Gangsta’s Paradise                                                                                         24 October 2019

Property Finder has noted that for the nine months to 30 September, there were 18.9k transactions involving properties, costing up to US$ 409k (Dhs 1.5 million); this figure was 11.0% up on the previous year, indicating there is a growing appetite for sales at the more affordable end of the market. The main driver appears to be the on-going softening in the Dubai property market, making prices more affordable. Off-plan sales accounted for the majority of the 11k deals so far this year. In the price ranges of US$ 410k – US$ 817k (Dhs 1.5 million – Dhs 3.0 million), US$ 818k – US$ 1.362 million (Dhs 3.0 million – Dhs 5.0 million) , US$ 1.363 million – US$ 2.725 million (Dhs 5.0 million – Dhs 10.0 million) and US$ 2.726 million (over US$ 10 million), there were 6.9k, 2.2k, 0.7k and 0.5k deals respectively, totalling 10.3k. Demand for ready or newly-completed properties grew a marginal 1.0% to 13.1k, with off-plan sales 23.6% higher at 16.1k; the highest number of off-plan sales were seen in Dubai Hills and Downtown – both having sales of 1.7k.

Meanwhile, JLL reported that YTD completions totalled 23.0k, including 6.3k in Q3, bringing the total for Dubai’s portfolio of total residential stock to 542k – a 3.6% increase since January. The company estimates that a further 33k are scheduled to complete by the end of the year – obviously this will not happen! There is no doubt that there has been a marked slowdown in supply, and this is reflected in the fact that projects, comprising only 7.8k new units, have been launched so far in 2019 – the lowest figure in three years.

According to Knights Frank, Dubai property prices have fallen 9.5% over the twelve months to June 2019 – only surpassed by Sydney’s 9.6% – in their survey of 150 cities; only 20% of the total registered annual losses including London, New York, Auckland and Rome. It was noted that in a number of locations, including Dubai, the prime sector continued to outperform the mainstream market but overall, the global market continues in the doldrums; the silver lining is that there is evidence that the rate of decline is beginning to fall. The fastest growth rate was seen in Xi’an, with an impressive 25% growth, whilst the average growth level was at 3.5%, with the average price rise being 5.9% and 2.0% in emerging markets and developed markets respectively.

One of the emirate’s biggest private developers, Nshama, is “waiting for the right time” to launch new projects and is holding back until a bounce returns to the property market. The developer, which is building the 21k-home Town Square community, is also awaiting directions from the newly formed Higher Committee who have been appointed to oversee and advise on the local real estate sector’s future priorities. The demand-supply conundrum continues to phase the sector and one of the main problems facing the new authority is to bring equilibrium to the market, as concern spreads about newly completed homes overwhelming actual demand, forcing further price drops. Nshama indicated that the current market demand is for units that are ready or near-ready; that being the case, the developer will continue to build but cut back on launches until they reach near-completion stage. To date, the developer has handed over 3k units (7.3% of the total) and expects that figure to top 5k by year-end.

To prevent financial catastrophe, in case of a sudden and unexpected slump in the realty sector, the UAE Banking Federation is proposing a cap on lending to real estate companies, which stood at US$ 66.3 billion last year. Any major problem occurring in this market would have a negative impact on the whole banking structure. The current downturn in the real estate market started in 2014, following a marked deterioration in the price of oil and the start of a market oversupply of property. There are now government initiatives afoot – including Expo 2020, long-term resident visas and amendments to freehold property law – that will hopefully pull the sector from its present depths.

Emirates National Oil Company is to enter into competition with the fledgling Al Ghurair-backed start-up, Cafu, whose app allows users to have their car’s petrol tank filled up, at their own residence, with a click of a button. The company is not worried that Enoc may steal some of its market share, suggesting that it will only fuel increased awareness for the benefit of both entities, as the consumer base expands.

It is reported that Creative Zone has acquired an undisclosed stake, at an unknown cost, in insurance comparison platform InsuranceMarket.ae, valued at US$ 80 million. It is part of the Dubai-based business formation firm’s strategy to further the growth of an ecosystem to support start-ups, by becoming a one-stop shop for all the business requirements of a new-start-up. Part of AFIA Insurance Brokerage Services, the company is a digital platform for comparing all types of insurance, having already serviced over 200k since its inception.

