking at annual “profit” rates, which the mortgage companies charge for a variety of Islamic financing methods in lieu of interest income, achieving of which would violate the rules of shari’a.

These profit rates range, according to Amlak, from 8.5% to 15% annually, depending on the type of Islamic finance product, the duration of the contract, and the status (resident or non-resident) of the borrower. For financing a $140,000 home on a 15-year timeframe with 20% down payment, a buyer can look at total expenditure of $220,000 or more, on an 8.5% contract. Some banks have offered promotional rates below 7% and the market share of bank mortgages is expected to increase in the UAE but overall, projections see the country reaching only a modest ratio of average mortgages to GDP by 2011.

Although the UAE mortgage firms describe their shari’a products as simple, the underlying financial engineering is a demanding task and can involve several transaction steps that will be confusing to mortgage customers unfamiliar with the techniques. They function well in the legal context of an Islamic country but require adjusting of legal frameworks in countries like the UK where Islamic real estate finance has still to find a real market. Cost of financial structuring and novelty of Islamic real estate finance products — of which Amlak and Tamweel each have more than half a dozen in their portfolio — could also act as hurdles against the interaction of these providers with conventional financial markets.

With its dependence on a bubble economy driven to a large extent by outside factors, such as economic growth in markets that the UAE wants to serve, high oil and gas prices stemming from high consumption in other world regions, and shifting of business activities because of tax and other investment incentives, the real estate boom in the GCC has something artificial to begin with, and this is not mitigated by the fact that the main real estate players are government-affiliated and were initially capitalized through state funds. The sector of real estate finance is pinned down between demand projections and state-driven property supplies that rely on ambitious targets such as establishing a new global tourism destination where before only a very small niche tourism market existed.

Other unknown factors in the equation are the enormous increases in construction costs, the high needs of financing for upcoming large public infrastructure and industrial projects, and the slow rate of home deliveries by UAE developers. Demand overhangs for residential units are now expected to persist into 2009 but it is a question how all that will affect the further evolution of the country’s property price spiral, the confidence of property buyers in the residential segment, and the business of mortgage firms. Under delivery bottlenecks, home financing would increase at a slower speed. This could bring relief to the mortgage companies but the scenario introduces uncertainty factors into the sector’s performance outlook. Regulation and oversight of the UAE mortgage sector, with enhancement of consumer education and protection, will be vital under all circumstances.

Still, the ruling question about the mortgage market in the UAE is not if it will grow in the near future but only how much it will expand, and how it will source the expertise to meet the expectations of its home market and regional markets. Recent estimates for the Saudi mortgage market alone have speculated on an increase from an expected $1 billion this year to $12 billion after just three or four years.

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Lebanon

Private banking, investment banking and private equity.

by Executive Staff
written by Executive Staff

With high oil prices pumping fairy-tale-like sums of money into the coffers of the oil producers, the private equity wave is sweeping the region, with more and more capital looking for interesting projects to finance. GDP growth in non-oil producing states is increasingly buoyed by oil money from abroad, most visible in the various “mega-projects” springing up not just in Dubai, Doha, or Manama anymore but now also in Damascus, Amman, and Cairo.

In the Gulf, PE funds are now replacing traditional commercial banks as big investment houses and the region is flush with money. The question, however, is: How does this play out in Lebanon?

The financial experts interviewed by Executive say that the domestic political situation during the past decade forced Lebanon to move on a separate path, different from the rest of the region.

According to Khaled Zeidan, at Banque de la Méditerranée, “Investment banking, as a stand-alone business, has ceased to exist. If we look at all the investment banks that sprang along Lebanon in the 1990s, Lebanon Invest, Middle East Capital Group, investment house, etc. … those houses, which were quite well-capitalized, were unable to survive because the depth of the market was not there.”

As he explained, most of the specialized investment firms were acquired by other banks and ceased to exist as independent entities. An example is Lebanon Invest, which is now part of Banque Audi Saradar, a big and diversified bank. Zeidan sees the reason for the investment banks’ failure is that for serious investment banking in Lebanon, there are too few deals available. Everyone banked on Lebanon becoming a business hub for the region but that did not materialize. And since investment banking is a high overhead business — people that work in this sector are usually extremely well paid — it cannot be run on a cheap budget. But, in his words, “if there is not enough of a deal flow for market conditions, it just doesn’t work.”

Failures of investment companies

Jean Riachi, chairman of Financial Funds Advisors, put it even more drastic: “Lebanon Invest and Middle East Capital Group (MECG) were not bought as star acquisitions, but instead were dismantled when they went into liquidation.” Like Zeidan, he sees one of the reasons for the failure of the investment companies that had started with some IPOs in the ‘90s, when there were high expectations about Lebanon, in the fact that the economic boom did not last. However, he adds that, “For various reasons, in some cases mismanagement, the basic foundations were not laid within these companies, creating problems. Also, the market did not mature — the local financial market, needed to create a secondary market for the primary issues, did not exist and was not established. It should have been created parallel to the investment business, but it did not happen, and thus the necessary conditions for successful investment banking were not brought in place.”

The fall of investment banking has, in Khaled Zeidan’s view, led to a strengthening of classic private banking.

