Dubai looking to life after the bubble

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Published on:

Dubai's magic property bubble has burst. Years of unrestrained building, imaginative marketing and audacious financial leverage finally distended it to popping point. Industry veterans claim they have seen it all before – indeed, that they have seen it all before in Dubai – and that the whole metro-desert fantasy was only ever based on impossible ambition and a high oil price.

From many quarters there is even a note of satisfaction at Dubai's difficulties. Its dizzy growth over the last 15 years defied the style and values of many other regional centres, and, say its critics, that capitulation to Western interests is now coming back to bite it.

For the real estate sector, the £20 million party thrown in November to mark the opening of the Atlantis Hotel on Nakheel's Jumeirah Palm island, seemed to be Dubai's last hurrah. Such a glorious snub to the global credit crunch was seen as either typically lavish, or grossly inappropriate. Added to the extravagancies that are the Palm, the Burj and Ski-Dubai developments, the writing, said detractors, was clearly on the marble-faced wall.

In November, real estate sector flagship Nakheel abruptly cut 500 staff (15% of its workforce) and announced it would go slow on some projects. Property giant Emaar saw its shares drop to record lows. Damac Group, owner of leading private developer Damac Properties, axed 200 jobs (2.5% of its payroll). The UAE's pipeline of $1 trillion of construction and infrastructure projects started to be affected.

Perspective

But the 'slowdown' should be put in perspective. Figures show UAE real estate growth could slow from 20% to 13% in 2010 – that is a rate most enterprises would still consider robust. And government officials have hinted that state-controlled property developers will turn off the supply taps to help stem price falls, if necessary.

Other markets are blossoming as Dubai wilts. Bahrain believes its real estate sector is secure, although affected. A report from Jones Lang Lasalle asserts that Saudi Arabia's real estate market is set to grow strongly over the next four years, driven by a growing economy and strong demographic fundamentals. Its nominal GDP of $608 billion is the region's largest, some 20% greater than the other six Gulf Co-operation Council (GCC) countries put together. For five years economic growth has been increasing by an average of 15% a year.

The Kingdom's real estate market also has more commercial (office, retail and residential) floor space than all the other GCC countries combined. The current stock is planned to increase by more than 60% by 2012 to offset major shortages in the residential sector.

Abu Dhabi's increased financial profile has fuelled hopes it will pick up as Dubai starts to flag. The emirate has already announced the launch of a government backed lender, Abu Dhabi Finance, a $136 million venture including Abu Dhabi Commercial Bank, Aldar, Mubadala Development Company, Sorouh Real Estate, and the Tourism Development and Investment Company. But experts in the region expect no favourable terms for struggling firms in Dubai. "Abu Dhabi will be there, not to bail out, but to buy out," commented one. "This is the time for it to asset its seniority as the capital of the Emirates."

The region's stock markets, like those elsewhere, have taken a hammering. In November GCC stock markets fell to their lowest level in four years, after a $220 billion drop in October. Their collective market capitalisation plummeted to around $595 billion on November 28, a decline of about $127 billion, according to the Joint Arab Stocks Data Base at the Abu Dhabi-based Arab Monetary Fund (AMF).

"The capitalisation in the region's bourses has dipped below their real value or performance," AMF Chairman Jassim Al Manai said. "This is because their prices actually reflect their expectations about future performance amidst the current global financial crisis and its repercussions." Saudi Arabia's Tadawul was again the main victim, losing nearly $62 billion, almost half the region's losses, due mainly to its large capitalisation and a speculative element.

Various exchanges are adopting different defensive strategies, with corporate action near the top of the list. Local reports said Bahrain was contemplating a staged sale of its stock exchange to Singapore Exchange Ltd (SGX), starting with close technical co-operation.

Hussein Zeineddine, head of Structured Finance at Kuwait Financial Centre (Markaz) notes: "We introduced several draft laws and regulations to bring new trading instruments in the stock markets, especially for options trading and derivatives. We were expecting the approval of the laws by the end of the year. However, the recent developments in the financial industry and in regional stock markets have created a new trend among financial policy makers...we do not expect laws of such significance to be passed in the near future."

