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

At a Crossroads: The Middle East transport and logistics industry

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

The Middle East has historically been a trade route for merchants, prized for its connections to both Europe and Asia. This history has laid the groundwork for a vast transportation and logistics network that is slowly emerging in the region and could be a significant source of economic growth for many years to come. The Middle East’s geographic location and excellent accessibility by air, land, and sea put it in a prime position to serve as a trade hub.

The trade volume between Europe and Asia is likely to continue to grow, as Asia has become a key production and manufacturing region for the Western world. Traditionally, air freight carriers used to stopover in the Middle East to refuel, halfway along this trade lane, and will continue to do so to maximize freight loads. However, volume growth on the Europe-Asia trade lane has increased the need for shippers to use larger vessels and apply more advanced logistics concepts. With product cycles speeding up, demand becoming less predictable, and companies managing their stock more closely, sea freight increases the risk of carrying outdated items. As air freight remains too expensive for most goods, the option of a conversion from cost-effective sea to air freight while en route becomes more significant. The Middle East is a natural location for sea-to-air conversion.

Beyond its potential as a global hub along the Europe–Asia trade lane, the Middle East can establish regional transport and logistics hubs serving northern and central Africa, Pakistan, and the Caucasus. The region has equal proximity to all these markets and very good connectivity by road and short sea transport. These markets currently lack access to competing regional centers, such as Europe and South Africa, and cannot yet afford the required infrastructure investments. Furthermore, as companies optimize their supply chains, it makes sense for them to establish a single regional distribution center in the Middle East for all of these markets. Increasing production capacity also underscores the need for a strong regional logistics sector.

Public Policy Steps for a Strong Industry

As Middle Eastern governments embark on the development of the transport and logistics sector to drive economic growth, it should be clear that the opportunities are not equally available to all countries. Hence, governments should consider four key building blocks for developing a successful transport and logistics sector strategy.

1. Choose a strategic play for the sector with appropriate infrastructure. The correct choice of one of the three strategic plays described hereafter needs to be based on a thorough and honest assessment of the qualifying factors. The global multimodal transport and logistics hub strategic play is the most demanding option, requiring a preferred geographic location and huge investments to create infrastructure incorporating a world-class airport and port zone. It also demands an economic environment that attracts foreign direct investment; the availability of a large free zone around the port-airport infrastructure; highly competitive handling charges; and living standards that accomodate a large expatriate community. However, there are very few truly global hubs: We predict that there is an opportunity to establish two global hubs in the region, and one will likely be Dubai.

The regional logistics and distribution hub strategic play requires similar elements but is less demanding in terms of overall size and multi modality. However, services and processes must adhere to the same high standards; the infrastructure must simultaneously provide good connections to global hubs and exporting countries, as well as excellent links to neighboring regional markets, via a strong road and short sea infrastructure. A few traditional gateways to the Middle East such as the Nile Delta, the Red Sea ports, Kuwait’s coastal area, and the northern shores of the Gulf could develop into regional hubs.

Finally, countries that cannot meet the needs of a global or regional hub play should focus on the development of domestic transport and logistics services.

2. Adjust policies and regulations to promote sector development. These should promote foreign direct investment, provide a liberal economic environment, and allow for full foreign ownership of the respective local entities.

3. Optimize government services to meet the demand of the logistics sector. The key government services required by the logistics sector fall into three areas: business and equipment licensing, regulatory oversight and competitive regulation, and customs services. Optimization of government services in the first two areas should be part of a broader economic development program to promote and foster entrepreneurial activity. Transactional customs services should be automated as much as possible and seamlessly integrated into the logistics service providers’ order management systems.

4. Promote the development of national transport and logistics champions. In most countries in the region, the industry structure of transport carriers and logistics service providers is still highly fragmented and often not developed.

The development of a strong domestic transport and logistics sector is a strategic imperative for economic development in the Middle East. The countries that succeed at establishing sustainable networks can expect to see increased economic activity, improved industry competitiveness, and growth in job opportunities. Those that do not, however, may find themselves falling by the wayside.

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Comment

Musings from Arab America

by Norbert Schiller
written by Norbert Schiller

During our holidays this summer we were fortunate to be able to stay with my wife’s extended Lebanese family on both the east and west coasts of the United States. It had been almost six years since we last visited, and I must say that staying in an Arab-American household lessened the shock of fitting into the American way of life; a kind of decompression chamber if you will. Behind closed doors nothing really changed; the family was as tight-knit as ever and if it wasn’t for the green lawn outside the window and the lack of blowing horns and shouting in the streets we could have all been sitting in Beirut.

