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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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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Real estate

Shopping centers – Just getting bigger

by Executive Staff
written by Executive Staff

While still there, although less in Abu Dhabi than Dubai, the traditional, open-air souq is quickly being overshadowed by the modern, air-conditioned mall in the political and financial capitals of the UAE. Dubai dedicates more space to its souqs but it also far surpasses its much larger neighbor in space dedicated to climate-controlled commerce. And both are furiously building more malls.

At the end of 2006, the land covered by existing shopping malls in Dubai alone gave the UAE more space dedicated to shopping than any other GCC country will have until 2010, based on announced plans at the time.

In May, Dubai announced what is being described as the “world’s largest shopping area” — 3.7 million square kilometers of leasable retail space, or gross leasable area (GLA) in industry lingo.

The move added a retail component to the Bawadi development launched last year within Dubailand — the emirate’s 278 million square kilometer entertainment development. Malls, boutiques and street-level shops will line each side of the 10-kilometer Bawadi Boulevard, woven between and through 51 hotels, which themselves will have retail space.

This deluge of retail space — the equivalent of over 544 World Cup regulation football pitches, which if laid out lengthwise in a line would stretch over 57 kilometers and take the average person over 11 hours to walk end to end — is over two-and-a-half times the GLA in Dubai at the end of 2006.

Less than a month after the retail plan was announced, Al Ghurair Investments, a holding company based in the UAE, inked a joint venture with Bawadi to build the first of the malls. Phase one of the AED10 billion ($2.74 billion) project is expected to reach completion by 2012, explains Arif Mubarak, chief executive officer of Bawadi LLC, the project’s coordinator. The Ghurair Group, founded by Al Ghurair’s Investments’ CEO’s father, opened the first mall in Dubai in 1983.

Mubarak declined to speculate on the total investment the Bawadi shopping space would draw but does not expect the building to be completed before 2015. The Bawadi hotel development, announced in 2006, is expected to be finished by 2016 and cost AED 367 billion ($100.55 billion).

Elsewhere in Dubailand, what will be the world’s largest mall has its pilings and infrastructure in place, according to an official with the mall’s owner. She said that they hope building of the structure will begin in a couple of months.

Outdoing the world and each other

Myra Searle, vice president for retail with the I & M Galadari Group LLC, which owns the Mall of Arabia, explained the first phase of the mall will take 29 months to complete and have 372,000 square meters of GLA. Phase two will be ready five to seven years later and put Dubai at the top of the large-mall food chain. The mall’s total cost is AED32 billion ($8.8 billion).

The Mall of Arabia will not only replace the current largest mall in the world, in China, but it will also depose Dubai’s current largest mall, Mall of the Emirates, often known as “the one with the ski slope.” The Mall of the Emirates built an indoor winter oasis with the centerpiece five-slope indoor skiing area.

Abu Dhabi is not attempting to defy nature with its retail outlets, and the space dedicated to the malls in largest of the emirates, which comprises 81% of the country’s total area, pales in comparison to Dubai. Between 2006 and 2010, the GLA in Abu Dhabi is expected to more than double from 574,000 square meters to 1.4 million square meters. This will leave the oil and gas rich sheikhdom with 0.87 square meters of GLA per capita, 37% less than what Dubai is expected to have by 2010.

As Abu Dhabi follows Dubai’s lead in mall building, it is also mimicking its neighbor’s self-contained development building model. Dubai is known for the many “cities” within it (Knowledge City, Media City, Sports City, etc.), which feature housing, office, entertainment and, of course, retail space.

One of Abu Dhabi’s largest development projects, Al Reem Island, being built on a natural island, will also host what will become one of Abu Dhabi’s largest malls. Less than a third the size of the future world’s largest mall, the Al Reem Island Mall is expected to offer 130,000 square meters of GLA upon completion in 2010.

The Al Raha Beach development, which is planned to span a length of the Dubai-Abu Dhabi highway and, again, Dubai-style, be built on reclaimed land, will also house a shopping mall, albeit much smaller. The Al Raha Beach Mall will only offer shoppers 40,000 square meters of GLA.

The ultimate goal of all this mall building is to draw tourists, but malls are also a hit with the local market. Residents of the UAE are serious shoppers. A 2005 Nielsen Company poll found 80% hit the mall once a week or more “for something to do” — or “shopertainment”. This is the second highest rate in the world behind Hong Kong.

