Breakin’ Up Is Hard To Do

The latest Knight Frank’s report indicates that average Dubai office rents have softened 4.3% over the past twelve months, despite a marked upturn in demand, especially in relation to firms’ consolidating their operations. Falls were more prevalent in ‘A’ grade buildings, where rents declined by 7.4% to US$ 41 per sq ft, whilst prime office space was only 1.4% down to US$ 68. As rents continue to come under pressure, some landlords have resorted to offering incentives including rent free periods, delayed price escalations and free parking. Rents are expected to remain under pressure for the rest of 2018, with vacancy levels remaining around 15%.

Developer Seven Tides has announced sales of US$ 82 million for all 661 apartments in phase 1 of its recently launched mixed-use SE7EN CITY JLT development. US$ 62 million of the revenue emanated from the sale of 572 studio apartments. The total US$ 354 million development, to be completed by Q2 2021, will feature 2.6k units, along with the usual add-ons of retail and F&B outlets.

An infrastructure tender for the US$ 1.2 billion MAG Eye Meydan District 7 development has been issued. Slated for completion by Q3 2020, the project encompasses 4.1k studio / 1 BR units and 536 3-4 BR apartments, with starting prices of US$ 133k.

Deyaar Development has announced that 35% of its Midtown development is now complete and will be ready for a Q4 2019 handover. The project encompasses 27 buildings and almost five million sq ft, with 659 apartments in the Arfan district and 579 in the Arnia district.

Despite the papers being full of stories of falling rents in the Dubai housing market, a recent Deutche Bank report ranks the emirate as the fourteenth highest among fifty global major cities. It estimates that the average annual rent for a 2 B/R apartment in the emirate is US$ 21.4k, still some way off the most expensive three of Hong Kong, San Francisco and New York at US$ 44.8k, US$ 44.0k and US$ 34.2k; at the other end of the scale come New Delhi and Bangalore at US$ 4.2k and US$ 3.5k. An interesting fact from the study estimates that US$ 82 billion is spent every year in the UAE on accommodation.

This week, HH Sheikh Mohammed bin Rashid Al Maktoum issued a decree cancelling any fines (covering over sixty different commercial violations) imposed by the Department of Economic Development until the end of the year. It is another step taken to further stimulate business in the emirate and enhance Dubai’s global competitiveness.

Dubai’s Crown Prince, Sheikh Hamdan bin Mohammed, has approved 26 Dubai 10X initiatives (from government departments) that aim to place the emirate ten years ahead of other cities. Two of these originated from the Dubai Airport Free Zone Authority – Dubai Blink, which would be the first global B2B smart commerce platform, and FZExchange. The latter will ameliorate capital investment opportunities for foreign investors, without the need to return to their home base, in a simplified and cost effective regulatory environment.

Meanwhile Dubai Land Department’s contribution to the Dubai 10X initiative is REST (Real Estate Self Transaction), a multiple-user platform for conducting real estate trading and transactions. The new smart system will eliminate paper documentation and simplify brokerage procedures, allowing Dubai properties to be traded at anytime and anywhere around the world.

In April, Dubai International witnessed 7.6 million passengers – almost the same figure as a year earlier – as total YTD numbers of 30.3 million are 0.8% higher than the same period in 2017. 27.4% of traffic emanated from three destinations – India (1.0 million), Saudi Arabia (557k) and the UK (530k). As in previous months, the number of flight movements slowed – YTD by 3.0% to 136k – but the average number of passengers per flight increased by five to 230. Cargo traffic declined – in April by 0.7% to 216k tonnes and YTD 2.6% lower at 832k tonnes. (YTD, Abu Dhabi recorded 193k tonnes and 4.0 million passengers).

Emirates will introduce its long awaited premium economy class on the newly-ordered 380s from 2020.