Both Lebanese-American families we stayed with were forced to leave during war. The husband of my wife’s cousin, who is originally Palestinian, remembers when in 1948, at the age of eight, he was forced to flee his village in northern Palestine after the Arab armies advised the inhabitants to leave because “the Jews are coming to take your land.” He made his way to southern Lebanon by holding onto the tail of his uncle’s donkey. On the east coast, my wife’s brother and his wife fled Lebanon for the United States in the mid-1980s, during one of the darkest chapters of the civil war.

Obviously, for my wife and her family, the first few days were consumed by relaying and absorbing Lebanese and Diaspora news: the physical changes taking place in Lebanon (the pulling down of the grand old building around the corner that once belonged to so-and-so) and how much of the country has been restored a year after the war with Israel.

However, unlike previous visits, the solid opinions that my wife’s family once held true were now blurred and the issues watered down.

When we first traveled to the States in the early days of our marriage 15 years ago, Lebanon was always on the forefront of every conversation. One misplaced word or train of thought could trigger an all out major debate on Lebanese politics that would result in phone calls to friends and family across America and even a call to Lebanon if it meant proving a point. Now that has all changed.

It’s not hard to explain this waning interest. American press coverage of the Middle East is something you have to actively seek out. Even with the 500 plus stations available to most cable subscribers, if you don’t have your own satellite hook up, you are not privy to all the international news stations like CNN International, BBC World, Al Jazeera, and LBC International. The newspapers inundate readers with local news, followed by a bit of national news and then a blurb here and there from the rest of the world. If there is something from the Middle East, it will probably be about Iraq and even then there is a good chance it will have a local angle. 

In the past, I remember always seeing a second, more international, newspaper lying around — the New York Times or Los Angeles Times — but now, with time, I notice that my wife’s family are slowly becoming more interested in the news that affected them on a daily basis. Even when we were visiting, they tended to veer away from the Middle East if some local issues, like the rise in crime, a garbage collection strike, or the bridge collapse in Minneapolis there was more anguish — “Haraam, they were just going home from work” — than for any car bomb outrage in Iraq.

One family member told my wife that she felt that her generation had “missed all the boats.” They had missed Lebanon’s golden era, caught the war and then had to endure all the insecurities of living as immigrants in the United States. And then came 9/11 with all that feeling of not belonging and being seen as outsiders. Her only consolation is that her children will hopefully feel more grounded and not live forever in search of a homeland.

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Money Matters

by Executive Contributor
written by Executive Contributor

Ithmaar Bank posts 130% in H1-07 net profits

Ithmaar Bank, a Bahrain based global investment institution, announced a 130% increase in its H1-07 net profits to $65.09 million up from $28.7 million for the same period last year. As a result of their expansion, Ithmaar experienced a tripling of operating profits from $23.7 million in the first half of 2006 to $71.1 million in the first half of 2007. Income from investment in financing amounted to $97.8 million, while $25.4 million was generated in fees and commissions and $23.1 million was generated from sale of investment securities. Total assets, including funds under management stood at $5.1 billion at the end of last June, compared to $4.4 billion at the end of last year. Ithmaar is growing at a rapid pace and is one of the most dynamic financial institutions in the region covering a wide range of Islamic financial services and investments. Ithamar’s wholly-owned Ithmaar Development Company (IDC) has made considerable progress in several major projects with the Kingdom of Bahrain and internationally.

Emaar ranked in top 10 of S&P Index

Standard and Poor’s (S&P’s) ranked Emaar Properties PJSC, the UAE-based real estate developer, in the Top 10 of IFCG Extended Frontier 150 Index for frontier equity markets. Attaining the highest weight of 5.59% in the index reflects Emaar’s strong regional presence and growing international recognition. The Extended Frontier 150 Index plans to accommodate the needs of increasingly sophisticated investors willing to expand in developed and emerging markets. This year, S&P Rating Services and Moody’s Investor Services assigned Emaar A- and A3 ratings respectively, with steady outlook reflecting the company’s strong financial profile.

