Chiquitita                                                                                       04 June 2020

The latest Cavendish Maxwell’s Property Monitor reported that Dubai property prices have lost 8.3% in value over the past twelve months, (an improvement on the 9.7% decline in 2018), but nudged 0.5% higher, month on month; prices rose to US$ 236 per sq ft. Because of the lockdown in April, physical viewing numbers suffered, so that 72.1% of deals were for off plan transactions; with restrictions easing, there will be a swing back to resale properties. In April, for the obvious reasons, sales deals were markedly down at 1.8k – 43% lower compared to a month earlier. Almost half the off-plan sales emanated from Dubai Properties (including La Vie (JBR), Madinat Jumeirah Living and Villa Nova) and Emaar’s Dubai Harbour and the Opera District).

Deyaar Development posted Q1 revenue of US$ 27 million and a profit of under US$ 1 million, as it made a US$ 3 million impairment provision on its investment properties. In February, it completed and handed over Dania district, the second phase of its six-building, 570 residential unit project, Midtown. The Dubai property developer also launched the project’s third phase – Noor District will house 593 units in seven buildings.

Microsoft opened its first ever artificial intelligence centre, Microsoft Energy Core, located in Dubai Internet City, and ready to start developing AI-focused technology in September. Its main function is to develop new AI technologies that could be used in the energy sector globally. The US tech giant has joined with ten other partners – Honeywell, Rockwell Automation, ABB, Sensia, Accenture, Aveva, Emerson, Schlumberger, Maana and BakerHughesC3.ai. At the same time, Microsoft also launched an AI Academy to provide digital skills to energy industry workers. BIS Research expects that spending on energy-related AI is expected to reach US$ 7.8 billion, within four years.

It was announced this week that The Big 5 event will not take place in November, as originally scheduled, but has been moved to September 2021. The four-day gathering for the construction sector, which comprises five specialised shows, is the largest regional exhibition that last year attracted 67k buyers, suppliers and experts. Although The Big 5 has been moved, Cityscape Global, is still scheduled to be held in November. A global conference of 12k chambers of commerce, that was due to take place next February, has been moved to November 2021 to coincide with the new dates for Expo 2020.

On 21 May 2020, Emirates restarted scheduled passenger flights to nine selected destinations, with these return flights continuing until the end of June. The selected destinations were London Heathrow, Frankfurt, Paris, Milan, Madrid, Chicago, Toronto, Sydney and Melbourne. This week, the airline announced that it would be servicing a further sixteen more locations as from 15 June – Bahrain, Manchester, Zurich, Vienna, Amsterdam, Copenhagen, Dublin, New York JFK, Seoul, Kuala Lumpur, Singapore, Jakarta, Taipei, Hong Kong, Perth and Brisbane. Emirates will be utilising their Boeing 777-300ER aircraft on these flights.

After posting a historic low of 44.1 in April, May’s Dubai PMI produced an improved mark of 46.7 and, although still in negative territory, it demonstrated that the economy may well be off its bottom. Although input prices are nudging higher, staffing cuts continue, sales revenue remain turbid and new orders plunge to new depths. Despite the lockdown easing, and businesses opening up again, many companies have yet to see the expected improvement in demand, with a marked decrease in new order volumes. It is still too early to comment whether the worse is over and what the recovery will bring and when it will occur.

The Central Bank reported that it was holding US$ 101.1 billion in total foreign currency assets – a 1.6% increase, year on year. There were also rises in current account balances (US$ 90.4 billion) and deposits with foreign banks (US$ 81.0 billion). The central bank’s held-to-maturity securities was at US$ 6.1 billion, with other foreign standing at US$ 4.8 billion.

Dubai Investments, which has the Investment Corporation of Dubai holding a stake, has declared a 2019 US$ 0.0272 dividend – equating to US$ 116 million. The Dubai-listed company has a myriad of interests, including in the real estate, construction, education, healthcare, food & beverage and financial sectors. The group, with a share capital of US$ 1.23 billion, has stakes in thirty-five companies, including DIP, Al Mal Capital, Emirates Float Glass and Emicool.