Dubai Aerospace Enterprise Ltd is to sell sixteen aircraft, valued at US$ 900 million that are currently on lease to eleven different airlines; proceeds will be used to pay down debt, following recent large-scale investments, as well as future expansions.

The world’s fourth biggest ports operator, DP World, is again in acquisition mode spending US$ 316 million to buy Cosmos Agencia Marittima in Peru, a country where it already has container terminals in Callao and Lurin.

It is reported that Dubai-based Landmark Group is considering a US$ 13 million investment in the 19-year old UK Italian restaurant chain, Carluccio’s. Under a CVA (Company Voluntary Arrangement), the company could close thirty of its 103 outlets (in four countries including UAE) as it attempts to slash costs, close non-profit making operations and invest in upgrading the remaining outlets. Landmark took full control of the 19-year old Carluccio’s in 2010, at which time its value was an estimated US$ 122 million.

The Labour Force Survey 2017 estimated that of the emirate’s total labour force of 2.78 million, 2.08 million lived in Dubai and the remaining 25.2% lived outside the emirate; the official Dubai population at 31 December 2017 was 2.98 million. The official unemployment level was given at 0.5%, with the labour market showing a 110k annual addition of workers over the past three years. The official percentage of employed rate, based on the total working age population, was 1% higher at 83.1%, with female workers 4.3% higher at 53.6%. Over 50% of the total were involved in three sectors – construction (27.6%), wholesale/retail (17.9%) and manufacturing (8.0%). 27.8% of all Emiratis worked as technicians/associate professors, with over a third of Emirati females being involved in jobs that required higher education and levels of skill and competency.

According to an International Data Corporation report, there was a significant 9.9% quarter on quarter decline in Q1 imports of mobile phones to the Gulf region to 5.9 million. Smartphone figures were 4.7% lower, (4.6% in the UAE) – the fourth straight quarter of declines, driven by falling consumer spending and the introduction of VAT in January (plus in Saudi Arabia by the new expat dependent tax). Samsung, with a 35% market share, continued to be the leader in the smartphone sector, followed by Apple and Huawei.

Petrol prices are set to rise tomorrow (01 June) with a monthly US$ 0.0381 (5.6%) increase in Super 98 to US$ 0.717; since January 2017, the price has risen 46.3%, from US$ 0.490, driven by the hike in energy prices (01 Jan 2017 – Brent at US$ 56.82, 31 May 2018 – US$ 77.56) and the 5% VAT as from 01 January 2018. Diesel will be 5.9% higher at US$ 0.738.

Having undergone a “comprehensive operational readiness review”, there will be a delay – to at least the end of next year – in the opening of Baraka nuclear energy plant in Al Dhafra. The facility will be the first nuclear power plant in the Arab world.

It seems that the Central Bank is coming to the party to help ameliorate the apparent liquidity problem in the market, by injecting US$ 3.8 billion in cash last month. It is expected that if this continues, it will go some way to boost economic activity and business momentum. The UAE Central Bank of the UAE raised its economic growth forecast for 2018 two notches to 2.7%, and 3.2% a year later, on the back of an expected expansion in the non-oil sector. “Due to improved international economic conditions,” non-oil GDP growth is expected to reach 3.9% – up from 3.4% recorded in 2017 – and 4.3% next year. However, because of a lower oil output forecast for this year, (mainly due to the OPEC quota cuts), there will be a 0.3% contraction in the oil GDP, with a marginal 0.1% expansion in 2019. Inflation levels this year are expected to hit 3.5% before falling to 2.5% in 2019.

52.5% of all Q1 remittances, totalling US$ 11.9 billion, by UAE expats emanated from three nationalities – Indian (36.8%), Pakistani (8.8%) and Filipinos (6.9%). There was a 10% increase in the number of trades carried out at money exchanges which now account for over 70% of the total transactions – a sign perhaps that banks are charging more for services. As these transfers account for 27% of the country’s current account, efforts should be made to reduce this by introducing attractive ways for expats to invest in the country. Naturally more money spent in Dubai will boost the local economy at a time when it is needed.