IMF forecasts strong growth for Syria in 2007

In its latest report, the International Monetary Fund (IMF) highlighted the strong economic performance of the Syrian economy in 2006 and has forecasted a positive outlook in 2007. According to the report the economy’s supply responsiveness, the tighter credit policy and the fiscal discipline have contributed in tightening inflationary pressures caused by the large demand shocks from Iraqi investors. The report assessed that Syria needs to maintain a strong external stability over the medium run, which can be achieved through strong fiscal adjustments, accelerated structural reforms and exchange rate flexibility. The IMF regarded the Syrian private banking sector promising despite the possible drawbacks it might face in developing reforms. In addition to that, vital action is needed for the state banks to attract the accumulation of non-performing loans and enhance competition. Finally, Syria’s economy is in need of progress in developing market-based instruments for monetary control and should reduce the excessive risk taking as well as dollarization.

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North Africa

Tunisia  Emirati Dreaming in Tunis

by Executive Editors
written by Executive Editors

Bilateral relations between the UAE and Tunisia are set to expand with leaders from both countries being keen on promoting joint-investment projects to enhance social and economic relations.

On his recent visit, HH Sheikh Mohammed bin Rashid al-Maktoum, vice president and prime minister of the UAE, expressed that the enhancement of bilateral relations is a starting point “towards wider avenues of mutual economic, technological and tourism cooperation.” He also added that such cooperation is a significant step in “embodying the deep fraternal relations and the common history of our two countries and peoples and building new bridges between the eastern and western Arab countries.”

The most recent joint-investment agreement between the two countries was part of a ceremony held during the visit of Sheikh Mohammed to Tunisia. Together with Tunisian President Zine El Abidine Ben Ali, the two leaders laid the foundation stone of a $14 billion real estate and investment development set to provide housing for half a million people. The mega real estate development project on the southern lake of the Tunisian capital is a joint venture between Sama Dubai, the international investment arm of Dubai Holding and the Tunisian government. The development will cover some 850 hectares and offer all the services of a satellite city, including retail and entertainment centers along with apartments, luxury hotels, a wide range of recreational and sports facilities, and up market housing.

Called the Century City and Mediterranean Gate, the development is intended to serve as a business hub, with office space for more than 2,500 international firms, with an emphasis on those in the financial sector. Businesses located there will benefit from state of the art communications infrastructure and impressive architecture. The centerpiece of the project will be two massive towers.

Additionally, the new city will play a major role in the country’s tourism industry, boasting 14 high class hotels and resorts, leisure and sporting facilities and a marina as part of the design.

Century City will be the single biggest investment project in Tunisia’s history, and will make Dubai the largest foreign investor in the country. The $14 billion price tag eclipses TECOM Investments and Dubai Investment Group’s acquisition of a 35% stake in Tunisie-Telecom in 2006 — valued at $2.25 billion.

According to Mohammad al-Gergawi, Dubai Holding’s chief executive officer, Sama Dubai expects to raise investment in Tunisia from $3 billion to $18 billion in the near future.

The potential for Century City to attract further foreign investment through companies relocating to the vast business district, drawn by the opportunities presented by a new city of up to half a million prospective customers, is undoubtedly welcomed by the Tunisian authorities.

State projections predict the work will add 0.6% to the country’s growth rate for a period of up to 15 years, and provide jobs for 130,000 people during the construction phase, pleasing statistics considering that unemployment is running at more than 14%, according to official figures.

Agreements signed between the state and Sama Dubai specify that most workers on the project will be Tunisians and the company will provide them with specialized training.

Al-Gergawi said actual work on the project will begin in the next few months. “The scheme is very important so it will be done in stages,” he commented. “It requires 10 years to be finished.” Al-Gergawi stated that Tunisia had been chosen as the site for the development by Sama Dubai because the country has potential to become a promising regional economic center, thanks to its position as a gateway to many other destinations. The growing services sector and the favorable investment regime were also strong attractions, he told a press conference in early August.

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North Africa

Morocco  Linking the continents

by Executive Editors
written by Executive Editors

The construction of an undersea tunnel linking Morocco and Spain has been on both countries’ agenda for over 25 years now. Today, the idea is closer to materializing than it has ever been before.

After rounds of geological tests and feasibility studies run by specialist independent geotechnical consultants from the Swiss engineering company Giovanni Lombardi, the project looks to get a go ahead by the end of 2007. The cost of this project has been estimated to exceed $13 billion and initial studies by engineers forecast a project length of up to 25 years.

It is predicted that the tunnel could carry 9 million passengers and 8 million tons of freight annually. There is a potential for boosting the economies of both nations as well as mutually improving tourism and trade opportunities. Currently, Moroccan exports to EU countries account for 73.8% of total export revenues and generate $12.76 billion (or 22% of current GDP) annually. In return, Morocco receives 65.1% of its total imports from the EU, the bulk of which are transport equipment and machinery, which contribute to Morocco’s automotive industries. Additionally, agricultural exporters would be set to gain a strong advantage from this transport development, being able to send some of Morocco’s more delicate exports such as flowers and tomatoes by train instead of ship.