May trading on the DFM saw a pick-up in foreign buying, as overseas investment returned to almost 50% of its January total, when the monthly net gain was US$ 150 million. Since January 2019, foreign investment had climbed by US$ 627 million, with buying of US$ 10.7 billion outpacing sales of US$ 10.1 billion. March and April witnessed net outflows of a record US$ 208 million and US$ 49 million respectively whilst in May, there was a US$ 56 million gain.

The bourse opened on Sunday 31 May and, 66 points (3.5%) higher the previous fortnight, went through the 2,000 mark to be 78 points to the good (4.0%), closing on 2,039 by 04 June. Emaar Properties, up US$ 0.03 the previous fortnight, was US$ 0.03 higher atUS$ 0.71, whilst Arabtec, down US$ 0.03 the previous four weeks, was flat at US$ 0.16. Thursday 04 June saw the market trading at 310 million shares, worth US$ 84 million, (compared to 337 million shares, at a value of US$ 118 million, on 28 May). In May, the bourse opened on 2027, but shed 256 points (22.7%) to close the month on 1,971. Emaar started the month at US$ 0.74 and lost US$ 0.05 to close May on US$ 0.69, with Arabtec also down US$ 0.04 from US$ 0.19 to US$ 0.15.

By Thursday, 04 June, Brent, up US$ 3.64 (11.6%) the previous week, closed US$ 5.10 (14.5%) higher on US$ 40.18. Gold, US$ 7 (0.4%) higher the previous week by US$ 16 (1.0%), was US$ 20 (1.1%) lower on the week to close on Thursday 04 June, at US$ 1,715. Brent opened the month trading at US$ 26.48 and gained US$ 9.01 (34.0%) in the month of May to close on 31 May at US$ 35.49. The yellow metal headed in the same direction, from its US$ 1,694 opening for the month, to close May up US$ 43 (2.5%) to US$ 1,737.

Renault announced plans to save US$ 2.2 billion, as part of a new cost cutting exercise which will also see 4.6k employees made redundant and up to six plants closed; it will also see the French carmaker focus more on electric vehicles. Notwithstanding the impact of Covid-19, Renault, 15% owned by the French government, was already struggling as sales dipped and now is to cut production capacity by 18% to 3.3 million units by 2024. The carmaker has about a 4% share of the global market and saw sales 3% lower last year, and 25% down in Q1. The days when Carlos Ghosn, the former disgraced head of a three-way alliance between Renault, Nissan and Mitsubishi, had grandiose expansion plans, to make 5 million vehicles, have disappeared and Renault have admitted “we have to change our mindset” and come “back to bases.”

Bentley is to cut 1k jobs (25% of its UK workforce), as it tries to come to grips with the economic meltdown resulting from Covid-19. The Crewe-based luxury car maker, owned by Volkswagen, which has been struggling the last few years, had seen vehicle sales 5% higher last year at 11k. The outlook for the industry is bleak, at least in the short-term, with latest figures showing that May UK registrations, at 20k, were the lowest May figure since 1952. This week, Aston Martin announced 500 redundancies and UK car dealership Lookers closed more showrooms, with plans to cut a further 1.5k jobs.

April passenger demand for air travel, measured in revenue passenger kilometres, slumped 94.3%, year on year, but subsequently daily flights have recovered somewhat, rising 30% by 27 May. IATA also noted that international passenger demand tanked 98.4% and capacity by 95.1%; domestic flight demand was 86.9% lower. International passenger traffic numbers fell around the world – ranging from Europe’s 99.0% to 97.3% in the ME. This week, it forecast that global airlines were expected to lose US$ 314 billion in passenger revenue this year – down 55% from 2019.  No wonder then that many airlines have already declared bankruptcy, while others have secured large government bailout packages and introduced massive cost cutting. Such an example is Lufthansa, which reported a US$ 2.4 billion Q1 loss, that has initiated sweeping job cuts, with plans to sell of non-strategic assets to help repay a US$ 9.8 billion German government bailout loan.

