Pick Up The Pieces                                                                                         21 February 2020

Having just completed Samia, a 284-unit development in Al Furjan, Azizi Developments has announced that it hopes to finalise a further fourteen of fifty-four ongoing projects prior to the end of the year, including four more in Al Furjan, several in the first phase of Riviera in MBR City, Downtown Jebel Ali and Mina, on the east crescent of Palm Jumeirah. Furthermore, it plans to build a further 100 projects, worth several billion dollars, to be delivered before 2025.

The 340 mt, 81-storey Uptown Tower, located in JLT, is 20% complete and is scheduled for hand-over within two years; construction is being carried out by Six Construct who have already overseen completion of enabling, piling and substructure works. The tower, designed by Adrian Smith + Gordon Gill Architecture, will feature a 188-key luxury hotel and 229 branded residences, to be managed by AccorHotels, as well as extensive conference facilities, Grade A offices and an entertainment plaza, bigger than New York’s Time Square.

Upscale developer Seven Tides has recorded a 70% hike in revenue, to US$ 27 million, over December and January, with its Seven Palm development responsible for a major share of the total; this was a consequence of a rebranding and relaunching at Seven Palm for both its hotel and residential apartments with a scheduled handover this December.

A week after announcing 2019 losses of US$ 60 million, Union Properties confirmed that it had received funding of US$ 55 million for the expansion of Dubai Autodrome, which will see the tracks in the Kartdrome transferred to the Autodrome. According to feasibility studies, the project is expected to raise annual revenue of US$ 80 million, excluding monies from ancillary facilities, restaurants, and auto services associated with the project.

According to Savills Prime Index World Cities report, Dubai posted the global highest rental decline – at 5% – followed by Kuala Lumpur’s 4%; despite this, the emirate still boasts some of the best yield returns in the world – at 4.5%, way above the global 3.2% average.  Dubai was also the third cheapest globally to purchase prime property, at US$ 580 per sq ft, down to the fact because of “oversupply, potential renters have a lot of choice and negotiating power”; only Cape Town and Kuala Lumpur were cheaper. At the other end of the scale, were Hong Kong, at US$ 4,610 per sq ft and New York with US$ 2,510 per sq ft. Dubai’s capital value dropped almost 6% in 2019, with better appreciation found in Berlin and Paris at 8.8% and 6.4%.

The UAE Central Bank Is to cut down on the misuse of home loans. having issued a general notice to lenders “to stop certain unacceptable practices” involving mortgages.  It reiterated that home loans – mortgages – should only be used for “constructing, purchasing or renovating a house for owner occupier or investment purposes.” The warning comes at a time when the property market is into its sixth consecutive year of falling prices – and the possibility of increasing bad loans for the lenders.

Latest CBRE figures indicate that by the end of last year, there were 609k residential units in Dubai, set to grow by 127k (20.9%) over the next four years. It also estimated that selling prices for both apartments and villas in the emirate ranged from US$ 131-US$ 531 and US$ 174-US$ 627 respectively.

JLL is confident that, after a dull 2019, this year will see a bounce in the hospitality sector driven by Expo 2020, (and the anticipated 25 million visitors over the six months from October), and a number of business-friendly initiatives introduced by the government over the past few months; these included moves to expand the number of cruise visitors to the emirate (which will probably top one million by the end of the season), the exemption of the visa fee for transit passengers and the completion of large scale projects. CBRE estimated that the average H2 occupancy rate in Dubai hotels was around 75%, (much the same as in 2018), whilst by the end of the year, supply stood at 122.2k keys, expected to grow by 4.5k keys (3.7%) by 2023. On top of that, the UAE economy is forecast to see 2.2% growth – up from 1.9% last year – and Dubai announced a US$ 18.1 billion 2020 budget, its largest ever.

CBRE estimated that the retail sector could have an over-supply problem which may worsen if the current supply of 53 million sq ft of GLA (gross leasable area) expands a further 21 million sq ft (39.6%) over the next four years. The consultancy noted that many landlords have resorted to measures, including rent-free periods and capital expenditure, to attract anchor tenants, in order to stimulate business; e-commerce continues to move consumer behaviour trends, as an increasing amount of sales, that used to be the domain of retail sellers, is moving inexorably to online platforms.

