Everybody Hurts 05 March 2020

Everybody Hurts                                                                                           05 February 2020

JLL expects the real estate sector to continue at almost historic lows but will soon undergo a “period of stabilisation”, with the rate of decline  of sale and rent prices slowing; Q4 sales prices fell by 3% (villas) and 1% (apartments), quarter on quarter – and, for the year, 10% and 5% respectively. Meanwhile, rents were 8% lower for both villas and apartments in 2019. The data also indicated declines continuing in primary areas – including Downtown Dubai and Dubai Marina – but noted steeper falls in secondary areas such as Motor City, JVT and JVC.

According to Knight Frank, the September introduction of powers for Dubai’s Real Estate and Regulation Authority, that were given the authority to oversee all future prospects, along with the upcoming Expo, have assisted in slowing the decline in Dubai’s luxury residential prices to 0.7% – compared to a global 2.0%, including London’s negative2.6%. At the other end of the scale, Frankfurt, Lisbon and Athens came in with increases of 10.3%, 9.6% and 8.9%.

In a bid to reach the underserved Dubai neighbourhoods and communities, Carrefour has introduced its Mobimart – the region’s first grocery bus. It will operate six days a week and will stock an extensive range of groceries and fresh food. Locally built by Bespoke Trailers, a start-up based in Al Quoz, it will follow a set route, stopping at several areas in Dubai, with the majority being residential (including JVT, JI, JVC, and Sports City as well as Kite Beach, and Rahaba labour accommodation).

With increased business emanating from the free zones, (11% higher at US$ 161 billion), Dubai witnessed a 6.2% expansion in non-oil foreign trade last year to US$ 372 billion, comprising imports of US$ 216 billion, reexports (US$ 114 billion) and imports (US$ 42 billion); all three sectors posted annual increases by 3%, 4% and 22% respectively. The figures are more impressive when they were achieved in very trying conditions of weaker global trade, (rising by only 0.9%), and a marked slowdown in the global economy. Volume-wise, total trade volumes were 19% higher at 109 million tonnes driven by a record 48% surge in reexports to 17 million tonnes; imports (up 9%) and exports (45% higher) contributed 71 million tonnes and 19 million tonnes respectively. Dubai’s five largest trading partners continue to be China, India, US, Switzerland and Saudi Arabia with respective totals of US$ 40.9 billion, US$ 36.8 billion, US$ 21.2 billion, US$ 16.3 billion and US$ 15.3 billion. Yet again, the highest traded commodity was gold, jewellery and diamonds – 7% higher and contributing US$ 100.8 billion.

Because of a coronavirus-led decline in global air traffic demand, it is reported that Emirates is requesting its 100k workforce to consider taking paid and unpaid leave. The world’s biggest airline by international traffic has written to staff about the impact of Covid-19 commenting that “We’ve seen a measurable slow-down in business across our brands and a need for flexibility in the way we work.” Only last week, Emirates halted all fights to China, except Beijing, and Iran because of the spread of coronavirus in those countries. IATA estimates that the damage to global airlines could be as high as US$ 30 billion in lost revenue due to an estimated 4.7 per cent decline in travel demand.

Flydubai posted a 2019 profit of US$ 54 million – a major improvement from a US$ 44 loss the previous year – as annual revenue dipped 3.2% to US$ 1.63 billion. Two of the main reasons for the uptick were the compensation from Boeing (associated with the grounding of the plane maker’s 737 Max) and a 17.8% drop in operating costs. Discussions are on-going between both parties  with the airline’s chief executive, Ghaith al Ghaith, commenting that the interim settlement agreement `’ no way can compensate for the loss of business opportunity or market share experienced by the airline” and continued  “whilst 2019 has seen a return to profitability it does not reflect the loss of market position and the unfilled opportunities Flydubai could have exploited.” Passenger numbers were 12.7% lower at 9.6 million, as its capacity fell by 15.8%, 19% of its flight schedule has been cancelled and its fleet has been reduced by 25% to forty-five 737s, (as fourteen 737 Max have been grounded since last March).

Coronavirus has claimed some local victims, including the Dubai International Boat Show, due to be held next week, at its new venue of Dubai Harbour. The decision to postpone the annual event was taken after “much deliberation in consultation with the event’s main participants and industry stakeholders”. Although the country is safe for travel, there were many significant participants unable to travel due to restrictions in their home country. The loss of the boat show this year will be a major blow to local hoteliers and retailers as it is MENA’s largest leisure boating event and one of the world’s most influential gatherings for the global yachting community. Taste of Dubai, Dubai Chess Open 2020, Dubai Lynx, K-POP Music Bank Concert and Art Dubai have already postponed their March events. However, this week’s Middle East Energy went ahead and currently the upcoming Arabian Travel Mart is still on. With kindergartens already shut down, the government announced that all the country’s schools will close for four weeks from Sunday. In another local coronavirus story, JA Lake View Hotel has confirmed that reports of the property being in lockdown was “a guest prank gone horribly wrong”. Dubai Police are still investigating.

