Where Did We Go Wrong?

Propertyfinder has signalled that the three year realty slump may have come to an end, following an 18 month fall in median sales prices of 20% (and rental falls of 21%), up to April 2017. The consultancy estimates that with a further 28k new units being released this year, prices could remain flat into 2018. (That figure of 28k does seem to be on the high side).

Following the success of its first Dubai Healthcare City project – Azizi Aaliyah – Azizi Development has launched the US$ 163 million Farhad Azizi. With 634 studio,1/2 bedroom units, as well as a community centre, schools and pool area – covering an area of 728k sq ft – completion is within two years. It also announced a double launch Azizi Berton and Azizi Pearl in Al Furjan bringing its total developments to date to 19; the former will house 245 apartments and the latter 260, with completion date slated for Q2 2019.

The developer has started on its US$ 460 million Meydan 1 project, encompassing 18 mid-rise towers having 2.3k apartments; this will be followed by phase 2, with 17 towers and 2.2k residential units.

Dubai Properties has launched phase 3 of its 8.2 million sq ft Serena community, Casa Viva, in Dubailand; this follows the success of phases 1 and 2 – Bella Casa and Casa Dora.

A month after launching its DUKES Dubai Sky Collection apartments, developer Seven Tides announced that the 60 apartments on offer have sold out.   With sales prices starting at US$ 271k, investors were lured by the five-year guarantee of an annual 10% return!

Arabtec has started infrastructure work on Dubai Investments’ The Palisades project in Dubai Investment Park. The contract for earthworks, and the grading of roads, is worth US$ 158 million and should be completed within three months. The master plan is for 20 buildings, housing 1.5k units, along with office, recreational and retail space.

It has been a good start to the year for Dubai Investment Park, with 280 new sub-tenants leasing premises in the four months to April, bringing the total number of operational companies to 4.9k. It is estimated that over 98% of its industrial zone is occupied and 95% of land leased. Furthermore, DIP boasts, inter alia, 12k residential units, housing 90k residents, 20 million sq ft of office space, six schools and five hotels.

As indicated in a recent blog, MAF has finally acquired 26 Geant stores, located in UAE, Bahrain and Kuwait, from BMA International. The retail giant has decided to move all these operations to its Carrefour brand, which will see the number of UAE outlets increase overnight by 13 to 80 stores. All employees from the “old” operation will be retained.

The latest report from the World Travel and Tourism Council is upbeat about the country’s travel and tourism sector. It expects that its contribution to GDP will rise by 2.9% this year, to US$ 44.6 billion, whilst it expects increases in employment – direct by 2.3% to 318k and indirect by 1.8% to 629k. Recent figures from Dubai Tourism point to an 11% hike in Q1 traveller numbers to 4.6 million.

The departure this week of C.S. Sea Princess from Port Rashid signified the end of this year’s cruise season. It has been a record year for the sector that has seen the number of liners berthing increasing by 18% to 157 and the number of visitors by 17% to 625k. Jamal Humaid Al Falasi, Director of Dubai Cruise Tourism, is confident of hitting the magical million within four years. Seabourn Encore will open the next season when it arrives on 25 October.

A study by US News and World Report ranks Dubai tenth in its best destinations in the world survey. Not surprisingly, it was the highest placed location in the MENA region and was placed ahead of the likes of Bali, Cape Town, Las Vegas and Venice; Rome topped the list.

In the Bloomberg World Airbnb Cost Index, Dubai is ranked third (behind Miami and Reykjavik) as the most expensive destination using that platform; records indicate that there are 4.2k properties (charging an average of US$ 180) in the emirate. As Dubai Airbnb prices jumped 7% year on year, local hotels recorded a 28% fall to US$ 175.

DEWA has awarded a US$ 68 million contract, covering Al Qudra Street and the Dubai to Al Ain highway, for a 40km extension of water pipes; this expansion will improve water-flow capacity and also service new residential areas.

July will witness a 5.4% reduction in Special 95 petrol to US$ 0.477 per litre, with diesel also heading down by 3.2% to US$ 0.501.