The growth in the number of European tourists to Morocco has given further impetus to ambitions to link Spain and Morocco across the Strait of Gibraltar.

Morocco’s tourist industry witnessed a successful first half of the year with EU figures showing over 2.26 million visitors from January to June 2007, representing a 7% increase in year-on-year terms. As such, the country is keen further to improve the accessibility of its tourist sites by moving ahead with the Gibraltar tunnel project.

European tourists

According to the Moroccan Ministry of Tourism, European arrivals to Morocco account for 83% of 2007’s arrivals to date, with French visitors leading the pack with 873,000 visitors in the first six months of 2007, an increase of 4% on last year. Visitors from Spain and Britain accounted for 479,000 and 175,000 visitors respectively, with British tourist arrivals recording a 43% increase as a growing number of no-frills airlines such as easyJet and Ryanair are making the country more accessible with flights to Marrakech, Casablanca and Fez. Germany, Belgium and Italy are also important markets, each accounting for approximately 100,000 visitors. The three most popular tourist destinations have recorded growth in the number of visitors in the last six months; Marrakech has seen a rise of 12%, Casablanca recorded a 9% rise and the coastal resort of Agadir saw a 3% more visitors than in the same period last year.

The construction of the proposed Gibraltar tunnel is a joint venture between government agencies Société Nationale d’Études du Détroit (SNED) in Morocco and Sociedad Española de Estudios para la Comunicación fija a Traves del Estrecho de Gibraltar (SECEG) in Spain. The tunnel would consist of a 39 km passenger, car and freight rail line running across the strait connecting the cities of Tarifa and Tangier. Its deepest point will be 300 meters.

The next step will be to consider a number of logistical challenges. Even though the distance across the Strait of Gibraltar is 14.5 km, the challenges posed to engineers by a Morocco-Spain tunnel are far greater than challenges facing engineers during the “Chunnel” construction between England and France, which lie 32 km apart at the Strait of Dover. The water is deeper; nearly 1000 meters at the shortest route across the strait, compared with just 61 meters in the English Channel. Another challenge is the texture of the earth. The first test diggings over 10 years ago revealed that the soft earth near Tarifa is not suitable for building a structure of this type. Recent tests have re-confirmed this and so Cape Malabatta has been selected as the entrance point to Morocco, after which the tunnel will continue to Tarifa. Additional concerns include securing the tunnel against human trafficking between Africa and Europe and whether the there will be a sustainable flow of goods and people in both directions given the economic disparities between the two continents.

Yet leaders of both countries are keen on proceeding. Spanish Prime Minister Jose Luis Rodriguez Zapatero has said that he is fully committed to the project. According to the minister the tunnel would “greatly speed growth, development and prosperity” on both sides of the Mediterranean. The goal behind the construction is to create “an integrated Euro-Mediterranean economic area” and possibly lead to developing the transport network further to include a link between Marrakech and Europe.

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North Africa

Algeria  Taking out Trabendo

by Executive Editors
written by Executive Editors

The part-privatization of Algeria’s ports to major operator Dubai Ports World (DPW) has been hit by a series of rolling strikes by trade unions. The potential unrest stems from talks the government is holding with DPW over the company possibly taking a 50% stake in the container terminals at the ports of Algiers and of Djen Djen, in the eastern province of Jijel.

Algiers port has reached saturation point and will need considerable investment to extend it. However, the stumbling block at the moment is the plan to include the potentially highly lucrative Djen Djen port, and disagreement over the issue of bringing in a foreign owner. Some also point to the possible disquiet of those involved in the “trabendo” economy, or contraband imports, as looking to scotch the deal to preserve their lucrative, if illegal, niche.

Djen Djen’s port is something of an oddity, having been built to serve a steel plant that was never constructed. However, it has developed as a major point for container and dry cargo transport (notably grain) abroad. The purpose-built port also benefits from very good land transportation links, as well as deep water piers accessible to ships of up to 120,000 tons.

Local media have reported that DPW made a $70 million bid for the operation of the Djen Djen port, coupled with a $120-150 million investment program to upgrade it. In June, the transport ministry announced that negotiations were making good progress.

“Dubai Ports World took into account the principal requests of the Algerian side at the time of the first round of negotiations, which was held in Algiers on June 12,” the statement said. “We will be able to advance.” The deal seemed to be likely to be finalized by year’s end, officials have been reported as saying.