The shortlist of potential buyers for Virgin Australia has been narrowed down from twenty to two – Bain Capital and Cyrus Capital Partners – with a final decision expected by the end of the month.  Australia’s second airline to Qantas went into administration in April, with debts of over US$ 4 billion, owing to 12k creditors, including staff. Regulators will probably require that the “new” airline maintains a full-service line (to give Qantas some competition and hence lower prices to consumers), with unions wanting built-in protection for their members. Cyrus Capital already has links with Virgin founder, Richard Branson, but that will have little effect on the final decision, whilst Bain is probably the favoured of the two; the US company has been using the services of Jetstar’s ex-CE, Jayne Hrdlicka, who could well be the new CEO come 01 July.

In a bid to improve his liquidity base, Richard Branson is looking for a further US$ 200 million, as he tries to sell a share in his Virgin Galactic Holdings, which is valued around the US$ 1 billion mark. Any money raised will be used “to support its portfolio of global leisure, holiday and travel businesses that have been affected by the unprecedented impact of Covid-19.” He has also pledged Necker Island (located in BVI) to support his global businesses, (worth an estimated US$ 20 billion), that have been affected by the unprecedented impact of Covid-19.”

It seems that the world’s biggest luxury goods firm, LVMH, may pull out of its US$ 16.0 billion takeover of Tiffany, that was supposedly finalised last November. Now, probably put down to Covid-19, the French company has this week said it would not now buy Tiffany shares on the open market. This seems a logical choice as Tiffany’s shares have sunk by 15.5% from their November price of US$ 135 to about $114 a share this week. Tiffany’s has 300 stores and employs 14k, whereas the larger French predator has 4.6k global outlets, employing 156k; its brands include Louis Vuitton, Kenzo, Tag Heuer, Dom Pérignon, Moet & Chandon and Christian Dior.

Gap posted a quarterly (to 31 May) loss of US$ 932 million., compared to a US$ 227 profit a year earlier, due to store closures because of the coronavirus pandemic; net sales fell by 43%. The clothing retailer, with 2.8k US outlets, of which more than half have reopened, also provided for a US$ 250 million write off of non-essential goods it holds. Gap is being sued by one of its landlords, Simon Property Group, for non-payment of US$ 66 million in rent relating to 390 stores it operates in Simon’s malls that had been closed during the lockdown.

There have been very many losers as a result of the pandemic but one company that has benefitted has been Zoom Video which posted a 135 times, year on year, Q1 profit hike to US$ 27 million, although revenue only jumped 169% to US$ 328 million. Zoom expects Q2 revenue to increase to US$ 500 million and an annual figure of US$ 1.8 billion, compared to US$ 622 million for their financial year ending 31 January 2019. Its share value has tripled to US$ 208 since the beginning of the year.

As business travel continues to recover, Marriott has reopened all of its 350 hotels in China, with a 40% occupancy rate; in late January, the rate was at just 7%, at the peak of the Chinese crisis.  The world’s third largest hotel chain noted that the impact of Covid-19 has been greater than 9/11 and the 2008 GFC combined. At the same time, Hilton also opened all their 255 Chinese properties. It is inevitable that it will take several years for hotels to return to “normal” occupancy levels, and will probably be the slowest sector to recover, compared to the likes of factories and production that seem to be quicker to get back to some sort of normality.

Following the continent’s biggest IPO of the year, at US$ 2.6 billion, shares in the Dutch coffee giant, JDE Peet, surged 13% on its first day of trading on the Amsterdam bourse last Friday, valuing the business at US$ 17.2 billion. The new business is largely part of the Reimann family’s investment firm JAB Holding which, in recent years, had acquired Keurig Green Mountain and Caribou Coffee, with investors hoping that it can now play on the global stage with Starbucks and Nestle. In 2019, the company, which also owns supermarket brands, including Douwe Egberts, Jacobs and Kenco as well as US retailers Peet’s and Intelligentsia, had revenue totalling US$ 7.6 billion.