“The trend is more or less the same [today],” Himanshu Vashishtha, managing director at The Nielsen Company UAE, said. “If anything, the proportion of people who do shopping for entertainment, or “shopertainment” as we term it in this part of the world, has only increased.” Why?

Little else to do but shop

“Six months of the year you have very hot weather and people definitely tend to seek indoor entertainment,” he said. “Couple that with the fact that 74% of shoppers enjoy shopping. This is true even when they are just visiting the hypermarket… And it becomes an outing.” With food courts, cinemas and other attractions, malls have become the place to go in the UAE. On average, residents spend three to four hours at the mall each trip. He noted the rates were higher among UAE nationals than the community of foreign nationals increasingly populating the country.

On average, Vashishtha said, those flocking to the mall spend AED400 ($110) per trip, or just under AED21,000 ($5,800) each per year. Right before the announcement of this new retail space, the real estate consulting firm Collier’s International estimated Dubai residents would need to spend AED31,000 ($8,490) per capita for all the malls to turn a profit.

The local burden, they estimated, would be reduced to around AED21,000 ($5,800) when tourist spending is considered, equal to what the entire country currently spends per capita each year. In Abu Dhabi, Colliers estimates residents will have to each spend AED18,000 ($4,932) to keep their malls in the black. Colliers did not estimate what amount tourists spend in Abu Dhabi malls.

So is all this mall building a viable plan?

“That’s the million-dollar question,” says Searle, of the Mall of Arabia. “Put it this way: A developer will know when Dubai is over-malled when the retailers no longer lease… At the moment we have seen no evidence of that taking place.”

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By Invitation

Breaking into a family affair

by Imad Ghandour
written by Imad Ghandour

The main advantage of private equity backed companies over normal family businesses has always been their ability to focus on increasing the value of the company quickly. Speed of execution and focus on shareholder value is the name of the game.

A recent report by Ernst & Young on the impact of PE ownership on corporate performance in Europe and the US reveals that PE increases the company value during the ownership tenure, and, even post-exiting. During PE ownership, the average value of PE owned companies increased by 26% compared to 12% for listed companies during the same period. More surprisingly, the growth of value in PE-backed companies continued after the PE fund sold its stake. Profits at the biggest US and European companies sold by private equity last year grew much faster than at their publicly listed rivals, supporting the buy-out industry’s claims of superior management skills, according to the E&Y report.

Despite the nascency of private equity in the region, private equity players have demonstrated similar ability to their international counterpart by focusing and quickly increasing shareholder value in several family businesses. Take for example Depa United Group, the leading interiors contractor who is planning to go public in 2008. TNI and other institutional investors have bought into the company since 2004, and were able to increase its revenue more than 10 folds and its value more than four folds over that period. Another example is Aramex. The once privately owned but currently listed logistics company grew its bottom line five-fold over the three years when it was in private hands, and its phenomenal growth continued post IPO.

But not all investments in family businesses have such happy endings. Unfortunately, the leap of faith that many private equity players do when they invest in a family-owned business is that business owners seek to maximize their company value in the next three to five years. In most cases, this is a wrong judgment call. In practice, the owner rarely makes maximizing his company value a top priority. Company or share value means very little to someone who is keen to keep his shares and pass them over to his children and grandchildren. Many family owners extract more value from things like revenue growth, market share and market dominance, and professional and industry prestige. The problem becomes more acute when the owner is the manager of the business, and hence, is driving the business according to his own agenda.

Without addressing this misalignment of interest, an investment in a family business is doomed to be problematic. Bulletproof agreements, good intentions, well defined strategies, and nice people will not mitigate the problem in a Middle Eastern business environment. Only when the business owner realizes a tangible financial benefit from increasing the company value will there be proper alignment and hopefully big returns from the investment.

Imad Ghandour is Head of Strategy & Research, Gulf Capital and Board Member of the Gulf Venture Capital Association.

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Real estate

Engineering the new – Economic city

by Executive Staff
written by Executive Staff

What are the three most important things for GCC real estate developers? The proper answer has to be (1) strategy, (2) strategy, and (3) strategy. This is the case for both the master planners in governments of kingdoms, emirates, provinces, or special economic cities and the entire field of private, listed, or state-backed property firms.