On the exchanges, there have been some high profile casualties, notably in the banking sector. In November Kuwait's Gulf Bank, the country's second biggest lender, revealed it had lost a total of $1.4 billion on derivatives deals. The bank said it would double its capital to raise an amount equal to the losses in order to restore shareholders' equity to its level before the crisis, but the collapse resulted in the board's almost immediate departure.

The UAE authorities have had to bail out Emirates Development Bank, which itself had absorbed the struggling Islamic mortgage lenders Amlak and Taweel Finance.

Bahrain's Central Bank has delayed the granting of eight new investment banking licences. Bahrain-based Gulf International Bank, owned by the Saudi Arabian Monetary Agency and the governments of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, admitted a $757.3 million net loss from 2007, mainly due to the US sub-prime mortgage crisis, and had to raise $1 billion in new capital.

Chief executive officer Khaled Al-Fayez, who set up the $30 billion bank in 1976, was replaced by Yahya Al-Yahya, a Saudi national who was the executive director for Saudi Arabia at the World Bank in Washington.

A report in December from Washington-based Institute of International Finance said the six GCC states would not allow the collapse of any key banks, and were in a position, with state control, to ensure that support. Low levels of debt, still-high energy revenues and conservative lending policies have left them with more options than their counterparts in developed markets.

Within the region, there are niches which are actually benefitting from the global financial turmoil. Global Investment House has secured licences to launch three new funds while hedge fund manager Brevan Howard Offshore Management has listed two new funds on Nasdaq Dubai. Banks like Kuwait Finance House, and Iran's Milly Bank, are consolidating their regional hold.

Lebanese banks have reported strong inflows as expatriate nationals send their money back home. Local banks stick to conservative lending policies, including towards real estate, and have been barred from engagement in the derivative markets. Central Bank governor Riad Salameh says that local banking liquidity is around 30% and the country's 60 banks hold some $100 billion in deposits, more than three times Lebanon's GDP. Profits are expected to top 10% this year, as long as expatriate remittances, worth some $6 billion annually, hold up. Through all its political instability, Lebanon has never defaulted on its sovereign debt.

Jordan, according to some fund managers, is an under-rated market. "It has exceptionally strong economic policies and good management," notes Francis Beddington at Insparro Asset Management. "It is on a par with Malta and Cyprus but it suffers from the woes of its neighbours. They stock market is small but it should be taken more seriously."

Another plus from the global slowdown: a cap on the rampant inflation that was plaguing many regional markets, taking its toll through rising food prices and rents for both locals and the significant population of expatriates. Analysts now expect 2009 inflation to drop to single digits in most GCC states, bar the UAE and Qatar. But it will remain historically high due to domestic demand and continued government spending on infrastructure.

New force in private equity emerging markets

The BMB Group Ltd (BMB), a leading global alternative asset management firm with offices in Brunei, London, New York, Kuala Lumpur and the Middle East, has acquired EMP Global, a private equity house dedicated to emerging markets.

BMB Group Ltd is headquartered in the Cayman Islands, with its parent company in Brunei. It manages the assets of some Asia's most powerful ruling families, together with other ultra high net worth individuals and institutions. The firm is majority owned by its senior management, with additional backing from a series of investors from sovereign families in Asia. The EMP partnership, founded in 1992, will become BMB's emerging market direct investment arm. The combined group will represent assets in excess of $12 billion.

EMP has raised some $7 billion of private equity funds. With offices around the world, including Washington, Hong Kong and Bahrain, it has launched major funds in Asia, South America, the Middle East, and Emerging Europe alongside a major institutional investors such as GE and the Islamic Development Bank.

The expanded BMB Group will field some heavy hitters in global investment terms. Moeen Qureshi, the former prime minister of Pakistan and chief operating officer of the World Bank is appointed vice chairman, acting as a senior advisor to group global strategy and the development of its sovereign wealth focus. EMP partner Don Roth, the former head of Merrill Lynch Europe, and treasurer of The World Bank, takes the post of head of principal investments for the BMB Group.