On Thursday, 05 March, the government issued a circular indicating that international travellers from ten COVID-19-afflicted countries – China, Hong Kong, Italy, Iran, Japan, Germany, Singapore, France, Kuwait and Bahrain – will be admitted and isolated in hospital until further tests, with or without fever, if they display even a few of the parameters of sickness form the list of Covid 19 symptoms.

Meanwhile in “Operation 60 Minutes”, the police have confiscated 29k counterfeit watches, with a street value of US$ 330 million. Two men, who ran the business in Naif, have been apprehended, with Brigadier Jamal Salem Al Jalaf, director of the General Department of Criminal Investigation at Dubai Police, praising the coordination between government entities and private companies that attributed to the success of the operation.

There is no doubt that HH Sheikh Mohammed bin Rashid Al Maktoum means business when he states that he “wants our government services to be the best of its kind in the world.” To help make this a reality, the Dubai Ruler has launched an eight-language Mystery Shopper application to help measure the performance of government entities. He hopes that this will “encourage all members of the community to become mystery shoppers providing the government with instant evaluations of their experiences”.

Although advised by the IMF to double the VAT rate to 10%, the UAE government has ruled out any increase, indicating that it is still too early to assess the impact of a tax that is barely two years old. The main aims of VAT were to pay for public services and to continue the shift away from the UAE’s historic dependence on oil as a source of revenue. In its first year, VAT revenues brought in US$ 7.4 billion, well ahead of initial estimates of US$ 3.3 billion; no figures are yet available for 2019.

The Central Bank is urging local financial institutions to review their business continuity plans such as “re-scheduling of loans contracts, granting temporary deferrals on monthly loan payments, as well as reducing fees and commissions”. This comes at a time when there are global fears that the current coronavirus may turn into a pandemic and, at the beginning of the week, the country had announced 21 cases of the virus. The regulator indicated that the country’s banks remain well-capitalised and are in a good position to support customers affected by the virus, without “jeopardising their own safety and soundness”. In line with the Federal Reserve’s decision on Tuesday, the central bank also cut rates by 0.5%.

According to Knight Frank’s latest Wealth Report, the number of GCC ultra-high net-worth individuals is expected to jump to over 9.1k (26%) in the next five years, whilst the number of high net-worth individuals will be 12% higher. 23% of the regional UHNWIs (considered to have a net wealth in excess of US$ 30 million) are to be found in the UAE – and 57% in Saudi Arabia. On a global scale, the number of HNWIs (those who possess a net wealth in excess of US$ 1 million) is set to grow by 27% to 650k by 2025.

As it plans to expand its regional presence, Siemens signed a ten-year lease agreement to set up its Dubai operations at District 2020 (the main site of Dubai Expo) from next year. It is expected that the German company will employ 1k in its new 11k sq mt office which will be used as a base and also by its soon to be spun-off Siemens Energy operation. Three years ago, Siemens made a commitment to establish a global headquarters for its airports, cargo, and port logistics business in District 2020.

It is reported that, having raised US$ 10 million in pre-Series A funding, iMile plans to open a new research and development centre, as well as expand to Egypt, Kuwait and Morocco; it currently operates in UAE and Saudi Arabia. The Dubai-based last mile delivery firm, already with two R&D centres in China, will use some of the money in “improving iMile’s tech prowess, customer experience and hiring new talent”. Established three years ago, it has companies such as Amazon, Mumzworld and Noon as its clients. It is estimated that the last mile delivery market will almost double over the next five years to top US$ 62 billion.

Manrre Logistics Fund, managed by Dalma Capital, has placed its shares with Nasdaq’s CSD (Central Securities Depository) which looks after them on behalf of shareholders and facilitates share transfers between investors. The Dubai-based investment company, which focuses on institutional-grade logistics and industrial properties across JAFZA, Dubai Investments Park and Dubai South, has a US$ 72 million portfolio of properties with an annualised 12.5% return. It is estimated that the UAE has the highest e-commerce penetration in the region, at 4.2%, which is set to double to US$ 21 billion in the next three years – and with it the demand for logistics real estate, industrial warehouses and fulfilment centres.