The DFM opened Wednesday at 3402 and traded 0.3% lower at 3392 by the end of the shortened week. Volumes were wafer thin, closing on Thursday at just 116 million shares, valued at US$ 50 million, (cf 350 million shares for US$ 128 million, the previous Thursday). Emaar Properties fell US$ 0.03 to US$ 2.12, with Arabtec trading at US$ 0.78, significantly up from its 22 June close of US$ 0.20; this anomaly arose because of its capital reduction plan that saw US$ 1.25 billion wiped off its share capital to its new level of US$ 409 million. The share price was amended on Wednesday from US$ 0.20 to US$ 0.83; the market was not impressed, with Arabtec losing a further 9.2% in two days of narrow trading.

At the end of June, the bourse closed on 3392, gaining 1.6%, month on month, from 3339 but down 3.9% YTD from its 01 January opening of 3531. Emaar, at US$ 2.12, posted an 8.2% monthly gain, from US$ 1.96, and YTD was 9.3% higher from its year start of US$ 1.94. Arabtec began the year at US$ 0.36 but with its share value greatly diluted on 28 June ended the half year on US$ 0.78.

By Thursday, Brent Crude, having shed almost 14% over the previous four weeks, regained some lost ground up US$ 2.20 (4.9%) to US$ 47.42, with gold again nudging lower by US$ 3 to US$ 1,246 by 29 June 2017. Brent started the year trading at US$ 56.32 and the month of June on US$ 50.76; closing on 30 June on US$ 48.77, it had shed 14.2% of its YTD value and 3.9% for the month. In comparison, gold performed well – 7.8% up YTD having opened on 01 January at US$ 1,151 but down 2.6% on the month from its starting position of US$ 1,275 to close on 30 June at US$ 1,241.

With the exception of Brent and coffee, all commodities, as they did in 2016 have headed upwards in the first six months and this trend will probably continue into H2. Despite the doomsayers predicting the end of sterling, all currencies have strengthened against the greenback. The bourses continue their upward trend, some into record territory, but expect a blip sometime before year end.

  Unit %age 2017 30 Jun 17 31 Dec 16 31 Dec 15 31 Dec 14 31 Dec 13
Gold US$ oz 7.82% 1,241 1,151 1,060 1,186 1,236
Iron Ore US$ lb 5.33% 79 75 47 73 135
Oil – Brent -14.17% 48.77 56.82 36.40 57.33 102.50
Coffee US$ lb -5.26% 126 133 124 161 260
Cotton US$ lb 1.45% 70 69 64 62 86
Silver US$ oz 3.88% 16.62 16.00 13.82 15.77 20.15
Copper US$ lb 9.27% 2.71 2.48 2.14 2.88 3.37
AUD US$ 6.94% 0.77 0.72 0.73 0.81 0.89
GBP US$ 4.84% 1.30 1.24 1.48 1.53 1.64
Euro US$ 8.57% 1.14 1.05 1.09 1.21 1.38
Rouble US$ 6.25% 0.017 0.016 0.014 0.017 0.030
FTSE 100 2.39% 7,313 7,142 6,242 6,548 6,730
CS1300 10.79% 3,667 3,310 3,731 3,532 2,291
S&P 500 8.27% 2,423 2,238 2,044 2,091 1,831
DFMI -3.94% 3,392 3,531 3,151 3,774 3,370
ASX 1.01% 5,722 5,665 5,345 5,415 5,352

Despite the fall in the DFMI , driven by poor performances by the likes of Arabtec and Drake & Scull,  low volumes, and the recent mini collapse of oil prices, brought about by market shenanigans, 2017 to date has been a better year than most “experts” expected. On the local front, realty is moving off its bottom and expect a slight upward movement before year end. The Expo momentum is beginning to take effect and oil prices will again head north for both political reasons and the fact that the Saudis will want higher prices because of the upcoming Aramco IPO. The emirate’s inflation rate will hover around 3.0%, direct foreign trade in H2 will top US$ 130 billion, its population will grow to 2.95 million by year end and its economic growth will reach 2.9%. The hospitality sector will again display world-beating occupancy rates but will have trouble improving revenue returns; travel will see marginal improvements.  Worries still remain in the retail field, particularly eateries.

The 147-year old Holland & Barrett, the UK’s biggest health food retailer, has been acquired by L1 Retail (a fund controlled by Russian billionaire, Mikhail Friedman) for US$ 2.3 billion. The company has 1.3k global outlets and a payroll numbering 4k.