Lonely Planet’s Best in Travel for 2020 guide places Dubai at ninth spot for the best cities to visit next year. The top three cities were Salzburg, Washington DC and Cairo. Rather gushingly, it notes “the future is now in Dubai as the superlative-craving emirate launches several boundary-pushing marquee projects in 2020,” including Expo 2020 Dubai, the Museum of the Future and The World Islands, as must-see attractions.

According to Dubai’s Department of Finance, total Expo-related projects will have cost US$ 8.2 billion by the time of its opening on 20 October 2020. Much of the funding has been financed from a budget surplus, as a result of “prudent financial policies”, according to its Director-General, Abdulrahman Saleh Al Saleh. He also revealed that the emirate’s sovereign debt reached US$ 32 billion, equating to 27.9% of GDP (compared to say the 120% mark attained by Australia), whilst the debt-service coverage ratio was only 5.0% of the general budget. The good news for residents is that he confirmed that there would be no increase in government fees, already frozen since March 2018.

The Department has already completed the general policy pertaining to the relationship between public and private sectors, and that PPPs will be seen in many future government joint projects.

The Dubai Free Zone Council has introduced a “one free zone passport” scheme which will allow businesses to operate out of multiple free zones in Dubai through a single license; this will result in cost savings for those entities that currently work out of multiple locations. The council is also considering allowing free zone entities to take up rental contracts from the current twenty-five years to fifty years. It is hoped that such initiatives will make the emirate a leading global destination for investment and business set-up and draw in an increased number of overseas companies and entrepreneurs. This initiative complements the recent regulation that saw free zone-based entities allowed to operate freely in “onshore” Dubai – as well as offshore. The DFZ Council is also reportedly looking at a “Free Zone 10X” platform, which would create a financial market exclusively for free zone enterprises to tap funding through IPO listings.

DP World posted a 1.1% like on like Q3 hike in its global container terminals, handling 17.7 million twenty-foot equivalent units– and over the nine months to September a 0.7% growth to 53.5 million TEUs was recorded. Whilst there was robust growth in Asia, particularly in ATI in the Philippines and China’s Qingdao, its home base Jebel Ali saw a 1.0% decline to 3.6 million TEUs, with volumes stabilising after a shift of low-margin cargo. However, figures were not helped by operations discontinuing in Indonesia’s Surabaya and China’s Tianjin.

A former Pakistani bank employee has fled the country leaving his wife to face authorities investigating five-year scam; he had been accused of embezzling US$ 2 million from a Dubai bank between 2011-2017. The accused transferred money to different accounts, by forging documents and manipulating the amounts of cash. His wife has been charged with criminal abetting and money laundering in a Dubai court, alleging that she withdrew the money via an ATM and subsequently issued cheques to her husband to transfer the money.

TransferWise has been granted a licence by the Abu Dhabi Global Market’s Financial Services Regulatory Authority to operate in the country under the name ‘TransWise Nuqud Ltd’. The low-cost fast money transfer platform will start operations next year and has become one of the first entities to be operational in ADGM’s ‘providing money services’ category. Their entry will ensure that the country’s 50+ banks and exchanges will have to raise their game – by lowering fees and improving service levels – to compete in the lucrative money remittance sector. On a global scale, TransferWise serves 6 million customers and processes US$ 5 billion in monthly customer payments.

Nasdaq Dubai saw the listing of two bonds, with a total value of $1 billion, from the Industrial and Commercial Bank of China. This makes the world’s largest bank by assets the holder of the highest value of conventional bond listings on the exchange by any overseas issuer – at US$ 4.6 billion.

Noor Bank posted a disappointing 12.0% dip in Q3 profit to US$ 50 million, despite revenue being 3.4% higher at US$ 149 million. The results were not helped by a 38.6% jump in impairment charges and an 11.5% reduction in income from Islamic financing to US$ 78 million. For the nine months to 30 September, the bank posted a 12.4% increase in profit to US$ 162 million, whilst operating income was up 6.7% to US$ 436 million. The Dubai-based Sharia-compliant lender is soon to be taken over by its larger rival Dubai Islamic Bank; the Investment Corporation of Dubai has stakes in both financial institutions.