The magnanimity of governments and leading developers in the Arab World is reflected unequivocally in their plans to build new cities. This drive to growth is so intense that we have become used to take immediate notice of a project announcement if it carries an investment price tag in the double-digits — of billions of dollars, mind you. A cost expectation of mere millions or one or two dollar billions for a new residential district or financial center in a GCC country nowadays will hardly stir the attention of the media and other market observers.

Viability is the test for new projects

These investment dimensions represent an immense responsibility to provide returns to stakeholders, which are the current and future generations of the cities, provinces, or entire emirates whose decision makers have committed these resources of land and cash to real estate projects that will depend on being economically and commercially viable over decades and perhaps centuries.

Already in the short term, a litmus test of viability for big development concepts can be applied by looking at their productivity in economic terms, measured through the price that the market is allocating to offices and commercial properties through rent, lease, and sales contracts.

For most mixed-use mega-projects, like the six economic cities on the construction agenda of Saudi Arabia, the chances for tallying real track records for demand are still years away. The demand for office real estate in new UAE business hotspots, however, is already very measurable.

By this yardstick, the quest for creating a regional or international financial hub in Dubai, for example, has matured way beyond the vision that it was at the turn of the 21st century. The Dubai International Financial Center (DIFC) currently counts among the most sought-after office locations in the Middle East and Africa, and one can easily include numerous European capitals in the list.

Soft evidence for the demand comes from stories of companies who queued for months to get a lease on an office at DIFC, accepting basically any size and price only to establish a presence there. Hard evidence comes from price surveys that put prime properties in Dubai into the range of the ten most expensive cities worldwide for cost of occupying an office. Other market assessments say that office rents for prime space in the emirate went up 35% in New Dubai from January to September 2007, on back of an estimated 50% average increase for prime office rents in 2006.

Rental rates for sub-prime offices in New and Old Dubai are also reported to have increased massively, with some less pricey areas even narrowing the gap to the top rental category where some analysts say space is offered at average annual rates of $60 (AED219) per square foot while others put the average paid in top business locations at almost $90 (AED329) per square foot. Real estate experts working in the UAE are in consensus that vacancies in office space in the main cities are practically nonexistent. Occupancy rates of “99%” apply equally to Dubai and Abu Dhabi, where according to a senior manager at developers ALDAR Properties, “any commercial, office, residential tower in Abu Dhabi is being sold like hot cakes right now.”

Looking forward, the expectation is that office rents will continue to move up for a while because demand growth is far from over and delivery of new office space is lagging behind developers’ forecasts, similar to the UAE-wide delays of residential construction. The latest assessment of the UAE office market, by EFG Hermes researchers, expects nonetheless that commercial space in Dubai will increase to 75 million square feet by end of 2010, three times its volume at end 2006.

Office space demand is difficult to identify

Factors influencing future occupancy of office space in the UAE business centers include demand from international companies and new economic initiatives created by the various emirates. A March 2007 research note by financial firm Prime said that the supply-demand dynamics for office space in Dubai is more difficult to identify than for the residential sector, adding that industry insiders expressed uncertainty over the future direction of commercial property.

Prime estimated that about 14,700 new companies would have to set up shop in Dubai from 2007 through 2010 in order to fill the forecasted supply, assuming an average office size of 3,500 square feet per company. It compared this to the number of new business licenses issued by the emirate’s Department of Economic Development in 2006. These numbered 13,170 and to 92% were licenses for commercial and professional activities, which the researchers viewed as likely clients for office space.

EFG Hermes, for its part, expects that commercial rents in Dubai will slide back gradually from 2008, reasoning that the bulk of new office space will hit the market in 2008 and 2009 and that the totals spelt out in current development plans will all be available by end 2010. The flooding with new space in 2008/9 will align office rents again with international averages, EFG Hermes wrote.

In addition to price expectations, the scenario is also changing noticeable in matters of quality. As market participants observed, supply limits of the last few years made companies accept secondary or temporary locations when space in their desired office tower or business zone wasn’t available. But with higher pricing and diversification, the market for commercial properties has entered a process of increasing sophistication. This, according to UAE real estate management companies, accentuates the differences between well-designed and managed office towers that have been constructed with clearly defined client needs in mind and towers that were put up with vague use concepts by general investors, based on having land and money to build.