L’Oreal has finally divested itself of The Body Shop (founded by the late Dame Anita Roddick in 1976) to a Brazilian cosmetics group, Natura for a reported US$ 1.1 billion. The French cosmetics chain bought the company, which has 3k stores in 66 countries, eleven years ago for just over US$ 1 billion.

Today, 29 June, is the tenth anniversary for Apple’s iPhone and in the ten years since then, the company has sold more than one billion units. Last year, the tech giant turned over US$ 24.3 billion in sales and it is estimated that two billion people now use smartphones.

After climbing 23% this year, Google shares took a 1.5% dive this week, following the announcement of a US$ 2.7 billion fine from the EC. It has been ordered to stop its “illegal conduct” and to treat all its rival price comparison services on an equal footing. The seven-year investigation concluded that since 2008, Google had systematically given its own search engine prominence over all its rivals, resulting in a significant increase in traffic, at the expense of competitors who suffered permanent losses. Those who consider that the EU appears to target US firms should look at how the boot is on the other foot when it comes to banking.

Two Japanese companies were in trouble this week. Takata has filed for bankruptcy protection in both its home country and the USA, as it faces billions of dollars in compensation claims resulting from use of its defective vehicle airbags. Key Safety Systems has bought all the company’s assets, apart from those relating to air bags, for an estimated US$ 1.6 billion. Already it has agreed to pay out US$ 1 billion in US penalty charges but is facing additional legal action, involving claims in excess of US$ 9 billion. To date, 100 million cars, using the company’s airbags, have been recalled.

Embattled Toshiba has now upped its estimate of 2016 losses by US$ 0.3 billion to US$ 7.0 billion and has again delayed its 2016 return to the end of the month; however, it is known that its liabilities will be greater than its assets and this must place a huge question mark on whether the Japanese electronics giant can continue in business. The company is facing legal claims, having inflated its profit by US$ 1.2 billion for seven consecutive years. Furthermore, it is facing huge losses from its investment in the US nuclear unit, Westinghouse. The company, the world’s second-largest chip manufacturer, will have to sell its prized chip operation, to have any hope of remaining solvent.

Three Australian Crown Casino executives have been jailed in China for illegally promoting gambling in that country. Although casinos can be found in Macau, they are banned in the rest of China. James Packer owns Crown and has operations in both Melbourne and Perth where it is estimated that international “high rollers” gambled almost US$ 47 billion in the last financial year, with Chinese punters making up 50% of the number.

A report by Deloitte Access Economics has valued Australia’s Barrier Reef at US$ 43 billion and has warned that more needs to be done to protect this World Heritage Site. It is facing on-going problems such as climate change, poor water quality, pollution and mass coral bleaching. The huge area is said to add US$ 4.9 billion to the economy every year and employs, directly and indirectly, some 64k.

China’s Yancoal has been gazumped by Glencore, as the race to acquire Rio Tinto’s NSW coal operations, Coal and Allied, hots up. Their latest bid of US$ 2.68 billion was higher than the Chinese initial offer of US$ 2.45 billion but that did come with regulatory approval. The Chinese have now responded with an increased US$ 2.69 billion offer that has received the approval of 97% of shareholders.

With a US$ 190 million investment in a new test bed, Rolls Royce is set to create 200 new jobs and secure its current 7k Derby payroll for five years. The new facility will be used to test large civil aero-engines.

Following the recent World Trade Organisation’s finding in favour of Boeing, the EU has appealed, claiming that Airbus is right to maintain that the US aircraft maker continues to receive unfair state government support. The 13-year old dispute seems set to rumble on, despite the WTO indicating that all but one of its 2012 rulings that Boeing was receiving billions in US$ in illegal subsidies have since been addressed; the exception – a US$ 800 million Washington state aid – still continues. The world body also found that subsidies, totalling billions of US$, have been provided to Airbus.

“Petya”, the latest global ransomware cyber-attack, emanating from the Ukraine, has struck largely across Europe and the US, including the advertising agency WPP, Russia’s biggest oil company, Rosneft, Danish shipping giant AP Moller-Maersk, the Chernobyl nuclear power plant and Kiev airport. The virus takes out affected users’ computers until an untraceable ransom of US$ 300 is paid, using the digital bitcoin. The virus is similar to May’s “WannaCry” cyber-attack that impacted more than 300k computers and includes “Eternal Blue”, a ransomware virus that may have been stolen from the U.S. National Security Agency.

