Do You Know Where You’re Going To?                        25 June 2020

It has to be Dubai when it is announced that the emirate will have the first-ever climate-controlled ‘Raining Street’ which will see year-round rain along a 1 km boulevard. Developed by the Kleindienst Group and located in their US$ 5 billion The Heart of Europe project, it will reduce the summer temperatures to 27 degrees in a place that can sometimes top 50 degrees. The Raining Street, inspired by a 150-year-old architectural concept of Austrian architect, Camillo Sitte, will be a major tourist attraction in The Heart of Europe, located on a cluster of seven islands, four kilometres off Dubai’s coast.

Business is picking up in the local real estate sector, with news that for the first nineteen days of June, there were transactions totalling more than US$ 1.4 billion, well up from the US$ 763 million over the same period in April. Although off plan sales were lower, mainly due to the absence of new project launches, 429 ready properties were sold up to 19 June, compared to 675 for the whole of June 2019. After almost three months of lockdown, Dubai is ready to open up its economy once again, as the government takes major steps to ease restrictions. Over the past weeks, shops and malls have started to open up and this week, commercial establishments and offices are operating at full capacity. On 07 July, Dubai will be ready to welcome international tourists. Big steps like these only serve to boost consumer confidence and puts Dubai on the road to recovery.

Valustrat, which tracks realty values across the emirate, sees the market starting to move in the right direction, as there has been an improvement in the uptake of Dubai properties. The first three weeks of June has already seen a 9.0% improvement, compared to the whole of May. Sales, which subsequently saw a 50% fall, had tanked following the government’s March decision to close non-essential establishments, suspend all international passenger flights and restrict the movement of residents.

Since the lockdown started to be eased, Azizi has reported a rebound in sales and enquiries and is even hiring 100 employees to push the sale prospects of the developer’s fifty-four apartment buildings, still under construction. This is a courageous move in a market that seems to have a supply/demand inequilibrium, with an oversupply that could well continue to push prices lower, more so as the current pandemic has seen many companies laying off workers or cutting pay packages. Whether the 10% population shrinkage, expected by some analysts, actually happens remains to be seen. However, the doomsayers, who tend to knock Dubai at every opportunity, have to remember that the whole world has been impacted by Covid-19 and the emirate is not the only housing market to have suffered. Reports from both UK and Australia point to the fact that house prices there will come under downward pressure and that, partly because of an anticipated rise in unemployment and a fall in consumer confidence, their housing markets will not return to early 2020 levels for some time.

One hotel group is confident that the sector will bounce back quicker than most expect. Rotana hopes to return to 2019 levels of occupancy and profits by the end of 2021, as international travel restarts. Rotana’s CE, Guy Hutchinson, is “cautiously optimistic” about the return of visitors to the country, once they are allowed in as from 07 July, after an enforced absence of almost four months. He reckons that pent up demand for travel will result in a quick return of both business and leisure visitors.

The government continues its fine balancing act of weighing up the pros and cons of  easing lockdown restrictions with those of opening up the economy, On Sunday, new travel rules were announced, with residents being allowed to travel overseas and for tourists to visit Dubai after a three month pandemic-driven break following borders closures from 19 March. All returning travellers must fill in a health declaration form before their journey to confirm they are virus-free and then undergo a Covid-19 screening test on arrival.

To help its with Saudi Arabia’s strategy to enhance its connectivity with its neighbours, DP World has tied up with Mawani (Saudi Ports Authority) to launch a new shipping line which will connect three ports – Jebel Ali, Jeddah Islamic and Egypt’s Sokhana. This will be the Mawani’s fourth shipping line venture. Last December, DP World, one of the world’s biggest ports operators won a 30-year old BOT (build-operate and transfer) to develop and manage the Jeddah port, and is slated to invest up to US$ 500 million to improve and modernise the Saudi port.