The vagaries in charting long-term prospects for commercial real estate in Dubai illustrate how strategies will be paramount assets for developers and governments. Location is very valid as classic parameter of selecting a property, be it for construction of a project or as site to rent/buy for a retail outlet, corporate headquarter, or home.

What, however, if it is locations that are being created? In the big schemes of regional growth, the players — in the UAE real estate market they are the governments of the seven emirates and the development companies they have established — are aiming to produce destinations and locations where largely no discernable commercial and social value concentrations had been perceived prior to the development initiatives.

The choice of locating one’s regional business office in a commercial center in Ras al-Khaimah, in Bahrain, or in the King Abdullah Economic City in Saudi Arabia is not going to be the same as making the more profitable pick between Park Lane and Old Kent Road in a game of Monopoly or deciding between the Champs-Elysees and a street off the Porte de Clignancourt for opening a luxury boutique. All mega-projects and larger development schemes in the GCC have characteristics of what is commonly called greenfield projects and decisions by companies to move there will be influenced by a confluence of factors, among which age-old reputation of the place will be the rarest.

Perception is crucial — it’s not all the same

From an outsider’s perspective of the UAE and other portions of the Gulf coast, similarities in climate and scenery are pervasive, although it is perhaps in the same way in which the distinct Japanese, Chinese, and Korean ethnicities of East Asia are regarded to look the same to outsiders. But as long as perception is crucial, it will be quintessential for master planners of Arab nations to devise their multi-billion-dollar projects in ways that create a mix of regulations, cultural settings, social and economic emphases, natural features, and lifestyle appeal that is just right for what they want to be. A challenging task for a community design if there ever was one.

According to the prospectuses and marketing presentations of various visionary communities in the region, the usual suspects for being included in a mega project are things like huge shopping malls, golf-course and marina adorned gated residential areas, a financial center or a dedicated free zone for specific industries, top-notch commercial infrastructure, and a tourism growth target calling for multiples in visitor numbers.

Within the UAE, emirates and cities without super-ambitious growth targets seem to be fewer than emirates with such plans. The best example for this national ambitiousness is Abu Dhabi. It has an array of development plans which by their size and number should be likened more to a flower garden than to a bouquet, ranging from a new airport and heavy industry outside the city to urban renewal and transformation of the natural islands surrounding the city, itself also located on an island. The summary net worth of real estate projects in the UAE capital is projected at $270 billion (AED986 billion).

Abu Dhabi developers say that the emirate has an advantage in devising its next steps with an eye on Dubai — in order to avoid its not so perfect experiences. “Dubai created a development blueprint and has put this area on the map, doing an unbelievable job in marketing. They compromised several things, one of them was infrastructure; we were lucky and saw this happen and studied it,” said Mohammed al-Mubarak, director for establishments and infrastructure at Abu Dhabi’s ALDAR Properties, the company that is mandated with key functions in the emirate’s real estate projects together with its counterpart, Sorouh Real Estate.

The view is shared by Samia Bouazza, marketing manager of real estate firm Tamouh Investments, who told Executive, “Abu Dhabi has the learning curve working to its advantage,” when compared with its two neighbors, Qatar and Dubai. Tamouh Investments, which is a major developer with projects in several UAE emirates, has a current 60-40 projects split between residential and retail space. Tamouh is the real estate arm of an Abu Dhabi based holding called Royal Group.

In Mubarak’s opinion, Abu Dhabi struck it right with a three-pronged focus on culture, education, and medical centers which the emirate is implementing through partnerships with international entities. It is building one museum under the Guggenheim name, which is reputed as franchisor in the elite activity of museum branding. It is also building a museum linked to the Louvre, which is the first-ever instance that the French institution lends its name to a distant branch in this form, and how can you get more elite than the Louvre? A whole island, Saadiyat, will be given to host culture and leisure.

For educational and medical excellence, Abu Dhabi will also collaborate with big international names, including MIT, NYU, Tufts, the Denver School of Mining among colleges and Johns Hopkins and Cleveland Clinic in hospital operations, Mubarak said, adding that ALDAR Properties will have a great opportunity in building integrated medical facilities under the model provided by Cleveland.