After closing sixty regional outlets last year, Chaloub Group is set to launch three e-commerce websites in 2020, with no details of which brands will be used for its on-line platforms. It has already opened twelve e-commerce websites for its ME brands – including Level Shoes, Sephora Middle East and L’Occitane.  Concurrently, the region’s largest luxury goods retailer will continue to assess its brick and mortar strategy, deciding which outlets to close and ones in which to reinvest, at a time when e-commerce is gaining increased traction. There is no doubt that Dubai is “over retailed”, as there seems to be mall openings every other month, with the result that supply is currently outstripping demand.

Lulu Group has announced that it will open twenty hypermarkets in the UAE before the end of 2021, including two in Dubai – Dubai South Mall, which has just become the Group’s 186^th outlet, and Silicon Oasis.

Of the twelve key Dubai warehousing and industrial micro-markets, in Savills’ Dubai Industrial Market report, seven locations have remained stable, with downward movements in the remining five. Grade B property saw decreases of between 10% – 12% in H2 and this is expected to continue this year, with landlords having to become flexible around lease terms and rental rates. E-commerce is expected to drive up warehousing demand which currently accounts for around 5% of Dubai’s total retail sales; as this ratio is up to 15% in the US and the UK, it is all but inevitable that Dubai will follow suit. Relative newcomers – cloud kitchens and vertical farming – have also started to make a minor impact on Dubai’s warehousing sector.

Local games developer Tamatem has secured a US$ 3.5 million funding round that included Dubai’s Wamda, Saudi Arabia’s Modern Electronics and the UK’s North Base Media. The seven-year-old company started life developing mobile games but now has become the leading mobile games publisher in the Arabic-speaking market. In 2018, the tech start-up raised US$ 2.3 million in Series A Round and will use the latest funds to expand its reach to new markets and increase marketing on current titles, as well as launching an investment and acquisitions fund, targeted at supporting independent developers and studios. By the end of the year, the size of the MENA mobile games market is expected to top US$ 2.3 billion.

W Motors, a Dubai-based luxury carmaker, is considering raising US$ 100 million to back expansion and its push into electric vehicles; it will be spent on a new Dubai factory, inventory, and R&D. The company is the maker of a US$ 3.4 million supercar, the 780-horse-powered Lykan Hypersport, capable of speeds up to 250 mph; only seven have been made so far. It has also manufactured to date ten Fenyr SuperSport, priced at US$ 1.6 million. W Motors is now looking at developing a US$ 600k electric version and hopes to deliver at least five hundred by 2025.

As part of its international expansion drive, Sebia has opened its first ME office in Dubai Science Park. The French company is a world leader supplying electrophoresis equipment, used in the healthcare industry for in vitro diagnostic testing for diseases such as myeloma – a form of cancer – and diabetes. The distribution and marketing office will support regional as well as Turkish and Pakistani operations, whilst its hi-tech training room will enable its company’s business partners to test its portfolio of medical equipment.

Allergan is being sued in a US$ 52 million lawsuit by distributor Dansys Group, alleging fraud and breach of contract. The Dubai-based medical equipment company had the exclusive rights to distribute Zeltiq’s CoolSculpting machines in four ME countries, including the UAE. The US pharmaceutical giant acquired the medical technology company, behind popular fat reducing treatment, for US$ 2.4 billion. Now Dansys is claiming that within two months of the 2015 deal, Allergan and Zeltiq colluded to illegally terminate the company’s contract and that the two companies did not abide by the exclusively agreement, having sold CoolSculpting encryption cards to other parties in the UAE.

In what is their second major tech investment, after acquiring 85% of The Entertainer, Bahrain’s GFH Financial Group bought a 70% stake in FinTech firm Marshal – no financial deals were readily available. Established in 1981, Marshal reckons it holds a majority market share in most of the sixteen countries, in which it operates. A 30-year relationship with Verifone, which has a 40% global share of the point-of-sale device market used for card payments, adds further value to the deal.

Dubai’s Knowledge and Human Development Authority will not allow any hike in student tuition fees in private schools next academic year, based on the latest minus 2.35% reading of the Education Cost Index. However, some schools may be eligible for an exceptional fee increase, based on clear eligibility criteria, as outlined in KHDA’s exceptional fee framework. Latest figures indicate that 2019 saw enrolments 2.9% higher – and 31% higher over the past seven years, comprising 70k students and the opening of 72 new schools since 2012.

Oasis has become the first regional brand to introduce Tetra Pak packages for its water products; from next month, it will be available in Tetra Prisma Aseptic 330ml carton packages selling at US$ 0.41 (AED 1.50). The company, a leading brand of National Food Products Company (NFPC), already uses Tetra Pak for its juices and dairy products. One of the main reasons for the move was the company’s commitment to a sustainable future – the new packaging is 100% recyclable, as well as being UV-protected.

