Handle With Care                                                           15 August 2019

Property Finder came out with staggering figures relating to Dubai’s reality, indicating that in H1, 21k residential units were completed, (16k apartments and 5k villas/townhouses), and that a further 38k are scheduled for delivery by the end of the year. If all are handed over, that would mean 59k additional units to what many perceive is an already overcrowded portfolio – equivalent to 9k more than the four-year total that had been handed over in the previous four years. To the casual observer, this would indicate a further deterioration in the sector, with prices still heading down, as they have done when only 15k were being handed over in 2015, 2016, 2017 and 23k in 2018.

Last year, 23k units were added to the emirate’s portfolio bringing the total to 597k at the end of 2018, comprising 485k apartments, 105k villas and 7k Arabic houses.  Over the past three years, the population has increased by 10.3%, 10.3% and 7.3%, with the number jumping 30.5% from 2.446 million in 2015 to 3.192 million by the end of 2018.

Say 30% of the population live in camps or staff accommodation, that leaves 70% of Dubai’s population (2.23 million) in the housing market (either as tenants or landlords). Assuming 3.5 to a unit equates to a demand of 638k units (2.234 million divided by 3.5). If these figures are correct – a population of 3.2 million, 30% of which require housing units, the average “unit” houses 3.5 people and that the 2018 number of units was 597k – then, at the end of 2018, demand (638k) was 6.9% greater than supply (597k).

Eshraq Investments has awarded the construction contract for its Jumeirah Rise project in Jumeirah Village Circle. The Abu Dhabi-based investment company is to build two mixed use tower and one hotel apartments, that will have a 36k sq mt total leasable area footprint. It also indicated that its residential apartments in DIFC have an almost 100% occupancy rate.

InterContinental Hotels Group is to manage a new 170-key Holiday Inn property, located on Deira Islands, and due to open in 2023; it will feature the usual accoutrements and become IHG’s sixth regional midscale hotel. The operator currently has a 92-property portfolio, with a further 38 to open over the next four years. 

Hong Kong-based AS Watson, which operates twelve different brands in twenty-five locations, is reportedly interested in entering the UAE market. The health and beauty retailer, that owns chains such as Superdrug, is confident that, despite the current softening in the retail sector, it could take advantage of cheaper rents. It also noted that in a slowing market, that could affect personal care product sales, it will not impact on cosmetics as much. Indeed, on a global scale, the beauty industry tends to be more resilient than many others, with annual growth of up to 5% reported. The retailer is hoping that the well-known ‘lipstick effect’ – that consumers will continue to buy luxury items (but cheaper ones), even when there is a crisis – holds true in Dubai.

It is reported that Kanoo Travel is to sell a 65% controlling interest to American Express Global Business Travel (GBT) for an undisclosed fee. The new JV will provide managed travel and events services to regional clients. Kanoo Travel, one of the largest ME travel management networks, has been a key member of GBT’s global travel partner network for many years.

Owing to the 45-day closure of one of its two runways, DXB H1 passenger traffic dipped 5.6% (year on year) to 41.3 million, as the number of flights came in 11.6% lower at 178k. Despite this “enforced” decline, Dubai International still remains the world’s busiest international airport by traffic volume. India, UK and Saudi Arabia are again the top three destinations, with 5.7 million, 3.1 million and 2.8 million customers respectively. Cargo also suffered for the same reason (and maybe from a sluggish global trade environment as well) and was down 18.3% to 1.036 million tonnes, with the number of bags, handled by the 175 km long baggage system, 3.9% lower at 35 million.

According to a recent Dubai Economy/Visa study, the UAE boasts the most advanced e-commerce market in the MENA. It forecasts that the sector will have an annual 23% growth rate over the next three years and, that by the end of 2019, transactions will top US$ 16 billion. One interesting statistic is that the average deal size in the UAE is US$ 144 – a lot higher than the US$ 79 and US$ 26 found in mature and emerging markets respectively. Furthermore, e-commerce penetration, at 4.2%, is more than the MENA average of 1.9% (and the GCC’s 3.0%). In the year to February 2019, apps for both food delivery and ride-hailing doubled their e-commerce share to 2.0%. There is no doubt that the expanding e-commerce sector in Dubai is boosting local economic growth.

One sector that seems to buck the current trend of flat or declining profits is banking, and latest figures serve to reemphasise this point, when looking at H1 results from those eighteen banks listed on the two UAE bourses. It is estimated that the combined H1 net profit of the listed banks jumped 16.7% to US$ 6.7 billion. The increase was seen more on the DFM, where Dubai seven banks’ profits were an impressive 32.4% higher at US$ 3.5 billion, whereas the eleven banks on the ADSE showed only a 3.5% rise to US$ 3.2 billion. Emirates NBD contributed 58.1% (a 50.0% hike to US$ 2.0 billion) of the Dubai total, whilst First Abu Dhabi Bank was responsible for a 54.6% share of Abu Dhabi’s total at US$ 1.7 billion.