On the residential side, Abu Dhabi is exerting its power in Al-Raha Beach, a suburb for 120,000 people, and Al-Reem Island, where a current expanse of infrastructure works is preparing the ground for settling 200,000 in three residential districts by 2012. Not to forget green, Abu Dhabi has stated its ecological commitment and added a project for building Masdar City as the world’s first zero-carbon, car-free and waste-neutral green community for 50,000 residents. Carbon appreciators will not be ostracized either, as the circle of mega-projects is rounded off by Yas Island. This is going to be a $50 billion or so development with resorts and shopping, where construction of a Formula One circuit is one month ahead of schedule and race fans shall be able to smell rubber from 2009 on. The tourism-centric island will welcome visitors year-round at a Ferrari theme park and driving school.

The combination of development angles in Abu Dhabi — which is by no means exhausted in the aforementioned projects — is certainly daring and intriguing. It also represents a form of public-private partnership in which memories of 20th century models for central planning meet with private sector sagacity for commercial initiative under an in the best sense communal umbrella of tutelage.

Collaboration between developers

This mode of collaboration is such that the government tightly guards the overall planning and developers — which commonly have the state as controlling shareholder — wrangle in a competitive way over which projects they win. Knowing a certain type of project is underway, the government will likely not want to duplicate something too similar, “so you’ll see all the developers meeting together and discussing their projects,” said Bouazza.

By their parameters, Abu Dhabi’s governmental authorities and urban planners (a department with international expertise) will instruct the companies with plots in a mega development to avoid duplicating nearby projects, Mubarak told Executive. “The interaction is such that we see the urban planning department as our big brother. It is a give and take that puts us on the right track. Once we have approval for the master plan, we take it to the next level.”

The UAE real estate companies, with their massive capitalization and 0-to-100-in-four-seconds attitude, are young giants bursting with developmental vigor, and the money it takes to make good on their ambitions. Coming generations will have to answer if the many mega plans and master projects in the region are sustainable and put together in the right proportions to serve their stakeholders and have been blessed with that mysterious touch that turns a drawing-board urban design into a fascinating, eminently livable location. Cultural references of the literary Western past may not work in these times.

As for Mubarak, he is more than confident that Abu Dhabi will become one of the world’s great capitals and that the growth of the near future will be something to behold. “I can see [Abu Dhabi’s] population doubling or tripling in five years. We want families to come and live here. All projects in Abu Dhabi are planned for generations,” he says. And: “The next two years will be a very exciting time.”

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Capitalist Culture

The Switzerland of the Middle East?

by Michael Young
written by Michael Young

Lebanon has often been referred to as the “Switzerland of the Middle East,” a line once taken seriously until the 1975-1990 war brought on howls of laughter whenever that cliché was uttered.

Fair enough. Lebanon is no Switzerland, and even its snow-capped mountains look different. Instead of pastoral tales of “Heidi”, the country can tell you stories of Shaker al-Abssi and car bombings.

Yet there is an essential similarity between the two countries: the fact that for a considerable amount of time they have had to manage the very different interests of a diverse, often conflict-ridden, population. What became Switzerland, in 1848, was for a long time torn apart by rivalries between Catholic and Protestant French-speaking, German-speaking, Italian-speaking, and Romansh-speaking populations, all manipulated by surrounding European powers. Lebanon, though all its citizens speak the same language, has nevertheless, similarly, been a society replete with divisions that its neighbors have played upon.

For many Lebanese whenever Switzerland is mentioned, federalism comes to mind. That’s understandable, but also too narrow a reaction. Often, the difference between federalism and partition is wholly misunderstood in Lebanon. In many respects both ideas may be inapplicable to the society, perhaps even undesirable. But that doesn’t mean that a new Lebanese social contract should not be discussed — one based on the idea of devolving powers to the local and regional levels.

Any serious capitalist culture must be based on the availability of choice and liberty, as well as the opportunity to bypass the natural inefficiency and overbearing nature of the state. Switzerland is a paradox in this regard. Local and regional autonomy and diversity are inherent in the federal structure. This, in theory at least, creates choice, renders local and regional development more efficient, and limits the powers of the federal government in Berne. The system certainly creates a looser, more plural structure than the centralized Jacobin state that exists, let’s say, next door in France, where everything tends to emanate from Paris.

