A Day At The Races

After ten days of Shamal, a sunnier and brighter Dubai is now bracing itself for the big day on Saturday – the Dubai World Cup. This horse racing extravaganza, with total prize money heading towards US$ 30 million, will reach up to 1 billion global viewers and once again show the world what Dubai has to offer.

Previously unavailable to the dilettante here have been an opera house and a major museum but the times are changing with the announcement this week that the emirate is going to establish a cultural district in Downtown Dubai. It will house an opera house, a modern art museum, galleries and design studios as well as two art hotels.

On the finance side, it has been reported that DP World is set to repay US$ 3 billion off its revolving credit facility. Interestingly this was six months earlier than its October maturity and has trimmed its total long-term debt to just under US$ 5 billion. Reports indicate a bright future as growth returns to much of its extensive portfolio, including sixty terminals around the world as well as the London Gateway development due for opening in 2013.

Another sign of improving times is that yields on government-related bonds continue to plummet with the 7.75% US$ 750 million 2020 note falling to its lowest ever level at 6.21% and the 2021 5.591% bond dropping to 5.22%.  Furthermore Emirates NBD reported that its recently-issued five-year bond (4.625%) was three times over-subscribed.

Dubai has already indicated that it will not require to raise any further money on the international markets this year but may look at refinancing options for the US$ 1 billion DIFC Islamic bond maturing in June and the US$ 2 billion sukuk for JAFZA later in the year.

As Dubai tries further to increase its competiveness and to assist new companies in establishing new businesses with the minimum of fuss, the Department for Economic Development is planning to introduce a 120-day hassle free trade licence. Whether this initiative will facilitate business and simplify setting up procedures remains to be seen.

However this can only help Dubai in its quest to maintain it being the leading financial centre in the region. A recent study places Dubai 29th (out of a total of 80) in a global listing of economic hubs, based on factors such as infrastructure, market access and competitiveness.

Yet another survey out this week shows Dubai to be the world’s 12th most expensive city with average office rents at almost US$ 80 per sq mt. Not surprisingly, Hong Kong, London and Tokyo accounted for the top three positions whilst the Australian cities of Sydney and Perth made the top ten.

There are signs that Dubai retail rents are almost back to their pre-2009 levels. The two driving factors to this strong growth are the rising number of tourists and the increased consumer confidence of local residents, spending more of their disposable income than they have been doing in the recent past.

MAF Holding, the Dubai-based mall operator, had occupancy rates at nearly 99% last year with an average lease length nearing 8 years. The consolidated group has a total retail space of nearly 1 million sq mt and net fixed assets of almost US$ 8 billion with a total revenue in excess of US$ 5 billion.

The danger signs to continuing growth would be a slowdown in the global economy (which would have a negative impact on incoming visitors and a cutback in the discretionary spending of local residents) and an over-supply of available retail space. At a macro level, extended declines in the Chinese growth rates, further problems as a result of the Arab Spring and other localised unrest and the on-going Iran problem would be major causes for concern.

Compared to most airlines, Emirates is still riding high but even they are having problems especially with the A380 wing cracks and the high fuel price which accounts for up to a staggering 45% of the airline’s costs. The continued grounding of some of their 21 Airbus superjumbos has lost Emirates estimated revenue of US$ 90 million (or, as reported, US$ 50,000 for every hour a plane is out of action) plus the staff costs and other expenditure placating disappointed passengers. With another 70 on order, one can only hope that a permanent solution is found quickly.

The fragile state of the aviation sector was made clear this week as IATA downgraded its 2012 outlook by forecasting that profits at US$ 3.5 billion will be 56% down on last year’s return of US$ 7.9 billion. But if fuel prices continue to escalate (having already risen 12% in the past three months), the outlook may become even more depressing.

In contrast, the Dubai Financial Market is flying ahead and so far this year it has proved to be one of the best performing markets in the world with a 24% return.

Those who have not invested in the DFM could look at the following horses in the Emirates World Cup – Silver Pond, Smart Falcon and So You Think. Good Luck!

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