According to the Institute of International Finance, last month, flows to emerging markets tanked 78% to just US$ 4.1 billion, with emerging market debt attracting 83% of the total and equities the balance, as the latter’s negative trend continued. Flows to China equities showed a US$ 4.8 billion net inflow, whilst outflows amounted to US$ 4.1 billion. Although some counties, such as India and Brazil, have yet to see the worst of the pandemic, it is abating in many of the G20 bloc countries, initially driving confidence forward; however, as US-Sino relations again deteriorate, this time driven not driven by tariffs but by disputes over Hong Kong and the World Health Organisation, emerging markets are still depressed.

The IIF also forecast that global remittances may fall by as much as 30% this year, which will have a negative impact on the major recipient countries, mostly classed as emerging markets. This was slightly more than the earlier World Bank estimate of a 20% decrease and a lot worse than the 5% decline seen after the 2009 GFC. The IIF noted that the countries most exposed to the pandemic, and oil price falls, are the economies that account for the bulk of global remittances. Another unfortunate fact was that Covid-19 badly impacted employment levels in industries that rely on migrant workers such as hospitality, retail, tourism and transportation which bore the brunt of lay-offs, thus reducing the amount of moneys sent “home”.

Moody’s continues to maintain India on a negative outlook, as the ratings agency downgraded India’s foreign currency and local currency long-term issuer ratings by one notch to Baa3 – the same rating given by S&P and Fitch. The agency is wary of India’s ability to cope with the challenge of implementing policies to mitigate the impact of Covid-19 and to deal with further stress in its financial sector. For over two months, the world’s fifth biggest economy has been in lockdown, that brought the economy to its knees, but Moody’s was keen to point out that this was not the main reason for its action; it is worried about “vulnerabilities in India’s credit profile that were present and building prior to the shock” as well the Modi’s government’s “slow reform momentum”. However, Covid-19 will probably stymie the country’s short-term growth in 2021, which will follow an estimated 4.7% contraction this year.

It appears that despite its troubled economy, there are strong buying opportunities in US realty, as many ME SWFs continue to show interest in certain sectors, such as select multi-family, office and industrial segments. Hotels are a definite no-no, with estimates that 35% of them will never reopen after the pandemic abates. Earlier in 2020, Bahrain’s Investcorp invested US$ 164 million in two US properties, whilst last November, the alternative asset manager, whose principal shareholder is Abu Dhabi’s Mubadala, paid US$ 800 million for 126 industrial properties. Two local entities, Gulf Islamic Investments and Abu Dhabi Investment Authority, have paid out US$ 230 million for a New York commercial property, and completed the purchase of 330 Madison Avenue in Manhattan. Returns from property in US real estate tend to be more attractive than the global average.

On Tuesday, the Reserve Bank maintained rates at a record low 0.25%, with the Australian dollar trading at US$ 68.13 – 23.6% higher than its mid-March level of just US$ 55.10. The main driver behind the dollar surge is that China, the first major power to recover from Covid-19, has renewed its almost insatiable need for Australian minerals, specifically iron ore and copper. Iron ore is trading around the US$ 100 mark – its highest level in nine months – and China accounts for 70% of the world’s seaborne iron ore trade and has more than half the global number of steel plants. Iron ore accounts for 16% of Australia’s exports, so any movement upwards is often reflected in similar moves with the currency. This is a major factor for the Q1 current account surplus widening to US$ 5.7 billion, equivalent to 1.7% of the country’s GDP, and the first time Australia has recorded twelve consecutive months of current account surpluses. Meanwhile, copper – at US$ 2.48 a pound – is more than 25% higher than three months ago.