Arif Naqvi seems to have been a bit of a chancer and now it appears that he is having the last throw of the dice to escape extradition from the UK to the US where he would face fraud and money laundering charges. Now his lawyers are arguing that he should be tried in London arguing that most of Abraaj’s operations were carried out in the UK and that should be the ‘forum’ where the case should be heard. The 59 year old founder of the disgraced Abraaj Group, which at one time claimed that it was managing over US$ 14 billion in assets, was brought down in June 2018 following an audit, commissioned by a group of investors, including Bill and Melissa Gates, into the mismanagement  of a US$ 1 billion health fund.

There was a US$ 500 million Sharjah Islamic Bank Sukuk listed on Nasdaq Dubai this week, with the money raised being used for strategic development. The five-year Sukuk, which brings its total listing on the local bourse to US$ 2 billion, was seven times oversubscribed. The latest trade sees the total value of Sukuk listed in Dubai at $69.3 billion, ensuring the emirate remains one of the world’s largest Sukuk centres.

The bourse opened on Sunday 21 June and, 183 points (9.7%) higher the previous four weeks nudged up 9 points (0.4%), to close on 2,087 by 25 June. Emaar Properties, US$ 0.04 lower the previous week, was up US$ 0.02 to US$ 0.76, whilst Arabtec, up US$ 0.01 the previous week, remained flat at US$ 0.17. Thursday 25 June saw the market trading at 280 million shares, worth US$ 59 million, (compared to 211 million shares, at a value of US$ 81 million, on 18 June).

By Thursday, 25 June, Brent, up US$ 3.82 (10.0%) the previous week, shed some of that gain, down US$ 2.58 (6.2%) to US$ 39.27. Gold, having gained US$ 20 (1.2%), the previous fortnight, was US$ 35 (2.0%) higher on the week to close on Thursday 25 June, at US$ 1,770.

Six global investors – Global Infrastructure Partners, Brookfield Asset Management, Singapore’s GIC, Ontario Teachers’ Pension Plan Board, NH Investment & Securities and Snam – have become a 49% partner with ADNOC. The Agreement sees the formation of a newly formed subsidiary, ADNOC Gas Pipeline Assets, worth US$ 20.7 billion. The new consortium will have twenty-year lease rights to 38 pipelines, with a volume-based tariff subject to a floor and a cap. The Abu Dhabi 51% partner will retain ownership of the pipelines and have full operational controls.

Next month, Segway will stop production of its iconic two-wheeled personal transporter, which has carried millions of standing passengers on a wide platform. Since it was introduced twenty years ago, it has been popular with tourists in major global cities, and with many police and security services, but failed in its main aim to revolutionise the way people moved around. However, it was seen to be challenging to handle and was banned in some locations. Now with this revenue accounting for just 1.5% of the company’s revenue, and its scooter range more profitable, the company has taken Segway off its production schedule.

Following a reported US$ 4.4 billion quarterly loss – including a massive US$ 2.0 impairment charge – Carnival Corporation has confirmed that it has a preliminary agreement to sell six vessels, as it seriously looks at downsizing its fleet. The Miami-based cruise ship operator, which has been mauled by Covid-19, and cannot predict when operations will restart, has seen revenue slump by 85% to just US$ 700 million, as its adjusted net loss per share, expected at US$ 1.95, came in at US$ 3.30. The company has ongoing monthly costs of US$ 250 million and has a total of US$ 7.6 billion in available liquidity. Its rival
Norwegian Cruise Line Holdings will not start operations until October at the earliest.

Germany’s Bayer is planning to spend US$ 16.9 billion to settle 100k US lawsuits alleging the company’s weed killer, Roundup, causes cancer and settling other claims relating to environmental damage in the US. The global pharmaceutical giant, which acquired Monsanto – the maker of Roundup – for US$ 63 billion in 2018, is still facing thousands of other claims which may cost a further US$ 1.8 billion, including US$ 800 million to settle claims, involving the highly carcinogenic substance polychlorinated biphenyls (PCBs), and US$ 582 million relating to damage caused to crops after the weed killer Dicamba drifted onto nearby farms, killing plants not resistant to the herbicide.