However, the umbrella union Coordination Nationale des Syndicats des Ports d’Algerie (CNSPA) has objected strongly to the plans to change the port’s ownership and their employer and threatened to block the deal.

One source of discontent is the government reneging on a pledge made by the minister for investment promotion, Abdelhamid Temmar, to tender the sale internationally rather than moving immediately to negotiate directly with DPW.

CNSPA has a membership of 14,000 across all of Algeria’s 10 most important ports, giving it a great deal of leverage in the situation, as has been show in the past. Strikes by CNSPA-affiliated unions in October 2005 against government privatization and labor restructuring plans left 100 ships abandoned by workers. The Port of Oran alone, where 15 ships were left stranded, hemorrhaged $130,000 a day during the industrial action. In May of this year, another anti-privatization strike shut down almost all Algeria’s ports, causing losses of up to $2.1 million in a single day.

Guermache Abbes Maamar, the secretary-general of the Algeirs port trade union, has said that opposition to the proposed deal with DPW was in the national interest and not only an issue of workers’ rights.

Maamar questioned the wisdom of “giving away” container activity, which generates 70% of the port’s receipts, in return for the proposed investments DPW has put on the table. The unions agree that Djen Djen is in need of an overhaul, but Maamar proposed that the government work with its port management authority Entreprise Portuaire d’Alger to develop the nation’s ports, rather than using foreign firms.

“We can do everything between Algerians: to buy gantries and all the equipment to improve the output. We cannot release sovereignty on the ports,” he added.

To break the current deadlock, it has been suggested that the unions should be involved in future privatization negotiations to ease the tension and distrust. However, it seems that the CNSPA is unlikely fully to embrace partial privatization to DPW. Meanwhile, private sector companies involved in trabendo activity at the ports are also against the deal. Many are believed to be involved in illegal practices which they fear the Emirati company might eliminate if the deal goes through.

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North Africa

Algeria  Building the Gas Bridge

by Executive Editors
written by Executive Editors

Algeria, the world’s fifth largest gas producer, is supplying around a quarter of the EU’s gas imports, and is hoping to expand further into that market. Its valuable position is firming with pipelines under construction to southern Europe and liquefied natural gas (LNG) deals with northern Europe. And although Russia remains the major gas supplier for the EU, Algeria’s flexible gas sector and geographical location are factors playing in its favor.

On July 12, Algeria and the EU finalized an agreement dealing with territorial restrictions, allowing companies of EU member states that import Algerian gas the right to resell it either within their own domestic markets or to third-party countries.

In return, Sonatrach, Algeria’s state oil and gas company, will have the right to a share of the profits earned by European companies, for LNG contracts only. Sonatrach will also be allowed to sell LNG shipped by tanker directly on the European market.

The deal will consolidate Sonatrach’s position as one of the main suppliers of natural gas to the EU, with Algeria behind only Russia and Norway.

Deepening the Algeria-EU relationship

Chakib Khelil, the Algerian minister of energy and mines, said the agreement was a further step toward deepening the strategic relationship between Algeria and the EU. “Algeria supports the establishment of Sonatrach as an active player in an open, transparent and competitive EU gas market,” Khelil said at a signing ceremony in Brussels, where the final details of the deal were hammered out after lengthy negotiations.

The EU’s Competition Commissioner, Neelie Kroes, also attended the ceremony. “The agreement reached constitutes a major breakthrough in our relations with one of Europe’s most important suppliers of natural gas and eliminates an important obstacle for the creation of a single EU-wide market in gas,” said Kroes.

The agreement with Algeria was essential for the EU, having launched the fully deregulated energy market within the bloc on July 1, allowing clients to choose their preferred suppliers of electricity and gas, rather than be tied to state operated utilities that continue to dominate energy markets in some EU member states.

Algeria agreeing to allow the unrestricted sale of its gas to third parties means that its present and future contracts are now in keeping with the EU’s new open market policy. Algiers had long held out against the ending of destination restrictions, fearing the move could result in wholesale reselling of its gas without any benefits coming its way.

Algeria’s long running dispute with Spain, over restrictions on how much of the gas piped through the Medgaz gas pipeline Sonatrach is allowed to sell directly on the Spanish market, appears headed to the courts.

The Algerian company has been limited to selling no more than 1 billion cubic meters of gas annually in Spain, despite being the largest single shareholder in the Medgaz project, with a stake of 36%. Sonatrach hoped to sell up to 3 billion cubic meters of gas a year.