“The bulk of Lebanese banks, even at the branch level, do private banking, the sort of high-end retail,” he said. In Lebanon, people do expect their bankers to offer them many things outside the basic deposit business. One can see that at multiple levels, even in commercial banks, where the bankers cater to wealthy individuals. When done in a more organized fashion, there are a few banks that have established private banking departments or are private banks. What they are doing is either managing assets out of Lebanon in Cyprus or Switzerland, or sometimes also in Lebanon. The relationship managers are located in Lebanon and travel throughout the region, gathering assets, developing new projects or following up with their existing client base. They usually provide everything — they do portfolio management, real estate business, can push a particular product. Overall, they are relationship managers that do the full-fledged liaison with a particular client. Contrary to investment banking, where a windfall could be made with each deal, private banking is a long-term, low-margin business. But as assets grow, a lot of money is made. The majority of banks, like UBS & Credit Swiss, generate 40% of their income from the asset management of their private banks.

Difficulties on the Lebanese front

In his view, “This model has been more of a success, it is here to stay, and most probably will continue to grow. Had there been more stability in the country, we would’ve seen even bigger success, since we have the human resources. It takes time, effort and a lot of resources. But it pays off in the end.”

Private equity fund penetration of the Lebanese market seems to be facing the same difficulties as the investment banks of the 1990s: not enough interesting deals and a reluctance of domestic, often family-owned companies to disclose and embrace international standards of business transparency.

The first product of this type launched in Lebanon, Lebanon Invest’s “Lebanon Holding” in 1997, was launched by an investment firm that had had deal flow in the past, had a sizeable team of 40-50 people, and was a product that had about $50 million in assets. Yet, it still failed. Zeidan sees the reason in the local business structure, explaining that, “When you are in PE you need to penetrate the family structures in the country, convincing them that if you are the PE fund entering into their capital, it will not change the course of the way they do business. But people have a problem with reporting in Lebanon, with transparency and all those things that affect the business environment. Hence, PE will have a hard time in Lebanon, like in the rest of the region. The market isn’t mature yet.”

The only place where PE can attract large sums of money is the real estate market. As Executive reported in previous articles, over the last 12 months large sums of money have been poured into Lebanon’s real estate market, as reflected in prices: up by 30-40% year-on-year. Yet, in the wider region real estate prices have been rising even more, so that now Lebanon is perceived to be a cheap market, attracting buyers and investors.

But in other sectors, industry or high-tech for example, Zeidan does not see any deal flow because there are not enough mature companies. There are a number of venture capital transactions but these deals do not attract PE people because they like to go into companies that are already established.

Think regional

There are some activities, in which Banque de la Méditerranée participated in a PE fund geared toward helping small and medium-size enterprises that do not have the resources.

Jean Riachi sees the impact of PE on Lebanon more in within the development of an integrated regional market: “When it comes to PE, one has to think regional. Even if there are interesting investment deals in Lebanon, they can be bought by regional PE firms. There is something happening with the integration of markets in the region. Lebanon is too small of a market. If you think only in terms of Lebanon, you think too small and you cannot succeed.”

Khaled Zeidan sees the developments in the region posing a threat to the Lebanese market, as major banks are looking for opportunities outside Lebanon because they do not see any realistic growth in the country today.

In the end, Zeidan calls to resist quick jumps from old, established financial tools onto the new horse in the stable. “In terms of private equity, one should wait with the analysis until one has a real PE market. Right now there are small, hybrid funds between private and public money. I don’t see any real PE flowing into Lebanon, unless it’s a specific deal, like buying land and developing a project. But private banking is here to stay.”

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By Invitation

Private Equity Makes Inroads into the MENA Region

by Fadi Majdalani & Ulrich Koegler
written by Fadi Majdalani & Ulrich Koegler

With the rapidly growing economies of the Middle East and North Africa (MENA) requiring greater levels of investment, an increasing number of private equity firms are appearing in the region.

Consider just how quickly the region’s private equity industry has evolved. Five years ago, only a handful of private equity firms targeted the MENA region. Today, over 75 firms, with approximately $10 billion in funds announced or raised in 2006 alone, are active throughout the region.

In mature markets, such as North America and Europe , private equity firms have proven to be effective active owners. Companies that have been acquired by private equity firms have achieved, on average, better risk-adjusted returns than publicly-owned companies in their respective industries. Accordingly, one would expect the development of the MENA private equity industry to have a positive impact.

The role private equity firms have in elevating business performance is particularly important as the region’s economies liberalize, leading to an increase in foreign and intra-regional competition. In order to compete with foreign and other regional companies, MENA-based companies will have to enhance their performance. This is particularly true for companies that were once monopolies and now find themselves in an open market, and companies that are government-owned and subsidized, and now face privatization. For such companies, private equity can serve as a effective catalyst for transformation.

Despite the rapid growth of the MENA private equity industry, it faces a number of challenges. While investors may look to mature markets to extrapolate lessons for the region, MENA-based private equity firms face region-specific challenges. As such, it is critical to understand what private equity firms are, how the region can make its own markets more accessible and attractive to private equity firms, and how the economic landscape will shift as these firms seek further inroads into the region.