According to reports, it seems that two recent appointees to the Abraaj Group’s senior management team, COO Matthew Maguire and CFO, Bisher Barazi, have resigned. Apparently, there have been discrepancies found in a number of the firm’s investment vehicles, following irregularities discovered earlier in the year in a US$ 1 billion healthcare fund which had several high-profile investors including the Bill & Melinda Gates Foundation. The company is currently busy reorganising its structure which involves selling off some assets to raise liquidity levels; they include a stake in its fund management unit, its Pakistani utility unit and its shareholding in Dubai’s Middlesex University. There are late reports that Colony NorthStar has ended talks to acquire a major stake in the Dubai firm. (Coincidentally, Deutsche Bank, which is undergoing a massive cost-cutting exercise, is reportedly planning to sell its 8.8% stake in the Dubai firm).

The DFM opened on Sunday (27 May), at 2954, and, having gained gaining 72 points the previous two weeks, edged 10 points higher, closing on 2964 by Thursday, 31 May. Emaar Properties was up US$ 0.01 at US$ 1.42, whilst Arabtec was flat at US$ 0.53. Volumes were markedly higher, trading 555 million shares on Thursday, valued at US$ 246 million, (compared to 321 million shares worth US$ 68 million the previous Thursday – 24 May).

By Thursday 31 May, Brent Crude, having dipped US$ 0.51 (0.6%) the previous week shed US$ 1.23 (1.6%) to close on US$ 77.56, with gold US$ 1 higher at US$ 1,305. For the month of May, Brent traded 2.2% up from US$ 75.92 (and 16.4% YTD from US$ 66.02), with the yellow metal unmoved from its 01 January opening price of US$ 1,305 but US$ 8 lower for the month.

For one day this week, Netflix was the world’s most valuable media company when its market value went north of US$ 153 billion, trading above rivals Disney (US$ 152 billion) and Comcast’s US$ 143 million. So far this year, its share value has risen by more than 80%. The company, founded in 1997 as a DVD rental service, has 125 million streaming memberships in over 190 countries, with daily viewing hours topping 140 million.

Smiths Group, a UK engineering conglomerate with a market capitalisation of US$ 9.2 billion, is reportedly in discussions with US companies, including ICU Medical, about a transatlantic merger of its healthcare business‎. The medical side of the UK business accounts for only 30% of its revenue and, even at these early stages, it is thought that any future business relationship will be a JV rather than a merger. However, Smiths will not be immune from the possibility of some activist group pushing for a break up of its assets.

Pret A Manger is ready to be sold to Luxembourg-based JAB Holdings for a sum likely to be in the region of US$ 2.0 billion. It would net the current owners of the 32-year old UK sandwich and coffee chain, Bridgepoint, a tidy profit, as they paid US$ 472 million for it in 2008. The chain has 530 global outlets which generated US$ 1.2 billion in revenue last year. The new owners already have the world’s second-largest coffee business, controlling both the Peet’s and Espresso House chains, as well as the Kenco and Douwe Egberts brands.

Another UK retailer is facing tough times, with Dixons Carphone warning of a sharp fall in profits to US$ 515 million this year and US$ 405 million in 2019. The company is expected to close 13% of its 700+ stores this year, as it takes drastic cost cutting action to become a much leaner organisation.

It seems likely that the UK government will start selling part of its remaining 70.5% stake in RBS – a 10% divestment would net the coffers US$ 4.0 billion. The government, that has been a majority shareholder in the bank since 2008, will lose money on any sale when the share value in 2008 was at an average US$ 6.78 and at the beginning of this week stood at US$ 3.91- a 42.3% diminution. Earlier in the month, RBS was fined US$ 4.9 billion by the US Department of Justice for the mis-selling of mortgage bonds before the financial crisis.