With the possibility of law suits arising because of the Grenfell fire, shares in Arconic, the maker of the cladding used in that and other buildings, fell over 6%. The US firm supplied the material to Reynobond PE and had publicly warned them of the fire risk involved. Now it has also withdrawn this particular cladding from production citing the “inconsistency of building codes across the world”. How authorities allowed this sort of cladding to be used in the first place beggars belief and one can only hope that the proposed public enquiry does not follow the same Hillsboroughesque cover-up antics that has taken 28 years for justice to be seen.

After years of falsifying accounts, by overstating earnings of its Italian operation, the Financial Reporting Council has begun investigations into the auditing of BT by PwC, covering 2015-2017. The UK’s accountancy watchdog will be looking at why the British telecom operator wrote off US$ 680 million for “inappropriate behaviour” involving “a complex set of improper sales, purchase, factoring and leasing transactions”. Casualties from the fall-out include the original auditors now replaced by KPMG and the termination of several senior managers, including the head of BT Europe, Corrado Sciolla, and BT Italy’s chief executive Gianluca Cimini.

With its two main creditors, the EU and the IMF, still in disagreement about the modus operandi of Greece’s bailout payment, it seems that the country may escape a July payment default with the world body compromising, by approving a financing programme “in principle”. This will provide more time for all parties but it is only delaying the inevitable impasse because both sides remain intransigent. The EU will not entertain any further “haircuts”, mainly for domestic political reasons – and the inevitable electorate backlash – despite the obvious economic logic that Greece cannot manage its present repayment schedule; this represents almost 200% of GDP. Meanwhile the IMF has reiterated the nation’s debt is unsustainable and debt reduction is essential for the future progress of the Hellenic country.

Not known for their forecasting, the IMF has cut US growth for this year and 2018 to 2.1%, from 2.3% (2017) and 2.5%. The White House is still going for a 3% expansion, despite some uncertainty about the efficacy of some of their economic policies, including healthcare and spending cuts. The Trump target is an ambitious figure bearing in mind that in this century, annual growth has only averaged 2%. The US Commerce Department upped their initial Q1 findings, reporting that growth was 1.4% (not 1.2%), driven by a 7.0% jump in exports, 4.5% fall in imports and increased consumer spending (which accounts for 67% of the country’s economic activity).

It appears that the Bank of England is asking banks to find a further US$ 14.6 billion over the next 18 months to shore up their capital base in case of a fall-out from bad loans. Its Financial Policy Committee is becoming increasingly worried that loans are becoming too easy, as complacency returns to the lending departments of many financial institutions. There has been a marked 10% increase in rapidly growing consumer borrowing via credit cards, personal loans and, notably, car finance; it is estimated that such lenders are ten times more likely to default than mortgage borrowers.

A week after indicating that “now is not yet the time to begin” raising interest rates, Bank of England supremo, Mark Carney, has suggested that rates could rise if business investment expands. Sterling rose 1.0% to US$ 1.294 – rather ironic for those in the Remain camp, who one year ago were predicting that the currency would fall off the cliff and hit parity.

If the EU thinks they have a problem with Brexit, then wait until the Italian banking system starts to unravel. In order to ensure “the good health of its banks”, the government is to throw US$ 5.8 billion of taxpayers’ money at two failing banks – Venetian Banco and Bianca Popolare di Vicenza – in a belated and futile bailout attempt. Any good assets remaining from this fallout will be taken over by Intelsat Sanpaolo, with the Gentiloni government guaranteeing a further US$ 13.4 billion for potential losses arising from bad debts and risky loans taken over. (This comes six months after the world’s oldest bank, and that country’s fourth largest lender, needed bailout funds).

The Italian banks have an estimated US$ 390 billion of bad loans (a staggering third of the eurozone’s total bad debt). In allowing the country to utilise state funds, the EC’s competition commissioner said this would “avoid an economic disturbance in the Venetian region” and that “these measures will also remove US$ 20 billion in non-performing loans from the Italian banking sector and contribute to its consolidation”. It remains to be seen who actually picks up the bill for this debacle and what happens when the next bank needs bailing out? Could the EU – and the Italian banking system – be in a bigger mess than most people think? It a matter of time before parties start wondering Where Did We Go Wrong?

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