Private Equity Firms Seek Value Creation

The private equity industry encompasses a wide range of firms that fundamentally seek to create value, but often in different ways. At the highest level, the industry can be segmented into venture capital firms, which invest in seed through growth stage companies, and buyout firms, which invest in growth through late stage companies. The vast majority of firms, at least in mature markets, are thesis-driven, in that they seek to invest in companies that have specific characteristics, such as industry, location, stage of development, and size.

All firms adopt one or more value creation strategies that are at the core of their investment thesis. As an example, leveraged buyout firms, seek to invest in late stage companies that have stable cash flows and can accommodate additional debt. By levering up such companies, buyout firms effectively lower their cost of capital. In addition, through management incentives and greater operational oversight, they increase returns on capital, thereby earning a greater spread between returns and cost – in effect, value creation. As another example, turnaround buyout firms seek to invest in companies that may be unprofitable due to uncompetitive product lines, poor management, or other causes. By developing a solid turnaround plan, often involving product portfolio, organizational, and financial restructuring, turnaround buyout firms save, what might be otherwise, a dying business.

Private equity firms profit from their investments largely by receiving a share (typically 20%) of the return on their fund’s portfolio return. This “carried interest” is typically received only after the fund’s investors receive a preferred return. In other words, if a minimum amount of value is not created, the private equity firm does not profit. In essence, this ensures strong alignment of incentives between investors and private equity firms in generating value for portfolio companies. It is important to note that private equity firms do also profit from their fund’s management fee (typically 2% of the capital – a substantial amount for large funds) and other fees (e.g., advisory fees) that they receive from their fund and portfolio companies, but these are, for the vast majority of firms, small in comparison to the carried interest.

In addition to having their own incentives aligned with the value of their portfolio companies, private equity firms are also effective at aligning management incentives. In a typical investment, a private equity firm will require management to put their own “skin in the game” by buying a sizable portion of the business. This makes management highly sensitive to the value of the company, and far more keen to making key performance-enhancing decisions. If the company performs well, all investors benefit. Furthermore, with the company shielded from the short-term scrutiny of the capital markets, management can make the types of decisions that have long-term benefits, but might ordinarily be punished by the capital markets and their quarter-to-quarter earnings focus.

Impact on Labor Market is Positive

Private equity firms generally have a positive impact on the labor market. By providing growth capital, private equity firms enable businesses to expand, thereby creating new employment opportunities. In addition, private equity firms tend to invest in improving business practices, thereby contributing to human capital development as employees learn new technologies and skill sets.

In some cases, particularly turnarounds, a private equity firm may engage in workforce downsizing to improve an acquired company’s performance. In the long term, this is beneficial to the labor market as it is far better to have a smaller company than no company, if the business were to fail. Companies that downsize to regain profitability in the short term, position themselves to invest in new avenues for growth that may later require them to increase employment.

Also notable are the indirect effects private equity firms have on the labor market. As private equity firms enlist the services of investment banks, law firms, accounting firms, and other service-oriented businesses, more high-skilled employment opportunities are created in adjacent sectors.

Regulation and Capital Markets Are Critical

The development of the MENA private equity industry depends heavily on the regional regulatory and business environment. In comparison to the private equity industry in mature markets, the MENA private equity industry is small, with just over $25 billion currently under management. In comparison, several deals in Europe and North America (e.g., Equity Office Properties: $38.9B, HCA: $32.7B) each topped $25 billion. Apart from having larger target firms, private equity firms in mature markets have three main advantages that many regional private equity firms lack.

First, private equity firms in Europe and North America have access to a wealth of financial instruments (tradable debt securities, preferred stock) which allow a richer palette of financing options for private equity firms to utilize in structuring deals. As an example, through preferred stock rights, a venture capital firm can minimize downside risk while increasing participation in any upside.

Second, private equity firms in mature markets benefit from greater access to more accurate and detailed market information – the lifeline of the industry – due to greater disclosure and accounting standards. As lack of information increases uncertainty, and consequently perceived risk, it lowers the valuation that private equity firms can place on potential investments, often rendering deals not possible.

Third, private equity firms in mature markets benefit from developed capital markets, enabling them greater opportunities to exit. Private equity firms typically exit through a sale of the investment (trade sale) to another company (40-50% of all investments) or through a public offering (20-30% of all investments). Within the region, the latter exit strategy suffers from a lack of developed capital markets, which are often too illiquid and volatile. As the region’s capital markets develop, in part by attracting greater institutional investors, exiting via an IPO will become a more viable approach.

Challenges Abound, but the Market is Ready

The MENA region may be ripe for private equity firms, but challenges remain. First, the region’s appeal is somewhat compromised by the limited availability of deals and increased competition from other investors, including private investors, investment holding companies, family conglomerates, and government investment agencies. For many private equity firms in the region, the current climate is one of “too much capital chasing too few deals.” This is particularly challenging because private equity funds typically have a pre-defined time limit for investing their funds’ capital. This time pressure could force fund managers to make suboptimal investment decisions.

Second, the increase in the number of firms and funds in the region has crowded the market, effectively making access to capital no longer a distinct advantage. Private equity firms need to better differentiate themselves by having a greater focus in their investment thesis, or by offering a value-add beyond capital, such industry/operating expertise, or access to customers and strategic partners.