Commercial Bank of Dubai posted a 28.3% Q3 increase in net profit to US$ 99 million, as operating income came in 6.1% higher at US$ 199 million. Based on these results, the bank is looking at record annual figures come the end of December. For the first nine months of the year, there was a 26.1% increase in net profit to US$ 290 million, with operating income 11.1% to the good at US$ 61.0 billion. Impairment allowances for loans and advances and the bank’s Islamic financing portfolio fell 17.7% to US$ 45 million and 2.6% to US$ 143 million respectively.

Etisalat Group reported a 2.1% increase in consolidated nine-month net profit after Federal Royalty, at US$ 1.8 billion, as consolidated revenues topped US$ 10.6 billion. It also posted a 5.0% hike in aggregate subscriber base to 148 million, whilst its UAE subscriber base reached 12.4 million.

The capitalisation of the two UAE bourses grew by 5.6% in 2018 to US$ 244.0 billion and should easily top Dhs 900 billion (US$ 245.2 billion) by year-end. This figure indicates that the capitalisation of traded companies accounted for 63% of the UAE’s GDP (59% in 2017), driven by increased share capital and enhanced FDI flows. Of that total, the banking sector accounted for US$ 127.7 billion, or 52.3%, of the total.

The bourse opened on Sunday 20 October and, having lost 30 points (1.1%) the previous week, regained a slight amount of that deficit to close 4 points up at 2784 by 24 October 2019. Emaar Properties, having shed US$ 0.03 the previous week moved US$ 0.01 higher to close at US$ 1.22, whilst Arabtec having jumped US$ 0.10 last week, nudged up US$ 0.01 to US$ 0.54. Thursday 24 October saw similar – and continuing relatively low – trading of 219 million shares, worth US$ 50 million, (compared to 180 million shares, at a value of US$ 69 million on 17 October).

By Thursday, 24 October, Brent, having gained US$ 2.04 (3.5%) the previous fortnight, kept in positive territory, up US$ 1.48 (1.8%) to US$ 61.39. Gold, having shed US$ 17 (1.1%) over the previous three weeks, was up US$ 7 (0.5%) , closing on Thursday 24 October at US$ 1,498. 

Just days before its planned (perhaps only 2%) partial initial public offering, Saudi Aramco delayed it again with reports that the US$ 2 trillion valuation may be, to put it nicely, on the high side; the IPO was expected to raise US$ 40 billion but the figure may now come in lower. Advisers are awaiting Q3 results which may see the sale figure lowered, with the eventual price being negatively impacted by other factors, such as weak oil prices, a sluggish and moribund global economy, along with September’s attack on the company’s biggest processing plant.

New York authorities are planning to take Exxon Mobil to court over claims it misled investors about the potential costs of climate regulation to its business. This could be the first of many similar cases expected to be faced by oil and gas firms in the future. It is claimed that the oil giant evaluated new projects based on lower cost forecasts for expenses associated with climate change than what was being relayed to investors. By making such investments look less risky, than they actually were, “ExxonMobil made its assets appear significantly more secure than they really were, which had a material impact on its share price.”

South African utility, Eskom, has received a US$ 4.1 billion government lifeline, as it battles to service a US$ 31.0 billion debt, following six months of spasmodic blackouts, caused mainly by previous underfunding, leading to an old and inefficient creaking fleet of coal-fired plants. The state of the country’s power sector is one of the main causes for the South African economy being dragged into contraction. There have been hints that the company has been beset with mismanagement and graft; indeed, with the resignation in May of Phakamani Hadebe, he became the tenth chief executive to quit the state-owned company in a decade.  

The perilous state of the UK High Street has been laid bare, with estimates that 85k retail jobs have been lost over the past twelve months, with Q3 retail numbers 2.8% down on the same period in 2018; full-time jobs saw a 4.5% decline, as part-time employment shed 1.5% of jobs. The quarterly figures were the 15th straight quarter of year-on-year declines, as the proportion of all empty shops touched 10.3%, its highest level since January 2015. The two main drivers continue to be Brexit uncertainty and weak consumer demand, with calls for government reforms, to business rates and the apprenticeship levy, to boost the sector.