A trilateral agreement between DMCC, Al Khaleej Sugar and Universa Blockchain will result in a new sugar trading platform. Using blockchain technology, traders will now be able to purchase, store, and trade sugar, through smart contracts on a blockchain technology. DMCC will provide the Tradeflow platform that will maintain a central register, confirming sugar ownership, via enforceable warrants, to prove the existence of reserves, enabling secure and transparent international trade. It is hoped that the end result will see Dubai become a major player in global sugar trade.

Following weeks of turmoil, that saw its London shareholding lose almost 50% in the first week of February, NMC Health Plc’s founder and Co-Chairman, Bavaguthu Raghuram Shetty, resigned on Monday, whilst a review is made of his actual holdings in the company, amid concern that it may have been misrepresented; at the same time, Chief Investment Officer, Hani Buttikhi, and board member Abdulrahman Basaddiq, also stepped down. The hospital operator, which operates the UAE’s largest medical network, had been targeted by US short-seller, Muddy Waters, and there had been speculation that its main investors were facing a margin call in which banks seize shares pledged as collateral. Last Friday, the company acknowledged that two GCC banks had obtained 20 million shares from BRS International Holding, an investment vehicle of NMC’s top shareholders, with the bank then selling eight million of them as “enforcement of security”. It was only two months ago that Muddy Waters alleged that NMC manipulated its balance sheet and inflated the prices of companies it had acquired; these claims have been refuted by NMC, with the company hiring former FBI Director Louis Freeh to conduct an independent review.

So as to return to a position, that will permit it to focus on its mid-and-long term strategy, of changing from a ports operator to an end-to-end logistics provider, DP World has decided to become a private company again and delist from Nasdaq Dubai. The move will see its parent company acquiring DP World’s 19.55% stake listed om the local bourse; the offer values the share at US$ 16.75, 28.8% higher than last Friday’s closing at US$ 13.00. Citing that the delisting would be “in the best interest of the company, enabling it to execute its medium to long-term strategy,” “the DP World Board has concluded that the disadvantages of maintaining a public listing outweigh the benefits”. According to Bloomberg, the delisting will help repay more than US$ 5 billion of government-related debt, as its parent will pay DP World US$ 5.2 billion to help repay some of its bank loans.

Dubai Aerospace Enterprise posted a 1.2% rise in 2019 profit to US$ 378 million, although there was a 1.4% dip in revenue to US$ 1.42 billion. During the year, the region’s biggest plane lessor improved its debt-to-equity ratio from 2.57 times p.a. to 2.64, as its unsecured debt, as a percentage of total debt, reached 62% – an improvement on 46% in 2018. Its 2017 merger with Irish-based lessor AWAS has made DAE one of the world’s largest based lessors, with its fleet now standing at 357. In 2020, the company has plans to raise a further US$ 2 billion – US$ 1.5 billion in unsecured debt and the balance from a sukuk issuance to add to its current cash flow of US$ 2.4 billion.

Etisalat posted a 2.0% rise in 2019 consolidated revenue to US$ 14.2 billion, with EBITDA posting a 51% margin at US$ 7.2 billion; last year’s profit nudged 1.0% higher to US$ 2.4 billion, attributable to exploring new growth opportunities and the company’s transition to digitalisation. Its UAE subscriber base topped 12.6 million, as its aggregate numbers came in 6% higher at 149 million. With a US$ 0.109 H2 dividend proposed, it will bring the total 2019 dividend to US$ 0.218, equating to an 80% dividend pay-out ratio.

A double whammy of an 8.0% hike in total income, to US$ 31 million, and a 16.0% fall in expenses, to US$ 14 million, provided the perfect platform for Amanat to post a 40.0% jump in 2019 net profit to US$ 16 million. The 2014 Dubai-listed investment firm, which focuses on acquiring stakes in the education and medical sectors, has a paid-up capital of US$ 681 million (AED 2.5 million), of which about 80% has been invested.  Amanat is planning to invest up to US$ 245 million in the GCC and Egyptian markets in the coming years and is studying whether to acquire a strategic stake in VPS Healthcare. Last March, it bought a stake in the Royal Hospital for Women & Children which is currently in its ramp-up phase – and will start earning profit this year.