In the UK, the Financial Reporting Council is to take disciplinary action against the former finance chiefs of Autonomy and Deloitte for their 2011 roles in the sale of the firm to Hewlett Packard for over US$ 10 billion. Within a year, HP was crying foul, amid accusations of a dishonest inflation in the selling price, so much so that it wrote off 75% of the value in 2012. The auditor is accused of failing to adequately challenge Autonomy’s accounting and disclosure of its purchases and sales of computer hardware.

A US court has awarded Apple damages of US$ 539 million against Samsung for copying certain features of the original i-Phone in a case that stretches back seven years. The US tech giant had asked for US$ 2.5 billion, with the South Korean conglomerate arguing that it should only have to pay US$ 28 million for profits directly related to the components or features covered by the patents.

President Trump has now allowed Chinese chipmaker ZTE Corp to remain in business after it had agreed to pay US$ 1.3 billion in fines, changed its senior management/board and provided “high-level security guarantees.” Last week, he intimated that he was doing Chinese President Xi Jinping a favour by lifting the ban that had cost the telecommunications-equipment maker US$ 3.1 billion.

As expected, US authorities have given the green light to Bayer’s controversial US$ 66 billion deal for Monsanto on condition that it sold off parts of its seeds and crop chemicals business; a US$ 8.8 billion sale has been agreed with chemicals producer, BASF. This deal goes some way to allay fears that the merger between the world’s two biggest agricultural companies would stifle competition. The new entity will result in cost savings of at least US$ 1.5 billion.

According to IATA’s April report, ME air freight volumes were 7.3% higher, year on year. On a global scale, April’s demand was up 4.1%, measured in freight tonne kilometres, but the pace in growth demand is still somewhat short of what was happening in 2017. However, it is expected that 2018 growth will be in the 4% region.

The bad loan situation at India’s five major state banks continues to deteriorate as it was reported that bad loans were more than US$ 6.8 billion higher than first estimated. The end result is that 31 March financials were littered with massive losses, as banks had to increase their loan impairment costs substantially. Half of the country’s 22 state banks currently operate under the RBI’s Prompt Corrective Action program that restricts lending and expansion, which then reduces banks’ lending powers which in turn have a negative impact on the Indian economy. Unfortunately, there is worse to come!

With the Indian rupee weakening over 6% YTD to 68 to the greenback -its lowest rate in eighteen months – there are concerns of the negative impact it will have on the economy. A strengthening US$ and a marked improvement in energy prices have a double whammy in that prices inevitably head north because imports, including oil, become more expensive. Furthermore, Q1 witnessed 4.4 billion rupees being taken out of rupee-denominated government and corporate bonds, the highest amount on record. The situation has not reached the crisis level seen five years ago and is unlikely to do so since foreign reserves in 2018 are close to record highs and the current account deficit is significantly smaller than in 2013.

All is not well with Asia’s third biggest economy. In a bid to boost sluggish lending and economic growth, Indonesia raised its benchmark interest rate for the second time in a fortnight, as fears rose of a continuing fragile rupiah (which has been trading at lows last seen in October 2015) and increasing capital outflows, not helped by the improving greenback. The authorities expect that lending growth will improve this year, increasing from the current 8.9% rate to 12% by year end, inflation will stay at the 3.5% mark and that growth will top 5.2%, slightly down from an earlier figure of 5.4%.

Although monthly Japanese producer prices in April nudged 0.1% higher, for the year, there was a 0.9% rise, driven by prices for transportation, advertising, communications and insurance heading north.

Last month, Chinese industrial firms’ profits rose at their fastest pace in six months, reaching US$ 90.1 billion – a massive 21.9% higher year on year and 15.0% YTD. Driven by higher prices and strong demand, the increase is even more impressive, when considering “negative’ factors such as cut-backs by regional governments, recent stringent regulations relating to industrial pollution (leading to many factory closures) and its rocky trade relations with the US. However, companies are seeing their profit margins being squeezed as debt growth slowed to its lowest level since the GFC.