For private equity firms that can overcome these challenges, the regional markets offer tremendous opportunities. For companies considering being acquired by private equity firms, there’s never been a better time to be on the “sell side.”

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Real estate

What‘s in store – Possible correction?

by Executive Staff
written by Executive Staff

Bubbly can be tasty. Bubbly stock markets are less so as those who have been caught in the implosion phase of market bubbles are known to share. The problem with market bubbles is not really that only very few people can detect them; the problem is that it is very tricky to avoid being hit when they burst.

For the past year, economists have been divided over the future course of the UAE real estate market, arguing when a correction will set in. The debate was quite intense in the immediate aftermath of the GCC stock markets correction, driven by the painful experiences of billions of dollars in market caps that were wiped out in the first half of 2006. Additionally, as analysts pointed out in autumn of last year, stock market corrections often are followed by downturns in real estate prices — and that with considerable lag time.

On the other side were experts who diagnosed the UAE as having continued severe housing shortages that in the short term would not likely be answered by home construction, despite the immense number of project announcements that flooded the emirate at the center of attention, Dubai, throughout 2006. In short, market liberalization, foreign property ownership, sector volatility, outstanding economic growth — both in the UAE and the GCC — has created two camps: One camp believes that Dubai’s property bubble has reached a head and will soon burst, while the other camp believes the sector will continue to experience growth at least until 2010 and the bubble will remain intact.

Diversifying economic programs

As part of its strategic diversification plan to rely less on oil revenues, Dubai has been for the past seven years spearheading an ambitious economic program with real estate, trade and tourism being the main drivers. The government invested directly into these sectors through the creation of the country’s top real estate development and operating companies. Consequently, Dubai’s measures designed to build a state-of-the-art, modern infrastructure, with the aim to attract millions of tourists and international firms has spawned massive construction projects in the emirate, which, in turn, has created a substantial and a buoyant real estate stock market. Real estate and construction accounted for 15% of UAE’s $164 billion GDP.

Not to be left behind, Abu Dhabi has also earmarked the real estate, business and tourism sectors as key drivers of growth and now engaged in a frenzy of construction activities unmatched in the world. The government of Abu Dhabi announced in mid-September its “Abu Dhabi 2030: Urban Structure Framework Plan,” which lays out a vision that would make the UAE’s capital a global city equal to its European peers. The plan estimates the city’s population to grow to over three million people by 2030 and calls for the spending of over $165 billion on real estate sector and infrastructure projects.

Due to the high speed of economic expansion, the real estate sector was marked by a speculative streak in both property deals and trading in the shares of sector companies on the two stock exchanges of the UAE, the Dubai Financial Market (DFM) and the Abu Dhabi Stock Exchange (ADSM). Equity prices have returned to levels that reflect more reasonable valuations but recent turmoil in international markets raised new questions if equities in the property development and real estate sector have fortified themselves by improving their corporate governance and sensitizing their expansion strategies.

The property sector’s volatility on the Dubai Financial Market was demonstrated in August by very strong, sudden fluctuations of leading property stock, Emaar, which swung within 48 hours from a 3.5% drop to a gain of 5.6% on poorly communicated information, fears, and speculative pressures. Emaar’s fluctuation impacted local and regional market indices but only on a very short term. Calm was restored in September and the following weeks demonstrated that UAE investors have considerable trust in the value propositions of listed real estate stocks.

One testimony to this optimism on the real estate sector was the trading start of Deyaar on the DFM on September 5. Strengthened by an IPO with high demand, the company — a real estate subsidiary of Dubai Islamic Bank — rocked up 100% on its first day of trading, achieving market capitalization equal to the fair value assessments the scrip had been given in recent weeks. The first month of trading saw Deyaar retaining comparatively high price levels of 80 to 90% above its issue price.

Notably, however, the two UAE bourses diverged in September as far as their real estate stocks. The key sector companies on the DFM, Emaar and Union Properties, were rather listless in their share prices. On the ADSM, however, key players ALDAR and Sorouh recorded substantial gains in the latter part of September. Up until the summer, Emaar (and the DFM real estate sub-index that is heavily under its influence) stuck out as subdued performer while Union Properties moved more similarly to its ADSM peers. If real estate sub-indices on the two bourses maintain divergent trajectories over prolonged future periods, it could imply that investors perceive the Abu Dhabi property market as promising but have doubts about the sustainability of Dubai real estate prices.

Supply still has to catch up with demand

However, until now, “the supply of properties, whether in the residential, commercial, hospitality or retail segments of Dubai and Abu Dhabi alike, has yet to catch up with the ever increasing demand,” a report by Dubai-based Shuaa Capital said. “The result has been spiraling prices and rental rates for properties on the market and those in the pipeline,” it added, noting that prices have increased by 13.9% in the eight months leading up to August 2007.

Freehold house prices had more than doubled in the last two years because a fraction of homes under development had been completed, creating a short-term supply crunch. Yet, with many set for completion from 2008 to 2010, experts say the market is set to experience a “declining price” phase and that prices may drop 20% by 2010.

But market observers told Executive that the current market conditions for real estate in the UAE will not turn to the worse in the foreseeable future, that balance on the demand curve has definitely shifted, and greater hunger for residential and commercial property is predicted. “The extent of a correction is difficult to quantify since the economic business cycle does not appear to be at risk of suffering a decline over the forecast period,” Shuaa said in its report.