Having declared a US$ 70 million profit in 2018, troubled Arabtec posted a US$ 211 million loss last year, all down to Arabtec Construction, as its other three main subsidiaries – Target (industrial), Arabtec Engineering Services (infrastructure) and EFECO (MEP) –  were said to be trading in the black; annual revenue sank 21.0% to US$ 2.1 billion. The main drivers behind the disappointing results were losses from investment in an unnamed associate company, legacy debts, an ongoing slowdown in the realty sector and tight liquidity in the construction field. The company confirmed that discussions were ongoing with Trojan, in relation to a possible merger. Over the past twelve months, its share value has sunk 63.5%, closing on Sunday on US$ 0.20.

The bourse opened on Sunday 16 February and, 104 points (3.7%) lower the previous three weeks, nudged four points higher (0.1) to 2738 by 20 February 2020. Emaar Properties, having shed US$ 0.12 the previous four weeks, was US$ 0.01 higher at US$ 1.06, whilst Arabtec, US$ 0.18 lower over the previous eight weeks, was US$ 0.02 to the good at US$ 0.23. Thursday 20 February saw the market trading 95 million shares, worth US$ 49 million, (compared to 133 million shares, at a value of US$ 81 million, on 13 February).

By Thursday, 20 February, Brent, having gained US$ 0.91 (1.6%) the previous week, was up US$ 2.70 (4.8%) to close at US$ 59.04. Gold, US$ 14 (1.0%) to the good the previous week, gained US$ 42 (2.7%), closing on Thursday 20 February at US$ 1,621.

Having seemingly escaped Japanese justice, fugitive car mogul, Carlos Ghosn is now facing serious charges from French prosecutors, alleging suspected misuse of corporate funds, aggravated breach of trust, document forgery and money laundering. The accusations relate to transfers between Renault SAS and Oman car distributor Suhail Bahwan Automobiles, as well as his spending on events and trips that may have been personal, with several million dollars in costs for the trips and events being covered by Dutch subsidiary Renault-Nissan BV, or RNBV. Another investigation relates his 2016 wedding held at the Versailles Palace and whether it was financed using a Renault sponsorship deal to cover the cost of that private event.  He is also facing further charges involving fees paid to consultants by the Amsterdam-based joint venture.

Morgan Stanley has made a US$ 13 billion bid for the discount brokerage firm, E*Trade Financial Corporation, that comes after a recent merger between competitors Charles Schwab and TD Ameritrade. The deal was the biggest seen in Wall Street since the GFC. Apart from adding 13.3% to its asset portfolio, which now stands at US$ 3.06 trillion, it will also enhance direct-to-consumer and digital capabilities to complement its full-service, advisory-focused brokerage.

As annual profits nose-dived by 33% to US$ 13.4 billion, HSBC announced that it would shed 35k jobs (14.9%) of its current 235k work force, over the next three years, as it targets cost cuts of US$ 4.5 billion by 2022, as part of its restructuring strategy. No retrenchment details were made known, but it is likely that four sectors will face the brunt of the personnel cull – the UK investment bank, the group’s central operations, the US retail banking outfit and those areas where jobs are being replaced by technology. With over 17% of the bank’s staff based in the UK, and most of HSBC’s profit emanating from Asia, it is obvious that the UK and Europe will feel the pinch. The main driver behind the profit decline was US$ 7.3 billion of write-offs, related to its investment and commercial banking operations in Europe.

Another year and yet another appeal by High Street retailers for the government to take action by reforming business rates. The latest is Shoe Zone that will be forced to close 20% of its 500 UK outlets if no change is forthcoming. The retailer indicated that although rents had fallen, its payment of business rates had increased from 26% to 54% over the last decade. The amount of business rates to be paid is based on the property’s rateable value, set by the Valuation Office Agency. In line with many others, Shoe Zone will make a simple calculation every time one of its properties’ leases is up for renewal – if it is not forecast to make a profit, the shop will close. Not only are most retailers hurt by the business rate mechanism, they are also facing the ongoing problem of e-commerce and a squeeze on consumer spending. Most hope that the new Chancellor, Rishi Sunak, will overhaul the system to help traders in his first budget, scheduled for 11 March.

Struggling since the start of the year to secure a rescue deal, the 265-year old Axminster Carpets was forced into administration this week for the second time in seven years. On its appointment as liquidators, Duff & Phelps sold the Axminster Carpets underlay division to Ulster Carpets and laid off 80 workers, retaining some to complete existing contracts. It could also sell Axminster Carpet Shop to Wilton Flooring.  The last accounts available, for 2018, saw the firm lose just over US$ 1 million.