Embattled NMC Health is looking for an informal standstill on its US$ 2 billion loan facility, appointing three firms, Moelis & Company, PwC and Allen & Overy as independent financial adviser, operational adviser and legal adviser to move the process forward. It is to ask its unnamed creditors “for continued support in relation to existing facilities from its lenders to achieve an immediate stabilisation of the group’s financing.”  NMC will also request that lenders refrain from exercising any rights and remedies that may arise from current or default breaches in loan covenants. Ever since December, when Muddy Waters Research claimed accounting manipulation, including asset price inflation with lender asset price inflation, its share market value has slumped by 67%. NMC also confirmed that all its principal shareholders, including Khaleefa Al Muhairi, Saeed Mohamed Al Qebaisi and BR Shetty together now hold, directly or indirectly, less than 30% of the company’s issued share capital.

Aramex has proposed a 16.5% dividend after posting increases in both revenue and profit – by 3% and by 1% to US$ 136 million respectively. By the end of 2019, the courier firm’s total cash stood at US$ 272 million, with a free cash flow of US$ 80 million. Aramex will also focus on “accelerating its business transformation roadmap across different areas in the company to realise synergies and lower cost of doing business on the ground.” It expects further growth in 2020 but that there will be continued pricing pressure on e-commerce business, as it spends more on in its last mile operations.

The bourse opened on Sunday 01 March, and 148 points lower (5.4%) the previous week, had another torrid week slumping 129 points (5.0%) to close on 2461 by 05 March 2020. Emaar Properties, having lost US$ 0.11 the previous week, was US$ 0.05 lower at US$ 0.90, whilst Arabtec, US$ 0.03 down over the previous week, was US$ 0.01 lower at US$ 0.19. Thursday 05 March saw the market trading 169 million shares, worth US$ 60 million, (compared to 132 million shares, at a value of US$ 72 million, on 27 February).

By Thursday, 05 March, Brent, having slumped US$ 8.03 (13.6%) the previous week, gained US$ 0.45 (0.8%) to close at US$ 51.01. Gold, US$ 81 (5.2%) higher the previous three weeks, gained a further US$ 23 (1.4%), closing on Thursday 05 March at US$ 1,669. For the month of February, Brent had retreated by US$ 6.12 (10.8%) to US$ 50.50, whilst gold shed US$ 3 (0.2%) to US$ 1,586.

Citing “extreme market conditions”, with investors deterred from investing, Intu has abandoned plans to raise US$ 2.0 billion to pay down a massive US$ 6.5 billion debt pile and secure its future. The owner of Manchester’s Trafford Centre and Lakeside, in Essex, saw its share value plummet 43% on Tuesday morning to recover to be 20% off by the end of the day. In line with the marked decline seen in UK’s High Street, landlords have been struggling filling in all the empty retail space left void by an ever-increasing number in departing shopkeepers. Like for like net rental income fell 9.1% in 2019.

Despite the global retail sector continuing to be battered by e-commerce, and the slowing wider toy market, 3.0% lower in 2019, Danish toy retailer Lego is still placing its faith in physical stores. This year, it plans to open 150 branded shops worldwide, (to add to their existing 570 stores), as the company still believes “people want to get their hands on bricks and be a part of the brand”. The Danish company had traditionally used third party retailers to sell their products.

John Lewis, which also owns Waitrose, has had to cut staff bonuses, set at 2%, to their lowest level in seventy years, with the main reason being plunging profits that fell 23% to US$ 170 million. It is now in the process of reviewing its business – for both brands – that will inevitably result in store closures and space reduction in some of their remaining outlets. Already three Waitrose shops are to close this year.

After a bid for fresh financial support failed, Flybe has finally called in the administrators and ceased flying, putting 2,000 jobs at risk. The struggling airline narrowly avoided going under in January but now, not helped by the advent of coronavirus and the decline in demand for air travel, has been forced to close. The company had hoped for a US$ 130 million government lifeline and changes to Air Passenger Duty taxes, but neither were forthcoming. Some analysts considered that the Flybe had over-ambitious expansion plans in the past and became too big for a relatively small UK regional market.

Lebanese authorities have frozen the assets of so far twenty unnamed banks, along with those of the heads and members of boards of directors of these banks; they also approved a draft law to lift banking secrecy. The country is undergoing its worst economic crisis since the end of civil war in 1990, with one of the highest global debt to GDP ratios at 166%, as its year on year public debt jumped 7.6% to US$ 92 billion. Its currency has lost over 33% in value, with the country having to repay a maturing US$ 1.2 billion Eurobond loan next week and both its current and fiscal accounts exceeding the country’s GDP by 21% and 9%.