As indicated, part of the Australian economy has bounced back with other sectors remaining in the doldrums. Whilst Chinese industrial production in April was 3.9% higher, year on year, retail was 7.5% lower. In addition, the economy will also benefit as commodity prices, including cotton futures, sugar futures and copper, move higher. There is a feeling that consumer confidence is heading north again after almost three months of lockdowns. The economy will suffer because of the travel ban – last year, Australians spent US$ 34 billion, when on foreign holidays, as overseas visitors increased the local sector’s revenue by US$ 41 billion, resulting in a net inflow of US$ 7 billion. It is certain that Australia will go into recession at the end of Q2 for the first time in twenty-nine years but there is every chance that the dollar will remain nearer the US$ 0.68 level, and be one of the stronger currencies in the developed world; interest rates will stick at 0.25%. Perhaps Australia will leave the pandemic in a better shape than most others – assuming US-Sino relations improve and there is not a second-wave outbreak.

However, for others, life in the lucky country remains downbeat. Two Australian economic sectors are facing an even bleaker future if the government’s JobKeeper, its US$ 40 billion monthly wage subsidy which assists some three million Australians, is pulled in September, as planned. Furthermore, latest figures from Digital Finance Analytics indicate that, by the end of May, the percentage of households in mortgage stress had reached 37.5%, equating to 1.42 million households. This will inevitably skyrocket, once the JobKeeper payment ends in September and then expect to see the number of defaults heading north. Both tourism and construction are forecasting that 400k jobs might go if the scheme is not extended and both are calling for increased government support, with the building sector looking for a US$ 85 million bailout. It is estimated, by the Tourism and Transport Forum Australia, that the industry, which employs 660k direct jobs, is losing over US$ 6 billion every month.

The Congressional Budget Office estimates that it will cost US$ 7.9 trillion, and take until 2030, for the US to recover from the impact of Covid-19 that will skim an annual 3% off the country’s economic output, worth an estimated US$ 20 billion until then. Already it has seen trillions of dollars pumped into the economy, to try and keep it afloat over the past three months, and 40 million + claiming unemployment benefits. It is estimated that the May unemployment level will top 20% when figures are released tomorrow – four and half times bigger than March’s 4.4%, then a fifty-year low. The Congress is still discussing whether to implement a further US$ 3 trillion stimulus package, as well as renewing several soon-to-lapse federal aid programs. Chinese tensions are beginning to rise with the latest move seeing the US banning passenger flights from China from 16 June, in retaliation to Beijing refusing to let US airlines resume flights to China.

The eurozone economy contracted more than expected in Q1 – and at the sharpest pace on record – losing 3.8% of its value, with worse to come in Q2. Some countries fared worse than others, with the three sick men of Europe, France, Spain and Italy, all down by 5.8%, 5.1% and 4.7% respectively. Even powerhouse Germany, which has yet to release Q1 figures, saw unemployment rising by 373k in April but still at a relatively low level. The fact is that the bloc’s economy is in freefall despite the massive amounts of money being thrown at it by the ECB and other agencies. Just months after implementing a US$ 830 billion rescue package, the central bank announced a further US$ 670 billion increase in its bond buying programme to US$ 1.3 trillion, as well as extending the programme a further six months to June 2021. Spending at these levels could easily see the value of money decreasing, push government bond yields deeper into negativity and increase the worries of long-term inflation. Even the sanguine President Christine Lagarde is warning that eurozone economic growth could fall between 5% and 12% this year and that could easily lead to a weakening euro by the end of 2020 which may also suffer when the UK finally leaves the shackles of the EU.

