Shelter From The Storm

Emirates-Read-MadridThe major news story of the week came with the announcement that Dubal, 100% owned by the  Investment Corporation of Dubai, was going to merge with Emirates Aluminium (Emal) – a 50:50 JV between Abu Dhabi’s Mubadala and Dubal. The end result is that the new entity – Emirates Global Aluminium – will become the world’s 5th largest aluminium producer, with an annual capacity of 2.4 million tonnes, and have an estimated value of US$ 15 billion. This comes after Q1 global aluminium sales fell by over 10% and that up to 50% of producers are struggling to break even.

In line with recent property releases, Nakheel announced sales of US$ 381 million of its 350 Legacy Nova Villas within five hours of their Sunday launch. With such high demand, the property developer decided to increase the original number of 226 units to be sold by a further 50%. Construction will start later in the year and be ready by 2015.

Dubai largest developer, Emaar has indicated it will soon launch its ‘The Hills’ development with luxury homes being built around the obligatory 18-hole golf course. This comes on the back of a recent Deutsche Bank report indicating that the local real estate recovery has been on track for the past 16 consecutive months along with a 6.2% growth in Q1.

As an aside, the Indian government is reportedly accusing Emaar MGF – a JV between Emaar and the Indian company MGF Developments – of violating their forex regulations with investments of US$1.5 billion. The accusation stems from their various purchases of farmland since 2005 when the rules only allow investment in construction and development of property. (Its shares fell 1.7% to US$ 1.58 following this report).

Arabtec has been awarded a US$ 220 million contract to build a 5-star, 447-room hotel and 136-serviced apartments in Business Bay. The two-tower building, with a built-up area of 125k sq mt, is slated for completion by June 2015.

Part of SKAI Holding’s sales strategy is offering deed ownership on some of the 481 hotel rooms in its US$ 1 billion Viceroy Palm Jumeirah resort project which will also include twenty-one  apartments and six villas. Room costs will be in the region of US$ 450k – US$ 490k. Under the scheme, investors will receive 40% of revenue, paid out on a monthly basis, with an estimated 12% return. With such a return, it is little wonder that 50% of rooms have already been sold.

In the aviation world, IATA has just revised their previous forecast upwards in relation to ME carriers and expect them to report profits of US$ 1.5 billion in the coming year. On a global scale, profits are expected to come in at US$ 12.7 billion (US$ 7.6 billion in 2012) on Revenue of US$ 711 billion. This represents a net margin of 1.79% which equates to US$ 4 for every passenger flying.

Emirates have just spent part of their estimated US$ 272 million annual sponsorship budget by signing up Real Madrid in a five-year shirt deal plus certain other hospitality rights. A similar deal was initialled with New York Cosmos of the US MSL.

Dubai Summer Surprise is due to start this Friday with officials hopeful of topping last year’s Revenue of US$ 3.26 billion for the 32-day event. The 2012 festival attracted 4.36 million visitors of which 21.0% came from other countries. It is estimated that foreign tourists spent US$ 33 billion in the country last year and that the tourism sector contributed US$ 52.8 billion to UAE’s GDP.

A further indicator of the rising confidence in the local market was the latest PMI figures which rose from 54.0 in April to 55.3 last month. Any reading above 50 represents growth and the mid-term signs are that 2013 will be a lot stronger than last year. Furthermore, payroll numbers were up for the 17th consecutive month.

It can only be a matter of time for the Dubai Financial Market Index to slow down following another 2.3% weekly rise to close the shortened trading week on 2422 points – up from its Sunday opening of 2367. A market that has risen 75% over the past year would normally need dampening down and this is what will probably happen over the summer months – but not before another mini surge if there is an upgrade – from frontier to emerging market status – for the bourse next Wednesday.

Interesting statistics from The Boston Consulting Group show that 4% of all UAE households have private wealth in excess of US$ 1 million with UAE’s 2012 household wealth up by 8.2% with 57k families having a total value of US$ 400 billion. Overall the wealth held in equities, bonds and cash rose by 18.3%, 9.2% and 5.2% last year.

However a cloud in the Dubai summer sky may well be attributable to the actions of the US Federal Reserve chairman who could be held responsible for the sudden turnaround in the HSBC / Nasdaq Dubai US$ Sukuk Bond index. After showing moderate gains early in the year, and an impressive 15.1% in 2012, it is now down 0.5%. The main reason for this decline is that Ben Bernanke has indicated that QE may soon be coming to an end as the US economy starts to drag itself off the ground. This in turn may well see loans becoming more expensive for local entities.

As most of the world’s bourses headed south amidst renewed volatility, the Australian dollar was again sold off and ended the week at under 95 cents – some 11% down over the past two months. Q1 saw a further dip in investment and general weak economic data may force the Reserve Bank to reduce interest rates from their current level of 2.75%. There is no doubt that further trouble is brewing down under – especially as the mining sector slows – and turbulent times lay ahead.

Surprisingly in the UK the PMI for services confounded analysts’ expectations by rising from 52.9 to 54.9 in May showing that growth is now a lot higher than earlier forecasts. If this trend were to continue, Q2 growth could come in at 0.6% – double that of the previous quarter.

This is in contrast to the eurozone where the 17-member bloc continues in a recession that has now gone on for the past eighteen months; there was a 0.2% contraction in Q1 with Italy and Spain both shrinking 0.5%. Even the Bundesbank has cut its 2013 growth forecast down to 0.3% as the German economy suffers from its neighbours’ problems. The prospects for any recovery in the short-term are very fragile and a continuing downturn is almost inevitable as both regional and global demand dampens.

With the global economic malaise added to theregional political turmoil, no wonder Dubai has become a Shelter From The Storm.

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