Although Q2 revenue shot 54% higher to US$ 13 million, Dubai investment bank Shuaa Capital posted a US$ 9 million loss, compared to a US$ 4 million profit a year ago. Over H1, revenue was 61% higher at US$ 28 million but still recorded a loss of US$ 15 million, following a US$ 7 million profit in H1 2018. The main driver was a 46% jump in expenses including finance costs, 120% higher, and a US$ 3 million impairment provision, now standing at US$ 5 million. Last month, the shareholders agreed to Abu Dhabi Financial Group taking over the firm in a reverse takeover, creating a new entity, with US$ 12.8 billion of assets under management, of which the major share of US$ 11.5 billion being introduced by ADFG.

Amanat Holdings PJSC posted a 28% increase in H1 total income to US$ 17 million, as profit was 26% higher at US$ 10 million. If the Royal Hospital for Women & Children was taken out of the equation, since it only opened in Q1 and carried forward pre-operating losses, the profit would have been 56% to the good. 85% of the total income was attributable to income from associates and subsidiaries (compared to 49% a year earlier), as the US$ 327 million invested in four portfolio companies started to pay dividends. As at 30 June, the company carried an excess cash balance of US$ 146 million.

H1 results for Damac Properties showed revenue of US$ 518 million and a US$ 22 million profit; during the period, the developer delivered nearly 1.5k units and had sales totalling US$ 490 million, as it launched its latest project, Zada in Business Bay, and had its first handover in Akoya. At the end of June, the company saw its total assets 2.0% lower at US$ 24.7 billion, whilst its gross debt fell by 25.5% to US$ 1.2 billion.

Arabtec Holding reported a 47.2% decline in Q2 net profit of US$ 7 million, with revenue falling 8.4% to US$ 597 million; H1 profit slumped 49% to US$ 16 million. The Dubai-listed contractor reduced its debt by US$ 102 million in the first six months and despite the decline in new awards during H1, its backlog remained strong at US$ 3.8 billion.

In line with other developers, Deyaar Development posted disappointing H1 profit numbers, down 44.5% to US$ 10 million although revenue moved higher by 7.5% to US$ 92 million (with Q2 revenue 17.6% higher at US$ 44 million). The Dubai-listed property firm expects better results, as it launches its next hospitality project, in partnership with Millennium Hotels and Resorts Middle East and Africa, and sees the first Midtown district, Afnan, in its final stages.

The bourse opened on Tuesday 13 August, after the extended Eid Al Adha break, at 2838, and having shed 62 points (2.1%) the previous week lost a further 42 points (1.5%) to 2796 by 15 August 2019. Emaar Properties lost US$ 0.04 the previous week and shed a further US$ 0.03 to close at US$ 1.41, with Arabtec flat at US$ 0.45. Thursday 15 August witnessed very low trading conditions of 91 million shares, worth US$ 34 million, (compared to 194 million shares, at a value of US$ 64 million on 08 August).

By Thursday, 15 August, Brent, having lost US$ 4.67 (7.5%) the previous week, gained US$ 0.85 (1.5%) to US$ 58.23. Gold, having jumped US$ 96 (6.8%) the previous week, rose a further US$ 21, trading 1.4% higher on Thursday at US$ 1,531. 

The world’s biggest profit-making company disclosed its financial results for the first time ever. Saudi Arabia’s Aramco posted an 11.0% dip in H1 profits to US$ 46.9 billion, as its earnings before interest and tax declined 9.0% to US$ 92.5 billion; the main driver to these decreases was falling energy prices. However, free cash flow headed north – up 7.0% to US$ 38.0 billion – with H1 capex 12.1% lower at US$ 14.5 billion. The energy giant is planning to acquire 20% of India’s Reliance Industries’ oil-to-chemicals business at an enterprise value of US$ 75 billion.

Apple’s ranking in global smartphone Q2 sales dropped to fourth, as it posted a 14.6% decline to 35.3 million units. It is estimated that the three leading companies – Samsung, Huawei and Oppo – accounted for over 52% of the global market, with shipments of 75.1 million, 58.7 million and 36.2 million respectively. Overall, there was an estimated 4% fall in smartphone sales, driven to some extent by older iPhone users keeping their phones for a longer time to avoid buying new, expensive models. Despite the ongoing trade tariff war with the US, it is interesting to note that Chinese tech firms – Huawei, Oppo, Vivo, Xiaomi and Realme – now account for 42% of the global smartphone market, a record figure that is set to grow in the future.