Some members of the bloc are not happy with the terms of the recently introduced US$ 560 billion bailout package initiated by Germany and France. Prime Minister Giuseppe Conte reckoned that the funds are not enough to keep Italy’s – and the bloc’s – economy afloat and that the EU had reacted too slowly to save members’ ailing economies, and also had not provided enough assistance. He also noted that “some EU countries are continuing to exert pressure for a ‘business-as-usual’ European budget and a modest recovery fund.” The other side of the argument sees the Frugal Four – Austria, Denmark, the Netherlands and Sweden – arguing that they would prefer offering loans, rather than grants, and were opposed to a common borrowing fund.

In a late move to incentivise the German economy, Chancellor Angela Merkel has agreed to a US$ 146billion stimulus package, designed to boost short-term consumer spending, (including a US$ 360 payment to every child), and to ensure businesses restart investing. Some of the measures included a temporary reduction in VAT as well as increased investments in G5 data networks, railways and electric vehicles. One noticeable absentee is the auto industry that failed to get direct government support for purchases of conventional cars. To date, Germany once again has led the EU by introducing funds of more than US$ 1.4 trillion to fight the pandemic – the most by any country in the bloc.

It is reported that The Bank of England governor is warning the country of the possibility of a no-deal Brexit if talks with the EU mandarins break down. Andrew Bailey has called on financial firms to be ready for ensuring that the UK’s financial system could deal with such a consequence. Not helped by Covid-19, and despite on-going negotiations, with the UK and the EU in their fourth set of talks, there is still no sign of an early agreement. However, sticking points remain, such as common standards on the environment and labour markets along with access to fishing grounds. The BoE has, in the past, confirmed that in the case of a no-deal Brexit, most risks to cross-border financial trade have been mitigated and that the UK banking system would be strong enough to deal with it.

Nationwide reported that May UK house prices dipped 1.7%, month on month, the largest monthly fall since 2009, and saw annual house price growth halved to 1.8%. This follows April figures that showed property transactions had dropped 53%, compared to the same month in 2019. There was also a warning that “the medium-term outlook for the housing market remains highly uncertain.” Although some point out that, once the shock of the pandemic has passed, there will be a rebound, whilst others expect that the decline will continue for the rest of the year. The logic points to an actual decline in prices, on the back of lower household incomes, allied with a worsening in consumer confidence. BoE statistics show that there were 15.8k mortgage approvals in April – the lowest monthly figure since records began in 1993 – and a massive 80% lower than two months earlier in February.

As expected, Chancellor Rishi Sunak confirmed that the state furlough scheme, (by which the government contributes 80% of an employee’s monthly pay up to US$ 3k), will come to an end in October. In the meantime, as from August employers will have to pay their employees’ NI and pension contributions, then 10% of the pay in September, followed by 20% the last month of the scheme. Some 8.4 million have availed of the government initiative, which is expected to have cost US$ 96 billion when it comes to an end. It will prove a difficult manoeuvre for the Chancellor, who has to avoid crashing the economy, whilst withdrawing the very generous – but very expensive and very necessary – furlough scheme. Nobody yet knows how many of the 8.7 million jobs will disappear come October. An extra 300k more workers were furloughed over the past week, bringing the total to 8.7 million and an extra 200k claiming self-employed applying for government grants brings the total to 2.5 million; this has seen UK businesses borrow US$ 37 billion so far during the crisis.

Opened 42 years ago by Chaudary Abdul Hameed, it seems that Covid-19 may claim one of Dubai’s major culinary, cultural and tourist destinations. It is reported that Ravi Restaurant is struggling because of the lockdown, with revenue on some days as low as US$ 272 (1k dirhams). Ravi’s is internationally famous for its authentic Pakistani food, that is served at unbelievably low prices by friendly, efficient staff, (numbering 70), in a no-nonsense environment. The founder can still be seen at the Satwa restaurant most days although his son, Waheed, is now the MD of the business. He has admitted that “we have been very badly affected by this” and that “it has come to a point where we are selling off personal assets to repay debts”. Like many other businesses, a rent reduction/relief would help both his operations in both Satwa and Karama. It is hoped that we have not seen the last of Ravi’s chicken hani, mutton kebabs and Chiquitita.