In the UK, HM Revenue & Customs has warned Airbnb that an ongoing tax enquiry could lead to legal proceedings against the home rentals site. This was revealed in their latest accounts which had a note that it had been contacted by HMRC over “tax laws or regulations impacting the company’s business”, involving operations and intra-company transactions. There is no smoke without fire when one considers that Airbnb UK paid tax of US$ 189k on profits of US$ 589k, and a US$ 18.4 million turnover, whilst its payments arm had a turnover of US$ 353.7 million but only made a US$ 1.5 million profit and paid tax of US$ 304k. The company claimed it follows the tax laws and that the Airbnb model had boosted the UK economy by US$ 5.4 billion in 2018. The company is not alone in facing criticism about the level of tax it pays in the UK and joins a list of other big global technology firms such as Apple, Amazon, Facebook and Google. Even the Organisation for Economic Co-operation and Development is proposing tax changes, aimed at making such firms pay more tax.

Unable to raise money, WeWork’s board has finally caved in and accepted a Softbank bid to buy billions worth of shares, including US$ 1 billion from co-founder Adam Neumann, who decided not to accept a JP Morgan offer, by receiving his shares, along with a US$ 185 million consulting fee and a credit line.    The Japanese investment giant will take over control of the company, now valued at just over US$ 8 billion – some way off its June proposed IPO price of more like US$ 50 billion, and this despite an H1 loss of US$ 900 million. Yet another case of the market losing its marbles.

Three global tech giants posted mixed Q3 results. Although Amazon reported another 20%+ growth in quarterly sales, (up 24% to US$ 74 billion), a 46.0% hike in shipping costs to U$ 10.0 billion was the main driver in a 25.0% profit decline to US$ 2.1 billion. The company’s new strategy of pushing one day deliveries to its Prime members had two outcomes – increased purchases in that sector but also higher transport costs. The cut in profit, added to a disappointing Q4 sales growth forecast, disappointed market watchers and drove the shares 6% lower on the day.

Twitter shares fell even more – by 17% in early trading – as quarterly results of a 9.0% rise in revenue to US$ 842 million and a US$ 37 million profit were lower than market expectations. The micro-blogging site reported that revenue was hampered by product bugs and unusually low demand over the summer. At the same time, it lowered its Q4 forecasts.

However, Tesla leapt 18.6% on Thursday following the company’s announcement that revenue reached US$ 6.3 billion, with its gross margin up from 18.9% to 22.8%. quarter on quarter – and moving closer to its 25% target; this increase comes despite reductions in the average selling price of its Model 3 but because of operating expenses continuing to head south. At the end of September, Tesla had its highest ever balance in cash and cash equivalents of US$ 5.3 billion.

This month has been a wake-up call for many investors, as at least three leading fund managers have been caught wanting. For example, Mark Denning, a 36-year company veteran, who managed more than US$ 300 billion for Capital Fund, which itself has US$ 2 trillion of assets under management, has been forced to resign after breaking investment rules. A BBC investigation found that, inter alia, he was secretly acquiring shares for his own benefit in some of the same companies as his funds.

A more drastic fall from grace concerns the iconic ‘stockpicker’, Neil Woodford, a former big winner for investors and now leaving many in severe debt. In his first 26 years in business with Invesco Perpetual, anyone who invested US$ 10k at the start would have pocketed US$ 250k when he left to form his own UK Equity Income Fund, which at its peak managed around US$ 13 billion. Now following a rash of poor decision-making and disastrous investments, the company has closed, as big pension funds and armchair investors started pulling out their money in droves. In June, the fund was suspended by its administrators, Link Fund Solutions, valuing what was left at a little over US$ 3.0 billion.

Last Friday, Bryan Cohen, a Goldman Sachs Group Inc. investment banker, was arrested over allegations of insider trading, that reportedly saw US$ 3 million in illicit gains being made. The leaking of non-public information continued for around three years and was tied to pending deals involving Syngenta AG and Buffalo Wild Wings Inc. The bank confirmed it was unaware of the allegations, until the employee’s arrest, and that the investment banker had worked in the consumer retail division.