A unit of Macquarie Group is to spend almost US$ 2.0 billion to acquire a 40% stake in a UK offshore wind farm from utility, Iberdrola. The Spanish company expects the sale to meet its 10 GW of offshore wind power target over the coming years. It is estimated that the East Anglia One site profit-making will generate income of up to US$ 500 million, when it starts operating next year. Wind power is becoming more prevalent on a global scale and provided more than half of the UK’s energy needs last week.

With a July vacancy rate of 10.3%, the number of empty shops in the UK High Street hit a four-year high, with monthly footfall 1.9% lower – its worst performance since 2012. Interestingly, although High Street traffic was down 2.7%, footfall in retail parks increased by 1.2%. Last year, the Centre for Retail Research estimated that 2.5k mostly medium or large retail businesses failed, with this year expected to end with even worse figures.

With an estimated capitalisation at over US$ 211 billion, Bitcoin accounts for nearly 75% of the global market – and is ten times the size of its closest competitor, Ether. Last week, the cryptocurrency traded 14% higher on the week, whilst most of its rivals saw their value drop. Maybe this asset class, like gold and government bonds, is benefitting from investors looking for a safe haven to place some of their funds. One fact is certain – Bitcoin is operating in a volatile market and although it is trading this week at US$ 12k, earlier in the year it was worth only US$ 3.6k but just two months ago in June was US$ 10.4k higher at US$ 14.0k.

In 2009, the then Prime Minister Najib Razak established the 1MDB state fund and has been accused of pocketing US$ 681 million from the sovereign wealth fund, to which he pleaded not guilty earlier in the year. Now the country’s regulators have charged seventeen current and former Goldman Sachs bankers in connection with their roles “in arranging, structuring, underwriting and selling the three bonds” that raised US$ 6.5 billion for the SWF. Because of the “severity of the scheme to defraud and fraudulent misappropriation of billions in bond proceeds”, convictions could result in prison sentences of up to ten years and fines of at least US$ 250k.

The RBA governor, Philip Lowe, has not ruled out having to cut Australian rates from its current 1.0%, or even introducing quantitative easing, if further measures are needed to stimulate the country’s flagging economy. The central bank has just reduced its 2019 growth forecast (again) by 0.25% to 2.50% but upped its 2020 unemployment rate to 5.25%, as wage growth remains moribund at 2.3%. Apart from a global slowdown, that has a negative impact on the country’s three main sectors – mining, agriculture and tourism – the central bank is concerned about consumer spending, (this has remained flat despite lower interest rates and tax cuts), and high levels of household debt. The 1.5% inflation rate is still some way off the bank’s 2.0% target (and is unlikely to be breached for at least another eighteen months). It is all but certain that rates will again be cut this year and when that happens, the currency will continue to remain south of US$ 0.70.

Once again, South Africa is going through turbulent economic times, as the rand becomes the world’s worst-performing emerging market currency, driven by not only a trade slowdown, and the threat of a global recession, but also domestic issues. This has led to its currency recently losing 10% in value, (now trading at 15 to the US$), unemployment rising to a worryingly high 29% and domestic growth contracting this year by 3.2%; latest figures indicate that this year, the country may only manage a 0.7% GDP increase. Factors, such as national power utility Eskom having had approached the government for assistance, with its massive US$ 7.8 billion debt, do not help and are an indicator why most credit ratings agencies, excluding Moody’s, have assigned the country’s bonds junk status.

On Monday, following negative primary election results for President Mauricio Macri, Argentine’s economy took a battering on both the stock market and currency fronts. Some of the country’s most traded stocks slumped by almost 50%, as the main Merval index closed down 31%, whilst the peso initially lost 30% in value to a record low before closing the day 15% lower to the greenback. With the country going to the polls in October, Alberto Fernández is now seen as the frontrunner for the presidential race. If he were to win, it will be the end of four Macri years and of his unsuccessful pro-business agenda that has failed miserably to save the Argentine economy. The country is in recession, with a 22% H1 inflation rate and more than 30% of the country’s population living in poverty.

Germany’s trade surplus narrowed in H1, as strong domestic demand led to imports growing faster than exports, adding to signs that Europe’s largest economy is slowly reducing its dependence on foreign sales. It seems that the German government is finally heeding the long-time urgings of both the IMF and EU to focus more on domestic demand for a way to stimulate global growth and reduce its economic imbalances. For the past eight years, Germany’s current account has been above the EC’s indicative 6% of GDP level but has fallen from 8.9% in 2015 to 7.4% last year. Now, driven by a sluggish global economy, Brexit uncertainty and trade tariffs, its export-reliant economy is unfurling to the point that H1 imports were 3.0% higher at US$ 622.2 billion, whilst export growth was up by only 0.5% to US$ 745.4 billion (but still US$ 123.2 billion above imports). In June, the trade surplus was at US$ 20.2 billion – narrowing, year on year, by 11.4% to US$ 122.7 billion – as the current account surplus dipped 3.2% to US$ 141.1 billion.