Australia’s scandal-plagued financial sector received another blow this week when the Australian Competition and Consumer Commission confirmed that it would be prosecuting ANZ, Citibank and Deutsche Bank (and several individuals) on criminal cartel charges. The case involves arrangements for the August 2015 sale of 80.8 million ANZ shares worth US$ 1.9 billion.

Australia’s Wesfarmers’ foray into the UK market has ended ignominiously following its sale of Homebase to restructuring specialist Hilco for just over US$ 1 (one pound). It only acquired the DIY chain, with 250 stores and 11.5k employees, two years ago for US$ 460 million and had already converted part of the chain to the Bunnings brand; it has also racked up losses and other costs of some US$ 890 million. This sorry episode will inevitably find its place in future university studies under How Not To Manage a Foreign Takeover 101.

In an indicator that the Australian economy may be facing some headwinds, April housing activity slowed, with dwelling approvals 5% off as non-residential permits also weakened. Although on a twelve-month basis they were 2% higher, they are still well down on the double-digit growth seen the previous year. It is obvious that the four-year housing boom has run its course, with home prices in the major cities slowing because of banks introducing tighter lending procedures. Any further softening in this sector will have a negative impact on the country’s US$ 1.4 trillion economy, as consumer spending will inevitable tumble. The annualised growth forecast has declined from the 2.8% trend rate to 2.4% and there is now every chance that rates will be held at the 1.5% mark until early next year.

President Donald Trump has gone ahead with his pre-election pledge of imposing steep import duties on steel (25%) and aluminium imports (10%) from the EU, Mexico and Canada. Undoubtedly, there will be repercussions with tariffs being applied from the ”injured” parties on the likes of agricultural goods, clothes, Levis, JD and Harley Davidsons. The reasoning behind the President’s move is to address an oversupply (and dumping) of the two metals and to protect American jobs.

US Q1 growth was downgraded at 2.2%, 0.7% lower than the previous quarter. Meanwhile, the current dollar GDP was US$ 203 billion higher at US$ 19.96 trillion that was attributable to improvements in many sectors, including exports as well as spending by government and consumers.

Italian government bonds rose to their highest level in over three years to over 3.0%, as political uncertainty continues. Its people will not forget the 2008 GFC which left the economy 6% smaller and added three million to live in poverty. With its national debt equivalent to 132% of national output – second only to Greece – it can ill afford the US$ 20 billion needed to drag many families over the poverty line by raising the basic monthly income to US$ 919.

With the proposed appointment of 81-year-old Paolo Savona as Finance Minister, Italy would have moved one step nearer to leaving the euro. He has been highly critical of the single currency – a “flawed project” –  in general and Germany in particular – which “has replaced the will of military power with economic power”. The markets were indeed worried, with US$ 4.4 billion withdrawn last week from the European equity and bond funds, the country’s MIB recording its third straight week of losses (down 8%) and government bonds at 2.46%, a level not seen for more than a year. Sergio Mattarella, the president of the world’s third-most indebted nation, did not waste any time and blocked his appointment feeling that this appointment could hasten the country’s exit from the euro.

Consequently, a frustrated Prime Minister-designate Giuseppe Conte gave up in his attempts to form a government. Both the far-right League and the 5-Star Movement argued that the president’s actions were unconstitutional and demanded an immediate new vote. By Monday, technocrat and former IMF official Carlo Cottarelli was called in to head a government of unelected technocrats.

Then there is the Spanish fiasco, with the distinct possibility of a no confidence vote, ousting the current Prime Minister Mariano Rajoy to be replaced by the unelected Pedro Sánchez, whose party has only 84 seats in the country’s 350-seat parliament. So much for the democratic process in Europe’s third and fifth biggest economies! Pressure will be mounting in the Brussels corridors of power – Breakin’ Up Is Hard To Do!

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