Suspicious Minds                                                      19 September 2019

A new law has seen the Real Estate Regulatory Agency take over responsibility for regulating and overseeing all Dubai developers’ escrow accounts, with management being carried out by accredited financial institutions. Rera will also govern the development, brokerage and management of real estate, with the aim of the exercise to provide “a secure environment to protect the rights of developers and investors”. More importantly, it will also have exclusive rights for policies designed to balance supply and demand. At the same time, the Dubai Land Department will carry out work, formerly done by Rera, for registering real estate rental contracts. These regulatory changes can only be for the good in such a soft market as the rights of both developer and investor become better defined.

Property Finder estimates that 21.0k residential units were completed in H1, with a further 38.4k more than 85% completed and expected to be ready for delivery before the end of the year. That being the case, it would mean a total of 59.4k units being handed over in 2019 –  a far cry from the average 23k per annum seen over the past four years.

For the five months to May 2019, US$ 28.9 billion worth of real estate transactions were recorded in Dubai, compared to 53k real estate deals, valued at US$ 60.8 billion, for the whole of 2018. Encouragingly, 66% of buyers (and 57% of transactions) involved were new investors. Business Bay was the busiest location in 2018 accounting for 4k transactions amounting to US$ 3.0 billion. The data indicates that new launch activity is actually declining – a trend that, if continued, would help balance the supply/demand conundrum. From 2013-2016, as new lease contracts decreased steadily, there was an increase in renewed lease contracts; over the next two years, both registered increases, with new lease contracts rising at a higher rate. This may point to an increasing number of new properties finding tenants.

In 2018, Dubai’s GDP jumped 1.9% to reach US$ 108.4 billion, with the real estate sector accounting for 13.6% of the total (6.9% in 2017) and construction contributing 6.4% to the total (6.2%, a year earlier).

Dubai Maritime City announced that construction has started on phase one of a US$ 30 million commercial precinct project that will include retail, residential, office towers and a promenade. Located in the Mina Rashid area, it is expected to be completed within eighteen months.

Brothers Ehab and Hani Sulaiman Elyoussef unveiled their iconic “Dubai Brand Logo” real estate project, designed to mirror the Dubai Brand Logo. The US$ 136 million residential and commercial project, stretching over 1.5 million sq ft, will result in the world’s largest logo and was inspired from the vision and directives of HH Sheikh Mohammed bin Rashid Al Maktoum.

So much for talk of an economic slowdown in the emirate when Symmetry Gym announces a 28-day intensive fitness package costing US$ 10k. Dubai’s most expensive gym, established eight years ago, boasts about 100 members, with monthly rates ranging from US$ 1.2k to US$ 2.4k for the Extreme Fitness Recharge plan. Amir Siddiqui, the centre’s founder, seems to have the right approach and has only targeted the top end of the market which at that level he considers to be almost recession-proof.

HH Sheikh Mohammed bin Rashid Al Maktoum has completed the comprehensive evaluation report of services in 600 government centres; this will become an annual transparent exercise. He has delivered on his promise of last month and has named the top five and shamed the bottom five government centres. Management at the worse performing offices were summarily dismissed, whilst at the other end of the ladder, bonuses, equivalent to two months’ salaries, were handed out to the team members. He directed immediate management replacement, in the worst centres, with highly capable leaders, and warned that he would visit again within a month to see if improvements had been made. The Dubai Ruler added “we have the courage to evaluate ourselves and our teams because the cost of hiding mistakes is much higher”.

Maybe Dubai entrepreneurs could take a leaf out of several small tourism towns in Western Australia that have gone into aquaculture that has provided a working option to traditional seasonal work. The WA government, which has laid the foundations for the industry’s growth, estimates that it will create an additional 30k jobs over the next four years. The abalone industry is now the biggest single employer in SW coastal towns such as Augusta and Bremer Bay. 95% of the abalone from Augusta is exported to Asian markets. The influx of permanent employment – rather than seasonal work – has provided an economic lifeline to coastal communities.

There is no doubt that the emirate has a sustainable, high quality infrastructure and for further enhancements, Dubai’s Department of Finance is to establish a dedicated unit to focus on public-private partnerships. Over the coming years, it is expected that the government and private sector will combine on a number of projects, valued in the billions of US$, so Dubai can achieve its ambitious targets set out by the Dubai Plan 2021 and the Dubai Industrial Strategy 2030.

More disappointing news for Dubai hoteliers in August as STR preliminary figures show declines in occupancy levels, average daily rate and revenue per available room down 0.2% to 68.5%, 12.5% to US$ 106 and 12.6% to US$ 73 respectively. However, both supply and demand were higher in the month rising 7.6% and 7.4%.