But that doesn’t mean that the Swiss are free from state authority. Taxes are high and must be paid at several levels. The federation’s obsession with compromise can also be suffocating for those seeking to break the consensus. Politics in Switzerland are not between a majority and an opposition. Everyone has a share in decision-making, at all levels of the state. Though ideological ambitions can be advanced, the process is slow. Individuals can be influential, but the system guards against dominant personalities.

Lebanon’s weak state authority

In Lebanon, the situation is very different. From the outset, when Greater Lebanon was created, the state was centralized, reflecting the French approach. Yet this administrative centralization was imposed on a diverse political society. Much informal authority had been exercised by the political class at the local or regional levels, which Ottoman rule had allowed for in the post-1860 mutasarrifiyya. What was the practical result of this? That the modern state became a repository of Lebanon’s contradictory social tendencies. Though centralized, state authority was never more powerful than that of the various factions in the state, who in turn represented different communal or other interests.

In Switzerland, the initially independent entities that would form cantons voluntarily agreed to join together into a single federal structure; in Lebanon, the change was imposed from the top down, from outside, and with the state mirroring the fractures in society. In Switzerland there was positive movement toward a common center of gravity; in Lebanon, the center of gravity became acceptable because it allowed autonomy.

These two different trends are not at odds — on the contrary, they were different dynamics leading to the same goal — but there was a key difference: the Swiss created governance structures that ultimately proved more powerful than the society’s individual parts; in Lebanon, the country’s individual parts (traditional confessional leaders, religious identities, and the like) remain more powerful than the state’s local, regional, or national governance structures. That is why the state is less stifling in Lebanon’s case, but also why the Lebanese cannot seem to hand power over to broader governance structures that might one day allow them to build a more solid state.

Finding the right balance between what to give to the state and what to keep for oneself in the form of liberty from that state, is an essential goal of successful capitalist culture. That’s why Lebanon and Switzerland, so fundamentally different, are so similar in trying to strike an equilibrium that allows them to manage their societies’ differences. Now all Lebanon needs to do is start that process, which the Swiss have spent over 150 years perfecting.

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Talking To

Carlos Ghosn – King of the road

by Executive Staff
written by Executive Staff

On his recent trip to Lebanon, Carlos Ghosn, CEO of Renault and Nissan addressed a group of Executive MBA students at the American University of Beirut (AUB). Ghosn who is credited for revamping the Japanese heavy-weight car maker has been spending much of his time between Europe, the USA and Japan. Executive managed to talk to the international business figure.

From your early years at Nissan, you’ve been dubbed by many as a cost killer, how much has this particular skill been put to work at Renault?

In 1999 and after a decade of decline, Nissan, with a $20 billion debt, was on the verge of bankruptcy. It was therefore urgent to cut down costs and I had to make some difficult decisions, that no one had the courage to make before. The situation was very different from when I took over Renault. The company had a sound balance sheet and was far from being in crisis. The Renault Commitment 2009 Plan set cost reduction objectives by business function. Unlike the ones put in place by the Nissan Revival Plan, the aim was not avoiding bankruptcy but improving Renault’s cost competitiveness. I don’t believe there are immutable recipes for good management. Good management is one that is adapted to a given situation and delivers results.

How have Nissan and Renault avoided the trap of corporate cannibalism?

The spirit of the Nissan-Renault Alliance in 1999 was shaped in part by the failure of the Renault-Volvo partnership. Renault learned that when things are imposed by force, they tend to fail. If employees feel that their company is taken over by another entity or that their identity is being absorbed by a greater power, the alliance will again fail. At the beginning of the Alliance, Renault’s behavior was crucial and though Nissan was financially weak at the time, we considered that there were no winners or losers. Executives at both companies were aware of the importance of respecting the identity and self-esteem of all involved parties.

We never tried to merge Renault and Nissan, and we have always been very careful to preserve the autonomy and value the identity of each company, its brands, products and corporate culture. I am convinced that this is a key factor in the success of the Alliance.

You said in an interview with Fortune magazine published in January that the auto industry was facing a difficult environment because of shifting technologies, consumer preferences and increasing oil prices. How is this affecting your long-term strategy at Nissan and Renault?