However, one thing is certain: the price rise can’t go on forever. If the real estate bubble bursts, the pattern will be different from that of a correction in equity markets. While the latter is characterized by huge trade volumes at lowered values, a collapse in real estate markets shows through illiquidity. The prices may not go down but transaction numbers melt away and distressed sellers have a hard time finding buyers. This is bad news for people who bought a home at a price they considered excessive on a rationale that the value of the property will still go up. After a property market correction, these people may have to wait for years for a buyer.

Possible correction in 2009

While international markets carry the memories of burst real estate cycles in the 70s, 80s, and 90s of the last century, opinions on the GCC market see the two possibilities of a sharp sudden drop or a soft landing. Prices will not go up indefinitely but a gradual slowing is a plausible scenario for many in the current positive economic environment of much of the region.

In its latest sector view, investment bank EFG-Hermes expects a UAE price correction in 2009, following upon “a rise in average prices of 10-15% in 2007 and a rise of 5-10% in 2008, with the peak being reached in 2H2008.”

Earnings of listed real estate companies in the UAE, so far, have been no cause of concern and it makes no sense to speculate on short-term weaknesses of publicly traded sector heavyweights, however disappointingly some companies may have treated their stakeholders.

Historic causes of real estate bubbles were in relation to the economy’s expansion low interest rates, scarcity of land, rapid accumulation of people in an area, and speculative pressures. Experts say if investors are concerned about real estate values and feel that the bubble might burst, than they must keep a close eye on long-term interest rates and the unemployment rate. If both of these rates start creeping up, it might be time to reconsider investment in real estate market.

Currently, the unemployment rate of locals in the UAE remains high and given that the emirates has its national currency tied to the US dollar creates a potential recipe for a bubble burst. Add to this the fact that that real estate companies in Dubai are already overvalued the chances for a burst become more acute.

But much can be done to reduce the risk of a stock market decline. For example, housing prices simply can’t continue to rise faster than wages do and wage increases must catch up to housing price increases. Furthermore, speculative excesses in markets will trigger downturns in real property valuations. As such, the government must take steps to end the speculative winds. Proper valuations of real estate firms are also in order. “Proper handling of the real estate market dynamics by the authorities will prevent a potential meltdown,” Samer Shaheen, a senior analyst at Zawya told Executive. “The UAE’s young markets lack a form of information sophistication. In-depth research on the property market to forecast trends are rare and much more on this level is needed.”

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Comment

Fulfillment & Betrayal

by Michael Karam
written by Michael Karam

The Palestinian businessman Naim Attallah has just published Fulfillment & Betrayal 1975-1995, the third installment of his autobiography. His first two offerings The Boy in England and In Touch with his Roots tells of his arrival in London as an immigrant and penniless student (he once worked as a hospital porter and laborer) and his impressive rise as a financier.

He began his career in banking as a foreign exchange dealer with Crédit Foncier d’Algérie et Tunisie in the City of London. He went on to become the protégé of the brilliant but ultimately flawed Palestinian banker, Yusuf Beidas who, in early ‘60s, made Lebanon’s Intrabank the biggest financial institution in the Middle East. Intra’s collapse in 1966 has been called by many a national witchhunt and a conspiracy as well as a key milestone in the subsequent unraveling of Lebanon. It certainly destroyed Beidas, who died a broken man in Switzerland two years later.

Amid the legal debris of the collapse, Attallah was named as Beidas’s executor, a role that, despite his success in other areas, would haunt him for years. In 1995, a summons was issued by a Lebanese court on behalf of the Beidas family, accusing Attallah of breach of trust in his handling of the aftermath of the collapse. He fought and won the case. Of Beidas, he said: “I felt he became the underdog, the victim of political vindictiveness and maneuvering and if you balance his debits and his credits are far in excess of his debits.”

That would be career enough for most people, but Attallah went on to become a flamboyant film and television producer, publisher, author and journalist impresario, and friend to the stars.

He also gave me my first job.

He was a close friend of my parents (in In Touch with his Roots he chronicles a rather glamorous and spectacular car crash in London in the ‘60s involving my parents and Attallah and his wife, pining the blame on my father’s carefree driving habits) and when the time came to find something for young Michael to do before going up to university, I was dispatched to Quartet, his publishing house where Attallah bestowed upon me the title of office boy. My brief foray into Attallah’s world coincided with an era — written about in exacting detail in Fulfillment & Betrayal — that made him famous (and infamous) and which warmed the heart of a young man happy to see a fellow Arab have London society at his feet.

It was 1983 and the London gossip columns could not get enough of what they dubbed “Naim’s Hareem.” For an 18-year old with his hormones raging, working at Quartet was like collecting the mail for Hugh Hefner, except that these women had degrees from Oxford and had parents who either owned castles — Liza Campbell — or who ran the country — Nigella Lawson. Some of the nastier elements of London society bristled at how an arriviste Arab — Johnny Wog — with a comb-over hair style had snagged such blue chip totty, but Attallah had rhino hide for skin.