Global markets suffered their worst week, ending 28 February, since the 2008 GFC, as all three US indices lost over 10%, with the London FTSE 100 shedding 3.2% on Friday 28 February – and almost 13% (equating to US$ 340 billion) over the last week in February. The last trading day of the month saw Germany’s Dax losing 4.2%, France’s CAC 40 sinking 3.9% along with Japan’s Nikkei 225 and China’s Composite both dropping 3.7%. The Dow and S&P 500 are now at August 2019 levels, while the Nasdaq has returned to December prices.

With investors’ worries growing, the Federal Reserve Chair, Jerome Powell, has confirmed that it was “closely monitoring” developments and that “the coronavirus poses evolving risks to economic activity” and that “we will use our tools and act as appropriate to support the economy.” Although the Fed has little wiggle room, as rates are already at historical lows, the chances of another rate cut is probable in a desperate move to counter the fall-out from coronavirus. It is also likely that governments will have to introduce further fiscal stimulus to boost economies that were already flagging before the onset of coronavirus. This week, the IMF announced US$ 50 billion in funding to help member-countries cope with the health and economic impact of the deadly coronavirus, with the World Bank Group chipping in with an initial fund of US$ 12 billion.

There is no doubt that markets have finally realised that the virus will continue to have a negative impact on the global economies – at a time when so many firms are experiencing disruptions to their supply chains and a decline in consumer demand. Goldman Sachs has warned that it could wipe out any profit growth this year whilst the likes of Apple and Microsoft have confirmed that their companies have already been affected, with worse to come. All global airlines are feeling the pinch, with IAG – owner of BA and Iberia – saying that its earnings had been affected by “weaker demand”, as travel bans are imposed and companies (and individuals) cutting back on travel plans. It is reported that 130 listed UK firms had warned about the effects of the coronavirus on their businesses. When there is uncertainty, mixed with panic, traders tend to ditch the equity markets and move from risky assets into less risky investments such as government bonds.

The annual Mipim global property convention, that takes place in Cannes each year, has been postponed from next week to June due to the outbreak of the coronavirus. The event, held in Cannes every year, usually attracts well over 20k attendees; until Friday, the event was still going ahead only for a number of high-profile attendees, including consultancies Knight Frank and Cushman and Wakefield, having decided to withdraw.

Italy was the first European country to report a major surge in cases of the coronavirus, and after China and Iran, is the nation to have the highest number of patients with travel restrictions being imposed and several towns in and around Lombardy under lockdown. There has been an economic impact because northern Italy is the country’s powerhouse (accounting for 40% of industrial output), with Milan being a major financial centre where a number of major tourist and cultural sites such as the cathedral (the Duomo) and the opera house La Scala have been closed.

Even before this crisis, the Italian economy was in bad shape including the fact that the country’s total production of goods and services are about at the same level they were in 2004 and 4% lower than in 2007 – a year before the GFC. The country has the third highest unemployment rate among under-25s at 28.9%, with only Spain and Greece having higher figures in the EU. It has seen its Q4 GDP fall by 0.3% so even before the onset of coronavirus, the economy was struggling because of weaker global growth and a slowdown in international trade. There is no doubt that the country will fall into technical recession in Q1 (its economy having contracted over the past two quarters) which will continue for the rest of 2020. It is not helped by the fact that its government debt equates to 133% of GDP – a lot higher than the 60% EU target.

The latest from the OECD points to global growth being at its slowest rate since 2009, having cut their previous November 2.9% forecast to 2.4%, mainly attributable to the ongoing coronavirus; the body even warned that a longer “more intensive” outbreak could see a further fall to 1.5%. it did indicate that it would recover in 2021 to 3.3% – if the epidemic peaked by the end of March. It would now seem logical that global central banks unite and support the financial markets which went into a tailspin last week losing US$ 3 trillion in the process.

There was some temporary good news for the Australian economy with Q4 growth higher than expected, at 0.5%, and for the twelve months at 2.2%, driven mainly by real estate transactions and rising inventories. However, even though it is still summer, Australia’s economy will cool and be hit by the double whammy of the bushfires (that could take 0.2% off the GDP figure) and coronavirus a further 0.5%; these estimates are on the conservative side.

Because the coronavirus “poses evolving risks to economic activity”, the Federal Reserve slashed interest rates by 0.5% on Tuesday in its first emergency rate cut since the Great Recession in 1929.As soon as the news hit the wires, the Dow Jones index bounced 700 points higher but retreated by the end of the day. In a teleconference, the G7 finance ministers pledged to use “all appropriate tools” to deal with the spreading coronavirus. Australia was just as quick to cut rates by 0.25% to just 0.50% and warned that COVID-19 was also having a “significant effect” domestically. This leaves the RBA in a conundrum because if they were to cut rates again it means that would handball the responsibility for economic growth to the government, as traditional monetary policy will go out the window – and fiscal policy will have to take up the mantle. At times like these, Everybody Hurts.

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