After resigning as boss of Wirecard last Friday, when auditors found US$ 2.2 billion missing, 50 year-old Markus Braun has been arrested by German authorities for inflating the company’s finances to fool stakeholders, including investors and customers, that its finances were stronger than they really were. The missing money was supposedly being held by two Asian banks, set aside for ‘risk management’, and now the company has admitted that “there is a prevailing likelihood that the bank trust account balances in the amount of Eur 1.9 billion do not exist”. Since the scandal broke, its market value has tanked by over 80% and the company that was valued at over US$ 24 billion, on its debut on the Dax 30 share index two years ago, is now worth less than US$ 3 billion, and still falling.  It seems that Munich prosecutors have been investigating four board members, including founder Braun, over the past year for “market manipulation” and the London’s Financial Times has been running several articles of internal problems within Wirecard. It appears strange that any action had not been taken a lot earlier – and questions will have to be asked why?

Another German company in trouble is Lufthansa, with reports that it will mothball its fleet of fourteen A380s for at least two years – and maybe for ever – if long haul travel does not return to 2019 levels. Europe’s biggest carrier has already confirmed that it will retire half of its Airbus jumbos. The airline has indicated that the remaining A380s will be relegated from its primary airport Frankfurt  to Munich, noting that “the chance that we will again operate any A380 (from Frankfurt) is close to zero”, but if there’s enough demand on “thick” routes, such as New York and Chicago, they might fly from Munich. Covid-19 could be the main reason behind a premature end to the reign of the A380, as both Air France is phasing out the jet and Emirates, its largest operator, is reportedly considering plans that could see 65 jumbos retired.

There were suggestions that the US$ 10.1 billion Lufthansa government bailout could hit the buffers, as only 38% of shareholders had registered to vote at today’s EGM which meant that 66.6% had to agree to approve the motion. If registration had topped 50%, then a simple majority would have won the day. If this did not happen, then the German flag carrier would have inevitably tipped into insolvency. There were concerns that  the company’s principal shareholder, Heinz-Hermann Thiele, with a 15% stake,  who had voiced his concerns that the government taking a 20% stake for the cash injection would dilute existing shareholdings,  could  scuttle the May deal in order to reopen talks for a better arrangement.  However, at today’s meeting, he voted to approve the term of the government bailout deal and so it was passed without any problems.

Meanwhile, the troubled carrier will close SunExpress, its charter venture with Turkish Airlines, with a loss of 1.2k jobs, as it cuts its costs and network, as a consequence of falling passenger demand. The airline was used by German tourists, going mainly to Egypt and Bulgaria, and it will redeploy its fleet, with Lufthansa taking over all seven of its Airbus 330s, whilst Turkish will use the eleven Boeing 737s. Europe’s biggest airline could lose up to 22k jobs as it has already closed its Germanwings discount division and plans to cut its own fleet to 100 aircraft.

The Royal Mail, which posted a 2.0% fall in profit, for the year to 31 March, to US$ 226 million, is planning to cut 2k management positions, (about 20% of the management workforce), as it tries to get to grips with Covid-19 reality. Job losses will hit senior roles, with half the number set to face retrenchment and, on the back-office jobs in finance, IT and commercial, whilst front line workers will escape most of the flak; the job cuts will save Royal Mail over US$ 170 million this financial year. The pandemic has seen the recent downward trends of post continue at a quicker rate. Senior managers have been trying to pull the organisation into a better operating unit, with a leaner top management structure, but according to its chairman, the ‘company had “not adapted quickly enough to the changes in our marketplace of more parcels and fewer letters”.