Two-year old Noon hopes to attract 25 million unique shoppers as part of its next ‘Yellow Friday’ sales push, which will this year run from 24 to 30 November. The portal, backed by Mohamed Alabbar and Saudi Arabia’s sovereign wealth fund Public Investment Fund, will be offering deals with up to 80% discounts. Last year, it saw an eightfold increase in revenue and the number of items purchased per basket 50% higher. There are reports that the US$ 1 billion e-commerce player could go public within five years.

Khaldoun Tabari, the former chief executive officer of Drake & Scull International, has claimed that accusations of financial violations against him are an attempt to find a “scapegoat” for rising losses; last year, fifteen separate complaints against their former CEO were filed with the public prosecutor by the firm. Since then, he has had his local bank accounts frozen and a travel ban issued while he was overseas. The case is still under review, as the authorities await a report from an expert committee, with Bloomberg indicating that the sum involved is over US$ 272 million (one billion dirhams).

Emaar Properties has signed the final terms relating to the issuance of a US$ 500 million sukuk – a ten-year Islamic bond with a 3.875% return; the developer is looking at issuing a further US$ 1.5 billion in the coming years.

The bourse opened on Sunday 15 September and, having dipped 3 points (0.1%) the previous week, lost 68 points (2.4%) to 2820 by 19 September 2019. Emaar Properties fell US$ 0.04 to US$ 1.32, with Arabtec US$.0.03 lower at US$ 0.44. Thursday 19 September witnessed improved trading conditions of 310 million shares, worth US$ 142 million, (compared to 98 million shares, at a value of US$ 51 million on 12 September).

By Thursday, 19 September, Brent, having gained US$ 0.06 (0.1%) the previous week, jumped US$ 4.02 (6.7%) higher to US$ 64.40. Gold, having shed US$ 30 (2.0%) the previous week, ended on Thursday 19 September flat at US$ 1,507. 

Two Saudi oilfields have been targeted, leading to half of Saudi’s oil production (and 5% of global production, equivalent to 5.7 million bpd) being affected. It is still early days since the weekend attack but there is every likelihood that it could lead to a delay in the massive Aramco planned IPO to debut in November on a local stock market before being listed internationally next year. JP Morgan had already been appointed to lead the initial listing, with the whole company being valued at US$ 1 trillion. Amazingly, 50% of the “lost” capacity was restored by Tuesday.

Airbus forecasts that air traffic will grow by 4.3% every year until 2039 which will lead to the number of planes doubling over that period to 48k; this will comprise 39.2k new jets, with the balance from the current fleet. Additionally, this will result in the need for 550k new pilots and 640k additional technicians.

Now that Cobham shareholders have agreed to a US$ 4.8 billion takeover bid by US private equity firm, Advent International, the UK government has “issued an intervention notice on the grounds of national security”. The Competition and Markets Authority will have to report by the end of next month; since 2002, the government body has investigated nine takeovers, on the grounds of national security concerns, and none have been blocked to date. The Dorset-based company, that employs 10k, pioneered technology enabling the mid-air refuelling of planes and is also involved in electronic warfare systems and communications for military vehicles. The fact that it is a world leader in mid-air refuelling may not be enough to stop the deal, although strings will be attached.

Thomas Cook is hoping that 75% of its bondholders back the takeover by Chinese firm Fosun Tourism, despite some lenders likely to vote against the terms of the agreement. The troubled travel firm posted a US$ 1.8 billion H1 loss and issued three profit warnings over the previous twelve months, as it struggles to reduce its debt pile. It has been hit by a double whammy of on-line travel agents and low-cost airlines, as well as last summer’s heatwave, potential customers undecided about travel plans due to Brexit worries and geo-political unrest in several places including Turkey.

It seems that the eleven-year old Airbnb is considering an IPO as early as next year. Having disrupted the hotel and travel industry, the “unicorn” would hope that its share value would not fall like the ride-hailing services Uber and Lyft did straight after their companies went public. No concrete details were readily available.

Another disrupter, Aldi is planning a US$ 1.2 billion investment splurge in the UK over the next two years, as plans unfold to raise the number of stores from 840 to 1.2k before 2024. The German discount supermarket group, which saw profits drop 26% last year, is in expansion mode and is not afraid to sacrifice short-term gains for sales growth, store openings and new customers; in 2018, its customer base increased by 800k to 16.6 million and sales by 8.1% to US$ 11.6 billion, whilst its share of the UK market jumped to 8.1%, becoming the country’s fifth biggest supermarket – still behind but fast catching Tesco, Sainsbury’s, Asda and Morrisons.