The automotive industry is indeed facing strong headwinds: competition is fierce, mature markets are stagnant or slowing; commodity prices are increasing for the fourth year in a row… The problem is that our industry has lost its pricing power. When commodity prices rise, we have to absorb the increase, as we cannot pass it on to customers. As a result, the profits of most car manufacturers are on the decline, which bears a risk for the whole industry. An even greater danger than the one inherent to value loss lies in a reduced capacity to invest for the future. This means we must constantly increase our cost competitiveness, improve productivity and expand into new segments as well as new markets to find fresh sources of profitability. Today, a car manufacturer restricting its operations to one region or one market segment is condemned to decline.

But there are also opportunities, such as preserving the environment, which will present a great technological challenge for the coming decades. The Alliance is well positioned to take on this challenge: through cooperation, we can avoid duplicating engineering efforts and resources as well as saving time in the development of new technologies. In such a framework, each partner takes the lead on a specific technology and makes it available to the other. Nissan has already developed hybrids, fuel cells and continuously variable transmissions. Renault has greater expertise in diesel engines, flex fuel, and is also working on electric vehicles.

At an AUB conference held last month, you explained how market capitalization reflects trends in the car industry. As an example, you discussed how the US car market capitalization was divided by half over the last ten years. Given such an unfavorable business environment, why were you so keen on closing the GM deal?

In my opinion, the strategy of extending the Alliance to North America was sound and the discussions revealed an important potential for synergies. However, strategy alone is not sufficient and conditions for a good execution were not quite available. The stakeholders of Renault and Nissan — shareholders, employees and partners alike — perceived the deal more as a risk than an opportunity. I am still convinced that extending the Alliance to a North American partner is a sound approach, but it can only be adopted if we have the means to implement it and stakeholders are motivated.

With net profits slumping at Nissan in 2006, some analysts have declared that you may have overstretched yourself. How do you respond to such allegations?

When results are good, management is considered to be working efficiently. When performance starts to fall, it stirs media criticism — it’s a natural process and I accept it. At the end of the day, your stakeholders are the most important party. The question is, how do they rate your performance? Every year, I face the company’s shareholders and ask for their support. Despite some of the recent challenges, 98.9% of Nissan shareholders voted this year in favor of our management team and the direction of the company. On a day-to-day working level, if you want to have an easy life, don’t become a CEO! Keep in mind not to melt down when faced with obstacles and work with your teams to find solutions and create further value. At this stage in the evolution of the Renault Nissan Alliance, having a dual CEO is helping to accelerate the decision process, which benefits both companies. We have recently announced the building of new plants by the Alliance in Morocco and India and we are introducing advanced new technologies in areas such as diesel engines. As long as I have the support of our stakeholders and believe that my position is adding value to both companies, I will continue to lead the Alliance and both companies.

What were the main reasons behind the Renault-Nissan recent $1 billion investment on a plant in Morocco?

Renault and Nissan lack production capacity for low-cost vehicles. For example, Renault had to postpone the launch of Logan MCV on some markets because it could not produce enough vehicles to meet demand. In Morocco, we were offered a great opportunity to increase our capacities in very competitive conditions as well as obtained a good incentive package. The plant will be located in a free zone of the Mediterranean port of Tangier, near one of the biggest maritime crossroads in the world. It will be dedicated to the production of low-cost vehicles (LCV): such as the ones derived from the Renault Logan platform as well as a new generation of Nissan LCVs. We want to make this plant a benchmark in terms of competitiveness and 90% of produced vehicles will be destined for export.

What new trends do you foresee in the car industry and how does the convergence of computing and communications affect tomorrow’s cars?

There is no doubt in my mind that communication and computing equip­ment will play an increasingly more important role in cars. People want to connect to their network and make their car an extension of their personal environment, using diverse plug-in features. We foresee another trend in the development of specific urban cars dedicated to city life, which will be small, reliable and have no carbon-dioxide emissions. We must also anti-cipate trends for developing countries, where we are currently observing an increase in demand for low-cost, reliable family cars. Between 1999 and 2006, the world auto market increased by 20%, while US and Japanese market levels held steady. However, all growth was witnessed in developing countries. Given such figures, the apparent strategy is to position ourselves in such markets and predict their development.