As expected, the German economy contracted in Q2 by 0.1%, compared to the previous quarter, driven by a marked decline in exports, down 6% on the year. Germany is the world’s third largest exporter after the US and China and is often badly hit by a global slowdown. The economy narrowly missed a recession (marked by two successive quarters of negative growth) last year but, with early signs for Q3 looking ominous. Europe’s powerhouse economy could hit the buffers. However, Chancellor Angela Merkel considers that the economy will move north this year and feels there is no need for any further stimulus. She may be in for a shock.

Official figures confirmed that the UK economy contracted by 0.2% in Q2 – for the first time since 2013 – following a 0.5% expansion the previous quarter. If the next quarter’s figures fall into negative territory, the country will enter a technical recession. Like most other global economies, the UK is being hit by slower global growth, as well as the added factor of Brexit uncertainty. Basic economics teach that the main factor that impacts market decisions is uncertainty; this will disappear one way or another, by 31 October and when that specific impediment is removed, the country will move forward at a faster rate than other countries. Prime Minister Boris Johnson has also promised a fiscal stimulus package to cope with Brexit, and a no-deal split, that will have the double whammy of improving consumer spending and a probable 0.25% rate cut by the Bank of England.

UK wage growth continued its upward trend in June, with a growth of 3.9% – the highest in eleven years – as the 76.1% employment rate, equating to 32.8 million, was the best recorded since records began in 1971. However, the Q2 unemployment rate shrank 0.2% – the first contraction recorded since 2012. Despite this improvement, it must be remembered that pay levels have yet to return to their pre-downturn peak. However, since March 2018, wage growth has been at a faster rate than inflation. These figures show that the UK economy continues to confound its growing number of critics and has built up an impressive head of steam.

Outgoing EC president Jean-Claude Juncker has confirmed that “we are not prepared to hold new negotiations on the withdrawal agreement but only to make certain clarifications in the framework of the political declarations that regulate future relations between the United Kingdom and European Union”. He also commented that a no deal (which now seems to be the likely outcome) would hurt the UK more than the rest of Europe. He remarked that “if it comes to a hard Brexit, that is in no one’s interest but the British would be the big losers. They are acting as though that were not the case, but it is.”. . . .”We are fully prepared even though some in Britain say we are not well set up for a ‘no deal’. But I am not taking part in these little summer games.” The sooner he goes the better.

For the sake of “health, safety, national security and other factors”, Donald Trump has decided to delay tariffs on some Chinese imports, including mobile phones, laptops, video game consoles and certain clothing items, until mid-December. However, 10% tariffs, totalling US$ 300 billion, imposed on some items, will go ahead next month. In return the US President expects something in return and there are hopes that China may decide to “buy big” from US farmers.

After two consecutive 0.1% rises the previous two months, US consumer price index climbed by 0.3%, in line with market expectations (and 1.8% year on year); the main driver was a 1.3% hike in energy prices which had dipped 2.3% in June, whilst food prices remained flat. However, the 2.2% annual rate of core consumer price growth was higher than expected and indicated that there are inflationary pressures at play. This is an indicator that an imminent rate cut is on the cards.

Latest data point to the fact that US economic growth will slow in Q3 to 1.8%, following annualised returns of 3.1% and 2.1% in Q1 and Q2. Based on these estimates, annual growth at the end of December is expected to be 2.5%, driven by the ongoing tariff war with China and the resultant slowdown in global trade, which has seen 2019 worldwide growth forecasts cut to 3.2%. Despite the Fed lowering borrowing costs in July, yields on government debt have touched three-year lows, including 30-year Treasury bonds approaching a record 2.106% low; indeed, every government security– ranging from one month to thirty years – are all trading below the 2.25% level. This is another sign that there will be another rate cut by the end of next month at the latest.

After two consecutive 0.1% rises the previous two months, US consumer price index climbed by 0.3%, in line with market expectations (and 1.8% year on year); the main driver was a 1.3% hike in energy prices which had dipped 2.3% in June, whilst food prices remained flat. However, the 2.2% annual rate of core consumer price growth was higher than expected and indicated that there are inflationary pressures at play. This is an indicator that an imminent rate cut is on the cards.

The dreaded “inverted yield curve” has reared its ugly ahead again and inevitably it is the harbinger of bad economic news. In a nutshell, this occurs when a government’s bond interest rate is lower for say two years than it is for ten. (In normal times, the longer the term of the bond, the higher the interest rate). It does not happen often but when it does it is followed by a marked slowdown or even a recession. This week, the event happened in both the US and UK and financial markets have flashed a warning sign to all stakeholders – Handle With Care!