At the beginning of July, Khelil said that Algeria would lodge an appeal against the Spanish energy watchdog’s ruling to limit Sonatrach’s sales.

“We will lodge an appeal with the higher authorities in Spain …  as well as the European Commission,” Khelil said. “What we are asking is to be treated like any other operator, Spanish or otherwise, whether for the distribution of gas or for the shares in the Medgaz project.”

Algeria and Spain are also involved in international arbitration over Sonatrach’s demand that the price of Algerian gas imports be increased in two stages by 20%, to keep the tariff in line with world prices. At the present rate, Algeria stood to lose around $300 million annually, according to Khelil.

Only days after the agreement was signed, Algeria moved to strengthen its energy production infrastructure, announcing more than $4 billion worth of construction tenders for new processing facilities.

In mid-July, Algeria awarded French firm Total the $3 billion tender to construct and operate a cracking steam facility with the capacity to produce 1.4 million tons of ethane annually. The plant will also produce polyethylene and ethylene glycol, with Sonatrach funding 49% of the project and Total the remaining 51%.

The same day, Sonatrach and a consortium of foreign firms, including Mitsui of Japan and Kuwaiti company Qurain, were awarded the contract to build and operate a $1 billion methanol plant with a projected output of 1 million tons a year. Again, Sonatrach will hold 49% of the project, with the other members of the consortium combining to take the rest. With so many projects in the pipeline, the future of the petrochemical industry in Algeria seems to be brighter than ever.

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Musings from Arab America

by Norbert Schiller
written by Norbert Schiller

During our holidays this summer we were fortunate to be able to stay with my wife’s extended Lebanese family on both the east and west coasts of the United States. It had been almost six years since we last visited, and I must say that staying in an Arab-American household lessened the shock of fitting into the American way of life; a kind of decompression chamber if you will. Behind closed doors nothing really changed; the family was as tight-knit as ever and if it wasn’t for the green lawn outside the window and the lack of blowing horns and shouting in the streets we could have all been sitting in Beirut.

Both Lebanese-American families we stayed with were forced to leave during war. The husband of my wife’s cousin, who is originally Palestinian, remembers when in 1948, at the age of eight, he was forced to flee his village in northern Palestine after the Arab armies advised the inhabitants to leave because “the Jews are coming to take your land.” He made his way to southern Lebanon by holding onto the tail of his uncle’s donkey. On the east coast, my wife’s brother and his wife fled Lebanon for the United States in the mid-1980s, during one of the darkest chapters of the civil war.

Obviously, for my wife and her family, the first few days were consumed by relaying and absorbing Lebanese and Diaspora news: the physical changes taking place in Lebanon (the pulling down of the grand old building around the corner that once belonged to so-and-so) and how much of the country has been restored a year after the war with Israel.

However, unlike previous visits, the solid opinions that my wife’s family once held true were now blurred and the issues watered down.

When we first traveled to the States in the early days of our marriage 15 years ago, Lebanon was always on the forefront of every conversation. One misplaced word or train of thought could trigger an all out major debate on Lebanese politics that would result in phone calls to friends and family across America and even a call to Lebanon if it meant proving a point. Now that has all changed.

It’s not hard to explain this waning interest. American press coverage of the Middle East is something you have to actively seek out. Even with the 500 plus stations available to most cable subscribers, if you don’t have your own satellite hook up, you are not privy to all the international news stations like CNN International, BBC World, Al Jazeera, and LBC International. The newspapers inundate readers with local news, followed by a bit of national news and then a blurb here and there from the rest of the world. If there is something from the Middle East, it will probably be about Iraq and even then there is a good chance it will have a local angle. 

In the past, I remember always seeing a second, more international, newspaper lying around — the New York Times or Los Angeles Times — but now, with time, I notice that my wife’s family are slowly becoming more interested in the news that affected them on a daily basis. Even when we were visiting, they tended to veer away from the Middle East if some local issues, like the rise in crime, a garbage collection strike, or the bridge collapse in Minneapolis there was more anguish — “Haraam, they were just going home from work” — than for any car bomb outrage in Iraq.

One family member told my wife that she felt that her generation had “missed all the boats.” They had missed Lebanon’s golden era, caught the war and then had to endure all the insecurities of living as immigrants in the United States. And then came 9/11 with all that feeling of not belonging and being seen as outsiders. Her only consolation is that her children will hopefully feel more grounded and not live forever in search of a homeland.

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