EMP's US operation will continue to run independently, managing existing private equity funds for corporations and governments. The offshore business of EMP will become BMB Emerging Markets, and is set to launch a range of direct investment funds focused on energy, infrastructure and financial services. New talent is still being hired for these businesses and executives say the choice is improving all the time.

EMP Global LLC has already appointed Chung Min Pang and Samir Soota as Managing Directors in Asia. EMP's Asian business is run through EMP Daiwa Capital Asia Limited, a joint venture formed in 2007 with the Daiwa Securities Group Inc. Chung Min Pang will be responsible for the Greater China region and will be a member of EMP Daiwa's Investment Committee. He will also support BMB's activities in China. He was previously the China country head for both Bank of America and Salomon Brothers, and most recently headed Aureus Capital in China.

Samir Soota will be based in Singapore to oversee the South and South East Asian markets. He joins EMP from Principia Management Group, a specialty investment services firm which he co-founded with a private equity firm. He has extensive experience in both private equity investments and restructurings.

Commenting on the EMP acquisition, Rayo Withanage, chairman of BMB Group said the transaction came at a time of "unprecedented opportunity for Eastern financial services players to capture global market positions." Roth added: "Our new business will be a global one that assists in the flows of new capital in a changing world, matching Eastern values with Western governance and experience."

Kuwait, which pegs its currency to a predominantly dollar-denominated basket, will see inflation fall to 7.5% after peaking at 9% in 2008 and Bahrain's official inflation rate is expected to rise to 6% in 2009, according to the IMF. Dubai's Shaikh Khalifa Bin Zayed Al Nahyan, in a rare public comment, downplayed fears of declining oil prices impacting the national economy. "Volatility in the oil market is not a new thing," he told an Egyptian newspaper.

Many managers make a distinction between the volatile and generally sliding stock markets, and the attraction of the long term future for the region, based on demographics, local financial strength, intra and inter-regional trade and development. Managers and institutions are looking locally, rather than outwards, for support. Hesham Al Agamy, executive director of Tharawat Family Business forum, said family offices were working on regional alliances by country or project. Confidence in other family businesses was now higher than confidence in external agents, he said.

"What is behind regional development are the young populations," comments Ghadir Abu Leil-Cooper, a fund manager at Baring Asset Management. "It is not only about the oil price going up or down. These economies know they can run out of oil and they need to diversify. Dubai has paved the way – it ran out of oil first. Now they and everyone else are looking at how to build a sustainable future." She points to Kuwait, with "unprecedented wealth creation and a realisation that you have to rely on yourself", and the developing markets in Abu Dhabi and Saudi Arabia.

Nick Tolchard, head of the international development division at Invesco Perpetual, says investors hoping for get-rich-quick forays into the Middle East and North Africa are bound for disappointment. "These are long term markets that require long term commitment. We want to build a set of relationships, and avoid a transactional approach. Yes, oil revenues have been a factor allowing early infrastructure build, but there are many stakeholders in these markets who want them to work." He says it takes time to set up and sustain a trusted dialogue with investors, so the firm "tends not to launch high with glitz", but to meet increasingly sophisticated demands quietly.

One factor that has definitely changed is the level of performance required from asset managers. "No more 'habibi business'," notes one Bahrain-based manager. "That is absolutely gone. It is track record, service and delivery, or you are out. Me-too products don't work either. Everyone knows everyone else around here and where the intellectual capital lies."

Graham Elliott, head of the Middle East for Barclays Global Investors, describes a "huge opportunity" for the asset management sector. BGI targets five key client groups: sovereign funds, central banks, emerging state pension funds, corporates and family offices. Like other firms, BGI is looking at the major market in the region, Saudi Arabia, particularly for shari'a compliant and alpha products.

"Investors in this region are not a homogenous group, they have different interests in different centres and you need to tailor the products accordingly." But what they have in common, he adds, is that they do not favour 'suitcase banking', where the market receives periodic visits from managers based elsewhere.

A growing certainty is that many executives are rejecting that model as well. Top recruitment agencies in the GCC say they are getting more than 100 applications a day from people at the top of their businesses, worldwide. "They can see the downside in these markets, but they can also see the longer term upside," commented one.

 More stories from Global Investor