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Comment

The business of doing arms

by Peter Speetjens
written by Peter Speetjens

Most media reported it rather matter-of-factly. Washington over the next decade will supply its regional allies Israel, Saudi Arabia, Egypt and several other Gulf States with $63 billion worth of advanced weaponry in addition to what these countries normally spend on military equipment. According to Condoleezza Rice, this extra weaponry is needed to counter the growing threat of Iran and Syria.

“We have a lot of interests in common: the fight against terrorism and extremism; protecting the gains of peace processes of the past and in extending those gains to peace processes of the future,” stated Rice. Selling arms to bring peace is the ultimate Orwellian double-speak, which by its very nature should raise suspicions that perhaps more is at play.

Let us have a closer look at the alleged threat by comparing some figures: With a 2005 defense budget of $4.9 billion, Iran ranked 32nd among the world’s spenders on military hardware, according to the Center for Arms Control and Non-Proliferation, while Syria had a budget of some $2 billion. That same list was topped by the US with a 2005 defense budget of $450 billion — 43% of the world’s total expenditure — which in 2008 is set to increase to $643 billion. The Americans were followed at some distance by China (6%), Russia (6%), UK (5%), Japan (4%) and France (4%). Saudi Arabia ranked 9th with a budget of $20 billion (2%).

The US plus NATO represent 75% of the global budget. Add to that America’s regional allies and their arsenals and you got a lot of firepower, more than a hundred times than that Iran and Syria combined. Now, even if Iran and Syria represent a serious and potentially nuclear threat, these numbers simply do not add up. Other motives must be at play. It may just be that war with Iran is on the horizon, but it could just be business.

There are over 1,000 arms manufacturers worldwide. According to Defense News, the 2006 market leaders were Lockheed Martin with defense revenues of some $36 billion, followed by Boeing ($30.8 billion), British BAE Systems ($25 billion), Northrop Grumman ($23 billion) and Raytheon ($19 billion). Of the world’s 100 biggest producers, more than half are American.

Their influence on domestic and foreign policy has a proud legacy. In his farewell speech on January 17, 1961, US President Eisenhower warned: “We have been compelled to create a permanent armaments industry of vast proportions. We annually spend more on military security than the net income of all US corporations. We recognize the need for this development. Yet, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.”

The market has no morals, so the world’s free market gurus claim, and America’s military industry is an industry as any other, one that seeks to promote its interests, sell its products and increase profits. Thus, to gain influence, weapons manufacturers contribute to the election campaigns of Republicans and Democrats, and individual politicians. They also hire PR and advertisement firms to promote their products and recently convinced US senators to replace the entire F15 fleet with F22 fighter jets, with a price tag of $135 million each.

Take the following fragment, which would suit any neo-con speech, yet stems from a Lockheed Martin promotional video: “Civilized society is under siege. The world is populated by renegade nations and extremist factions willing to use any method available to spread their beliefs. These potential enemies continue to modernize and upgrade their military capabilities.” Conclusion: civilized society must arm itself.

So, here you have an arms dealer mingling in political theory, while in pursue of its commercial interests, which are not necessarily in tune with the well-being of the US or other nations. According to the US Congressional Report “Conventional Arms Transfers to Developing Nations,” the US sold 36% of all conventional weapons to the world’s developing nations, while the five Security Council members plus Germany exported 75% of all arms destined for the developing world.

When the Cold War came to an end in 1989, many thought the arms race would end. Global trade declined from $1 trillion to $800 billion in the mid-1990s, yet today it is well beyond Cold War heights. Interestingly, the increase started way before 9/11 in 1998, when Bill Clinton lifted a ban on arms transfers to Latin America. Why?

“Chile doesn’t need F-16s,” Jimmy Carter explained. “But if Chile spent a large portion of its free budget funds on F-16s, it’s almost inevitable that Argentina would have to buy F-16s just for some future contingency. This would then spread to Brazil. And the first thing you know, South America will be covered with F-16s and other advanced weaponry, electronics, defense techniques to defend yourself against F-16s.” And as soon as everyone has F16s, we need F22s!

PETER SPEETJENS is a Beirut-based freelance writer. 

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