Having confirmed that if it were unable to get the “requisite level of funding” then it would need to “consider all appropriate options”, Laura Ashley shares tanked losing 41% on Monday. H2 sales fell 10.8%, to US$ 142 million, in “challenging” trading conditions, attributable to “market headwinds” and weaker consumer spending. During the 70s and 80s, Laura Ashley, founded in 1953, was an iconic brand and one of world’s leading clothing brands. Since then, it seems not only to have lost its direction but has manged to lose 90% of its share value since 2015. By the end of the week, talks with Wells Fargo proved fruitful relating to a US$ 20 million drawing facility; the market was impressed, with shares rebounding by 45%.

Although UK retail sales bounced back last month by 0.9%, it was not all good news as the three-month figures fell into negative territory; however, January saw the largest monthly rise since March driven by stronger demand for clothes and footwear, up 3.9%, with  “moderate growth” by food retailers, which saw sales rise 1.7% during the period. January also saw a year on year increase in internet sales by 4.9% and department stores, up 1.6%. This come after the British Retail Consortium estimated that 2019 was the worst year since 1995 for the retail sector, as annual sales dropped by 0.1%.

In what was an expected move, Washington introduced tariffs on Airbus and EU aeroplane parts as the dispute over subsidies to aircraft makers took a turn for the worse; tariffs will move from 10% to 15%, with others remaining at 25%. The administration maintained that “the United States remains open to a negotiated settlement that addresses current and future subsidies to Airbus provided by the EU and certain current and former member states”. There is no doubt that the purpose of these extra duties is to target the four countries where Airbus is built – primarily the UK, France, Germany and Spain.

The local doom and gloom merchants who continue to moan about the state of the Dubai economy could do well to take note from latest German figures. Following a revised O.2% increase in Q3 GDP, the country had another very weak Q4, with growth reported at 0.0%, as the annualised growth was only 0.4% (compared to Dubai’s 2.0%). It is obvious that trade tensions, exacerbated by the on-going US-Sino tariff war, has played its part in a marked decline in exports growth last year, with investment in machinery and equipment also “down considerably”. Because of its position as the world’s third largest exporter, and that it relies more on its manufacturing (which accounts for 20% of its economic activity), than say the US or the UK (at 10% and 9%), any slowdown in global trade has a bigger impact on the German economy vis a vis  most other countries. If Donald Trump went ahead with his threat of introducing tariffs on EU cars, it would prove devastating for Germany, already reeling from aluminium and steel tariffs. On the back of Germany’s plight, the eurozone is also in a pickle, posting 0.1% Q4 growth, with both Italy and France seeing their economies shrink.

There is now every chance that the Johnson government will cement a trade deal with the EU by the end of the year. As seen last year, EU officials will act tough but when push comes to shove, the UK government will walk away with almost all of what it wanted at the beginning of negotiations. As the UK economy will record a bigger expansion to what is expected in the EU, not helped by a German economy in a rut, it seems that sterling, currently hovering around the US$ 1.30 level to the greenback, could gain a further 10% by year end, as the bloc’s economy continues to soften. It is inevitable that the new Chancellor will introduce fiscal stimulus, including major infrastructure expenditure, to boost the UK economy. It is likely that GDP growth will be around 1.4%, along with inflation at 1.8% – still lower than the Bank of England’s target of 2.0%.

UK employment seems to hit new highs every quarter, as employment jumped another 180k to 32.93 million and the number of women in work rose by 150k to 15.61 million – both new records – with weekly pay at US$ 663, its highest since March 2008; earnings have risen 3.2% over the twelve months ending 31 December 2019. Based on these figures, the Bank of England will put any rate change on hold, at its March Monetary Policy Committee meeting.

Driven lower by weak global growth, Typhoon Hagibis in October and an ill-advised sales tax hike, from 10% to 12%, Japan’s Q3 economy shrank at the fastest rate in five years, with annualised GDP slumping 6.3% – more than expected. Now with the coronavirus outbreak, and its impact on tourism and bi-lateral trade, with many Chinese factories closing down, it is all but inevitable that the country will be in recession in Q1. Prime Minister Shinzo Abe did finally realise that the economy was in trouble, by approving a US$ 120 billion stimulus package in December, but it may be too late for him to Pick Up The Pieces.