Malaysian authorities have publicly demanded that Goldman Sachs pay a mouth-watering US$ 7.5 billion in damages for its role in the now infamous 1MDB scandal; however, it seems that probably a third of that figure would be more in line with expectations. By 2013, the bank had picked up over US$ 600 million for helping the fund raise US$ 6.5 billion, much of which went missing under mysterious and shady circumstances. The 94-year old Prime Minister Mahathir Mohamad has pledged that he would recoup money lost by this global scandal and reportedly he has sent Daim Zainuddin, a known top dealmaker, to arrange a quick and sizeable settlement from the US bank. Seventeen current and former bank executives have been charged and face court action in the Asian country.

Unfortunately, for Goldman Sachs, this sordid episode has had impact in other locations such as Abu Dhabi where this once lucrative market has gone flat. Investors have also been probing the firm’s role in a controversial deal involving Etihad Airways. In 2016, three staff members left the bank following alleged breaches of guidelines, when advising a potential buyer on an investment in fast-food company Kuwait Food Co. After missing out on at least US$ 25 billion in deals in the emirate, it is now focussing its emphasis on Saudi Arabia. This week, another of its senior bankers in the UAE has been dismissed over compliance violations.

The Royal Bank of Scotland, still 62% owned by UK taxpayers, has gone backwards as it posted a Q3 US$ 10 million loss, caused mainly by a US$ 1.2 billion charge for PPI (payment protection insurance); this compares to the US$ 1.2 billion profit posted for the same period last year and was the bank’s first quarterly loss since Q4 2017. Its investment banking arm, NatWest Markets, reported a US$ 255 million Q3 loss caused by a “deterioration in economic sentiment for the global economy” and a fall in bond yields.

Westpac continues to rack up costs, now rising to US$ 1.4 billion following the latest addition of US$ 253 million, as a result of its misconduct and shabby treatment of customers. The other three big Australian lenders – ANZ, CBA and NAB – have also seen 2019 provisions higher relating to costs from the banking royal commission, which was highly critical of the unethical and scandalous behaviour of the country’s banking sector. Furthermore, Westpac will also be hit by a significant penalty, (probably in the region of US$ 100 million) from Australian regulators, for its failure to report “a large number” of International Funds Transfer Instructions (IFTIs).

In Australia, the Lower House has passed a controversial bill to ban cash payments of US$ 6.9k (AUD 10k) and that anyone using cash above that limit to pay for purchases could end up with a two-year jail sentence and fines of up to US$ 18k. In a move that would obviously breach individual privacy, the Currency (Restrictions on the Use of Cash) Bill 2019 has been passed by the House of Representatives. The law is supposed to alleviate tax evasion, money laundering and other crimes and would force Australians to use electronic transactions or cheques over cash for payments above the threshold.

The Australian Tax Office is evidently not doing its job properly when its latest report shows that debts, mainly from SMEs, are on the increase, as tax debt hits record highs. In the last tax year, audit activities saw tax funds gain US$ 10.5 billion, whilst US$ 29.4 billion was handed back as tax refunds.

More trouble hit Boeing this week with the unwelcome news that messages were sent between its employees about issues with the automated safety system on the 737 Max prior to its final 2016 certification. The Federal Aviation Administration is “concerned” and has requested an “immediate” explanation for the delay in turning over the documents. Meanwhile, the US plane maker confirmed it is cooperating with the investigation of the 737 Max, and “we will continue to follow the direction of the FAA and other global regulators, as we work to safely return the 737 MAX to service.” Both Boeing and the US regulator have been roundly criticised for inadequate oversight of the risks associated with MCAS (Manoeuvring Characteristics Augmentation System), which was designed to make the aircraft easier to fly. Its shares slumped by 10% on the two days’ trading, following the announcement. The week did not get any better as on Wednesday, it declared a 53% decline in Q3 profits, with a negative cash flow of US$ 2.9 billion, compared to a positive US$ 4.1 billion in 2018.

Despite being one of the chief scaremongers, and apparent Remain supporter, Mark Carney, has indicated that the new Brexit deal struck by the government is “welcome” and a “net economic positive”. Despite the BoE governor’s remarks, and IMF support of the deal, Boris Johnson failed in his attempt to move parliament to vote for immediate departure from the EU. By Thursday, the PM has said he would give MPs more time to debate his Brexit deal if they backed a 12 December general election. His promise to leave the EU by 31 October lays in tatters – despite his best efforts and because of a vacillating and shambolic parliament. So much for the democratic process, with the House of Commons beginning to look like Gangsta’s Paradise.