I would take packages from the Quartet offices in Goodge Street to Attallah’s penthouse office on Poland Street just off Soho to find London’s most desirable women draped over his office. “Naaaaayeem,” they would drawl. “Won’t you take us to lunch?” Attallah, first and foremost a businessman, would bat away their requests: “Not now darling. Later.”

Although not what it was, Quartet will be remembered as a genuine force in publishing and Attallah’s record as a publisher is considered, even by his many enemies, as that of more than just an exotic dilettante. Sure he had his lemons but he did publish The Joy of Sex! Furthermore, he never forgot he was an Arab. Quartet published two books that at the time were considered controversial: Jonathan Dimbleby and Don McCullin’s The Palestinians, one of the first in English to tell the Arab-Israeli story and God Cried, a searing account of the 1982 Israeli Invasion of Beirut, written by Tony Clifton and photographed by the late Catherine Leroy

Attallah went on to produce movies, found magazines and become the CEO of the Asprey. Now 77, Attallah is regrouping. When I interviewed him in London in February of last year, I put it to him that he must surely be slowing down, taking it easy. Sitting in his Mayfair office, and resplendent in a bright red shirt and natty black and red pinstripe suit, he said he had a few debts to pay off but then would “recapitalize and start again.”

Fulfillment & Betrayal 1975-1995 by Naim Attallah (Quartet), £25

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Real estate

Profiles – More than neighbors

by Executive Staff
written by Executive Staff

Sharjah

Industrial, residential, and cultural aspects are combined in the profile of Sharjah. The emirate ranks third in terms of housing demand, size, and population in the UAE. Industry is a development focus where the emirate claims to generate 40% of the country’s industrial GDP in its manufacturing establishments and 19 industrial zones.

The latest major industrial zone projects in the emirate are the Emirates Industrial City (EIC) and the Sharjah Investment Center (SIC). EIC is owned by UAE and Saudi developers through a holding company. The project’s size is 7.7 million square meters; it caters to small and medium enterprises, with a strong space allocation to logistics and warehousing. SIC is a mixed use industrial, commercial, and business zone of 2.9 million square meters that is being developed by SNASCO, a Saudi-owned real estate firm.

In 2006, Sharjah was ranked in second place for the number of industrial establishments in the UAE after Dubai, with a share of 29% among the country’s close to 3,600 registered industrial enterprises. However, in terms of cumulative value of industrial investments it was a distant third place after Abu Dhabi and Dubai. The industrial infrastructure of Sharjah includes its airport and three commercial ports, with leading free zones being Hamriyah Free Zone and Port and SAIF at the airport.

The residential sector in Sharjah faces high demand from people working in Dubai who seek affordable living in the northern emirate. The emirate’s leasehold ownership options and local market conditions have supported diverse building activities and residential towers. Residential projects with noteworthy profile include the Sharjah and ABBCO towers by UAE real estate firm Bonyan International, or the Taawun 2 and Sondos towers by Tiger Real Estate.

For its tourism and resort sector, the emirate’s largest project is the $4.9 billion (AED17.9 billion) Nujoom Islands development, comprising 10 islands with residential, commercial, and resort facilities. Other facets of the tourism development include emphasis on doubling the emirate’s number of hotel rooms to 10,000 by 2010, attracting cultural visitors and increasing the conference and events side of business travel to Sharjah.

With all ongoing developments and relative to its size and economic weight, Sharjah is underreported in international and regional media. The emirate maintains a conservative value approach and cultural emphasis. It has 2,600 square kilometers of land surface, including areas on the Gulf and the Indian Ocean coasts; its population was reported at 725,000 in the last census. The ruler of Sharjah is Sheikh Dr. Sultan bin Mohammed al-Qassimi.
 

Ajman

The government of Ajman is overseeing an expansive residential real estate boom that started with the passing of freehold property legislation in 2004, opening the market to foreigner ownership. The smallest of the emirates is benefiting from the sky-high prices of real estate in Dubai and throughout the country and can draw soon-to-be residents and investors with prices as low as AED 350 ($95) per square foot. There are over 200 residential towers in the works.

It’s impossible to gauge exactly how much has been spent on developing real estate in Ajman. The government acts as lead financer for most of the projects and does not disclose the costs.

The emirate is positioning itself through building a new urban center and by aiming to be more than a “suburb of Dubai.” The Al-Zora project is undertaken in collaboration between the government of Ajman, private investors, and Solidere International in a billion-dollar partnership. Another mixed-used project is the 72-tower commercial and residential complex, Emirates City, which will cost an estimated AED15 billion ($4.1 billion).

Tameer Holding, based in neighboring Sharjah, is building residences and commercial properties in Almeera Village, a freehold development that advertises its location of being only 15 minutes from Dubai International Airport. The project was initially expected to cost AED1.2 billion ($410 million).

However, the price tag is likely to rise. According to Tameer, the developer is currently in the final stages of negotiations with the Ajman government to lift the 11-story cap initially placed on buildings in Almeera Village.

“Initially, the majority of properties available in Ajman are residential,” Roger Wilkinson, a managing director of the real estate management and leasing company Northern Emirates Property, told Executive. “However, Ajman does not want to become a satellite city that will only accommodate people who will have to commute to other emirates for work or for pleasure. You can purchase leasehold offices there.”