Faced with over 2.6k lawsuits, accusing it of fuelling the US opioid crisis, US drug-maker Purdue Pharma has filed for bankruptcy protection, with the board approving the Chapter 11 filing on Sunday. The company, owned by the billionaire Sackler family, had already reached a deal with 24 US states but still faced opposition from the remaining states who were against the proposed settlement. The family has agreed that the money raised by the dissolution (thought to be in the region of US$ 12 billion), plus a further US$ 4.5 billion from their personal wealth, will go towards settling the lawsuits.

In a bid to boost the flagging Indian economy, by helping exporters and easing overseas borrowing norms for some housing projects, finance minister Nirmala Sitharaman has introduced a raft of measures, totalling US$ 7.0 billion. The reimbursement of taxes and levies on export promotion will result in the “loss” of US$ 7.0 billion in revenue. Exports continue to head south, and returns would be even worse if it were not for the weak rupee. Whether these measures will help to improve the unemployment rate, (currently at its highest level in 45 years), car sales at its worst on record, and to boost economic growth, which at 5.0% in Q2 was at its slowest pace in over six years, remains to be seen.

Because carmakers continue to refuse to share technical information with independent mechanics, as is the norm in the US and Europe, Australian car owners are paying an extra US$ 1 billion every year. Figures from the AAA point to the fact that a standard service could cost 30% more at a dealership than at an independent outlet. This is despite the fact that car-makers made a voluntary data-sharing agreement in 2014 and that the federal government agreed in May 2018 that reform of the sector was a priority.

Australia’s economy is indeed slowing, as indicated by latest unemployment figures again nudging higher, hitting 5.3% last month, compared to 4.9% in February; the number of unemployed stands at 717k. NSW posted the lowest return at 4.3%, whereas South Australia recorded the highest at 7.3%. In August,15.5k full-time jobs were lost as 50.2k part-time jobs were added. Indicators are that any employment growth is being driven more by part-time roles, with a growing divergence between employment growth and growth in hours worked. Partly because of the employment figures, the Aussie dollar fell below the US$ 0.68 level and it is certain that the RBA will cut rates again to 0.75%, a record low, as early as 01 October.

As expected, the Fed cut interest rates for the second time in three months, with the 0.25% reduction leaving them at between 1.75% – 2.0%. Chairman, Jay Powell said that the move was to shore up the US economy, amid “uncertainties” about future growth, with President Trump commenting “Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”.

Also this week, the Fed continued to pump in up to US$ 75 billion a day to preserve the Federal Reserve’s control over short-term interest rates. The repurchase agreement operation injects more liquidity to the system, as banks have been struggling to find the cash needed to meet reserve requirements; this, in turn, has seen a hike in short-term borrowing rates.

YTD, UK house prices rose at their slowest rate in July since September 2012, indicating that there had been general slowdown in UK property price growth. Although the market slowed in London and the SE, the biggest falls were recorded in the NE, with annualised declines of 2.9%, with Wales at the other end of the spectrum with an increase of 4.2%. The average price of a UK house has risen to US$ 285k.

UK inflation growth dropped to its slowest rate in almost three years as it dipped to 1.7% in August from 2.1% a month earlier; the two main drivers cited were falling costs of computer games (down 5%) and clothing prices rising “less than last year after the end of the summer sales” – 1.8% compared to 3.1% in 2018. These figures will widen the gap between inflation and wage growth (at 3.8% in July) and will lead to increased household spending which in turn will boost GDP figures. Even the BoE has at last intimated that the country will not go into recession this year – a great stride forward from their previous prediction that the economy would fall off a cliff following the Brexit referendum. They did however think that a no-deal Brexit would lead to weaker growth, higher inflation and a further drop in the value of sterling.

However, by the end of the week, there seemed to be movement on the Brexit front with Jean Claude Junker announcing that there still could be a deal with the UK. This is not the first time that the EU has changed its mind, on an important issue, at the last minute and this softening of its position points to the fact that a no deal exit would also harm member countries. Indeed, it would be hard to find any other organisation that is so adept at 11th-hour trade and political agreements. All that has gone on before represents basic 101 negotiation skills positioning in order to obtain the best deal for them, even at the other party’s cost.

It is almost a shoo-in that an agreement will be reached over the controversial Irish backstop and that Boris Johnson will deliver an acceptable alternative. Then, with further tweaks to other aspects of the agreement, it will be long forgotten that in summer the EU had stated categorically the withdrawal agreement was not up for renegotiation. Finally, the UK can sing we can’t go on together with Suspicious Minds.