Once the leasehold law was passed in 2004, the building boom began. Since then, three projects have been completed, adding over 1,800 new apartments to the real estate pool and 26 buildings to the skyline.

Prices have been on the rise since the first new leasehold project was completed in 2005. The “introductory launch price” per square foot for an apartment in the first development was AED157 ($43) per square foot but has risen in increments to between AED300 ($82) and AED400 ($110), according to Wilkinson.

He described property prices in Ajman as “realistic and reasonable,” which currently attracts mainly buyers for investment purposes, but prices are set to increase.

Ajman has an active free zone that was established in 1988 and received autonomous status in 1996. Future development plans include relocation of the emirate’s port and construction of an airport.

Ajman is the smallest emirate in the UAE with a land surface of 259 square kilometers and a population estimated at 235,000. Its southern neighbor is Sharjah.
 

Ras Al-Khaimah

The emirate at the tip of the United Arab Emirates, Ras al-Khaimah, catapulted itself into wider awareness around three years ago. The launch package included investor conferences, the formation of an investment authority, the establishment of a real estate company, and, importantly, a marketing approach of compacting the emirate’s elaborate but unwieldy Arabic name into RAK for all these tasks.

RAK Properties, the emirate’s primary real estate development firm, was established in early 2005 and undertook an initial public offering worth $302 million (AED1.1 billion) one month after its incorporation. The company is owned to 5% directly by the RAK government; the shareholder base includes corporate, governmental, and private investors as well as 49% in circulation on the Abu Dhabi Securities Market.

Initial flagship projects by RAK Properties include a $2.7 billion (AED9.9 billion) coastal leisure development, launched as Mina al-Arab in spring of last year, and two residential towers that are said to reach the market next year as its first completed projects.

In 2006, RAK Properties assumed a stake of over 20% in another development company by name of Rakeen, set up together with the emirate’s government and the national airline. Rakeen claimed having operations in eight countries less than one year after its creation and is involved in large new projects in Ras al-Khaimah, including a financial free zone first announced this summer.

Industrial zones, ports, and infrastructure are part of the emirate’s development program but its tourism projects have attracted greater attention. RAK’s announced development ambitions in 2006 reached literally if not to the stars but at least — almost — into orbit with a plan by a commercial US company to create a commercial spaceport for extra-planetary tourism through suborbital flights that provide five minutes of weightlessness.

In 2005, RAK authorities teamed up with Saraya Holdings and the Arab Bank group in a resort and residential project. The Saraya Islands project will play on the theme of Arab seafaring heritage and address the luxury resort crowd, according to statements issued by the joint venture partners in December of last year.

Newer projects in the RAK development portfolio include a $2.5 billion (AED8.4 billion) free zone for the hospitality industry under the name of “ihottz” that was announced in April and Financial City, which was introduced in June as the center piece development for an offshore project called RAK Offshore. Owned by the Ras al-Khaimah Investment Authority, or RAKIA, and developed by Rakeen, the offshore project aims at becoming a center hosting financial, legal, logistics, and insurance services.

RAKIA confesses to a private-public model of economic development in which the vision of the emirate’s crown prince and deputy ruler Sheikh Saud Bin Saqr al-Qasimi is of great importance. He ascended to these positions in 2003 as younger son of Sheikh Saqr bin Mohammed al-Qasimi, who has ruled Ras Al-Khaimah since 1948.

According to RAKIA, the emirate has a population of 250,000, an area of 2,468 square kilometers, a coastline of 65 km, and almost zero crime.

Fujairah and Umm Al-Quwain

Tucked away from the international attention that Dubai and Abu Dhabi attract because of their outsized ambitions and wealth, the emirates of Fujairah and Umm al-Quwain have nonetheless seated themselves on the bandwagon of real estate development. Fujairah is situated on the eastern slopes of the Hajar Mountains, facing the open waters of the Indian Ocean. At least for the time being, it seems a bit distant from Dubai to be a major contender in the game of commuter communities but it started sprouting resort hotels that inserted oases of luxury into the frame of the terrain’s harsh natural beauty.

Land ownership in Fujairah is more restrictive than in other emirates of the UAE, which limits its attractiveness for residential buyers. On the industrial front, Fujairah has airport, port, and free zone. Its strongest prospect for industrial growth appears to be as shipping hub for oil and gas, which bring producers in the UAE and Saudi Arabia the advantage of avoiding the shipping bottleneck of the Strait of Hormuz. Plans call for (further) port expansion, construction of a major pipeline in the next few years, and erection of an LNG storage plant.

The development of tourist hotels and resorts was promoted by the Emirate of Fujairah since early in the century when the local government co-invested in building the Le Meridien Fujairah Beach Resort, the first of several resort projects in the sea-in-front, mountain-in-back category. A Fujairah tourism bureau (FTB) was established by government decree from 1997 and apparently erupted with a spurt of content in news in 2001/2002 (including a welcome page in Arabic, German, and English).

According to the FTB, Fujairah covers a territory of 1,450 square kilometers on a length of 70 kilometers. The emirate has an estimated population of 130,000 and it is ruled since 1974 by Sheikh Hamad bin Mohammed al-Sharqi.

At the crossroads of the UAE’s northern emirates, Umm Al-Quwain is an emirate that aspires to greater prominence. The overarching development project is the master-planned Al Salam City, a mega real estate concept with a timeline of more than a decade and a target of attracting 300,000 or even 500,000 in population. The development rationale relies on both nearness to Dubai and creation of the city’s own economic sphere.

Announced in 2005, the project cost was estimated at $8 billion to be invested by 2020. With its implementation this project, run by Tameer Holding, would make the emirate the UAE’s biggest gainer in the number of residents by far, given that the 2006 national census results attribute a population of less than 50,000 to Umm Al-Quwain.

Two coastal resort projects also grace the emirate, the $2.2 billion (AED8 billion) White Bay waterfront resort community and the $3.3 billion (AED12 billion) Umm al-Quwain Marina. Apart from these big ticket residential items, the emirate is investing into infrastructure development, including a large desalination plant. An industrial zone with integrated camp housing for laborers, the Emirates Modern Industrial Area, was developed by Tameer. A free zone has been in existence next to the emirate’s Ahmed Bin Rashid Port since 1998.

Umm Al-Quwain seems to maintain no significant own presence on the internet. Its territory stretches over 750 square kilometers and entails what UAE tourism websites routinely call “endless beaches.”

 

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Banking & Finance

IPO Watch – Making a splash

by Executive Staff
written by Executive Staff

September’s IPO window was not just open, it was wide open as several new IPO announcements were made and several ongoing IPOs came to a spectacular conclusion with oversubscription rates for two primary issues in the range of 15 times each. At close up, supply of $160 million worth of stock in the two issues faced demand above $2.3 billion.

Impending primary issues confirmed in September included Kuwait’s Noor Telecommunications Holding Company which is offering a 49% stake to the public at a price of 110 Kuwaiti fils per share. The IPO is expected to be launched on October 7. Not far behind, the UAE’s Al Nahda International Education Company, which operates a large number of schools in Abu Dhabi, announced that it will offer 770 million shares or 38.5% stake to the public, at a share price of AED 1.02. The IPO is expected to launch in the fourth quarter of 2007. An extension of subscription was reported from Syria, where Al Aqeelah Takaful Insurance said it lengthened the period to October 27 after achieving 50% subscription coverage by September 26.

A new IPO proposal was communicated from Qatar where a conglomerate will approach the market under the name Aamal with an IPO worth $284.5 million for 30% of its capital. The timeline is not yet confirmed but the measure will be the first to target expatriates as part of the subscriber base. Even more weighty prospects come from the Saudi market, with a lead by Saudi Aramco. The company said that an oil refining joint venture set up with Japan’s Sumitomo Chemical Co. on the western coast of the Red Sea will raise $3 billion in an IPO to finance its operations. According to media reports the IPO is expected to launch by the end of the year.

The joint firm known as Rabigh Refining & Petrochemical Co. (Petro Rabigh) had a total projected cost at $4.3 billion, but surging materials prices have pushed up the figure to $9.8 billion. The company has already raised $5.8 billion in loans from about 20 banks and the IPO, which would be the largest ever in the region, will cover the remaining costs.

According to Zawya’s IPO Monitor, three companies — two from Jordan and one from Oman — were on track with successful subscription periods between end of August and late September. Oman’s Galfar Engineering and Contracting was 14.81 times oversubscribed when it closed on September 10. Jordan Baton for Blocks and Inter Locking Tiles was 15.17 times oversubscribed when it closed on August 30.

Expected to be oversubscribed is also Jordan’s United Cables Plants Co. which launched its IPO on September 17, offering a 25% stake, worth $14.1 million, of its $56.4 million capital. Announced closure date for subscription was September 30.

Galfar Engineering was the largest IPO in Oman history

Galfar Engineering was the largest IPO in Oman’s history. It garnered immense demand from institutional buyers whose hunger for allotments upward of 10,000 shares exceeded supply almost 33 times. In the retail tranche of the offering, where prospective buyers could request up to 10,000 shares, demand was lower by a factor 30 and oversubscription amounted to only 2.3 times, according to the company.

Galfar was the demand tiger in September, with $2.27 billion on subscription records versus its $156 million offering. In late September, the company said allotments on the retail category (10,000 or less than 10,000 shares) was 43.91%, and the second category (more than 10,000 shares) 2.97%. The additional funds were to be refunded on September 25, the company said. Galfar is expected to be listed on the Muscat Securities Market around October 24.

Rights issues of importance have been furthered by two banks, Qatar National Bank and National Bank of Kuwait, both of which are appealing to their shareholders with new expansion plans. QNB wants to up its capital of currently $446 million by 48.5% through its rights and bonus shares issue. NBK is looking for a 20% increase of its present $693 million capital.

The IPO that gapped the headlines for first-day performance at listing in September was Abu Dhabi’s Deyaar Development, a real estate firm, which registered a gain of 100% during its debut on September 5 on the Dubai Financial Market. By end of trading day, Deyaar’s shares closed up at AED 1.91 ($0.52) after peaking to AED 2.02 and recorded transactions valued at AED 3.299 billion ($898.5 million) or 1.73 billion shares. This was in line with analysts expectations of a fair value estimate of AED 2.0 per share, implying an upside of 96% to the IPO plus subscription fee price of AED 1.02 per share.

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