Intu Properties has warned that it could go under within days if it cannot obtain further funding. The struggling shopping centre group, which boasts the likes of Manchester’s Trafford Centre and Essex’s Lakeside in its extensive portfolio, posted a US$ 2.5 billion loss last year, on top of a US$ 1.5 billion deficit in 2018. If talks with lenders break down, it could be as early as tomorrow, 26 June 2020, that its malls may start to close. However, Intu is still hoping to arrange a ‘standstill agreement’ with its creditors.

The latest in a very long line of UK High Street retailers having to call in administrators is JD Sports-owned Go Outdoors. After their appointment, the parent company, which initially paid US$ 140 million, in 2016, for the company that specialises in camping equipment, bikes and clothes, has now bought back the firm for US$ 70 million, in what is known as a pre-pack administration. With 2.4k staff working in 67 stores, Covid-19 has just crystallised ongoing cost problems in the sector, largely attributable to high, and normally inflexible, long-term rents. JD Sports has taken on all the liabilities and continue to pay wages and suppliers of the company. Recent times have seen Cath Kidson, Laura Ashley and the UK arm of Victoria’s Secret call in administrators and only last week, Pounsdstretcher launched a company voluntary arrangement (CVA).

A week after Wagamama, Pizza Hut and other food chains warned Boris Johnson that the sector faces mass job cuts, without more help, it is reported that Pret a Manger is struggling. It seems inevitable that there will be job cuts as global weekly sales, with outlets in the UK, US and France, have slumped by 85% to around US$ 3.8 million; its US operations managed sales of just US$ 125k in a week’s trading. Although the sandwich chain has reopened more than three hundred UK stores, they are only offering takeaway or delivery services. Pret is also continuing discussions with all their UK landlords with the aim of cutting rental costs.

One industry that was in turmoil even prior to the onset of Covid-19 – and now devastated with slumping demand – is steel. Consequently, Indian-owned Tata Steel, UK’s largest steelmaker, is seeking a government bailout package, estimated at US$ 625 million; if successful, it will save 8k UK jobs in Port Talbot, other sites in Wales, Hartlepool and Corby. The company has struggled to make a profit in recent years, posting a 2019 loss of US$ 460 million, as it has also been battered by rising production costs and international competition. It is reported that the government loan could be converted into equity at a later date, if the company could not repay the debt.

Nine months ahead of his initial target of making his company debt free, Mukesh Ambani has already raised the required US$ 23.0 billion to realise his goal, after a rights issues and divesting some of his assets, including a stake in its energy business to BP. India’s richest man has enticed investors such as Facebook and  Saudi Arabia’s Public Investment Fund, to put money into his digital business, Jio Platforms, as he tries to transform his energy-led empire; with these latest investments, totalling US$ 30 billion in 2020,  Jio is valued at US$ 164 billion. On Friday, 19 June, shares of Reliance jumped 3.3% to a record high, giving the Group a market cap of US$ 146 billion. It is reported that Ambani’s latest target could be acquiring stakes in some units of Indian retailer, Future Group, which already has a partnership with Amazon.

The IMF has lived up to its reputation of probably being the worst global predicter, as it amends its April forecast for the world economy. It estimated then that the global and UK 2020 contractions would be 3.0% and 6.5%, now amended to 5% and 10% respectively. The IMF always gives a specific forecast for sixteen individual countries, each one, with the exception of China (which is expected to grow by 1%) they expect to contract; the largest change in the two months came from India which in April was expected to have marginal growth, now superseded with a 4.5% contraction. The more dismal news emanates from a sharper downturn than the earlier forecast envisaged.

On Thursday, Qantas announced that, with smaller revenues (because of lower demand) expected over the next three years, it had been forced to lay off 6k staff, (about 20% of its total payroll), as it had to cut costs to reflect the decreasing size of the company. Meanwhile, the airline (and its subsidiary, JetStar) will leave 15k workers on the government furlough scheme. With Australia’s virus curve flattening faster than most other countries, Qantas expects domestic demand to return to some sort of normalcy by 2022. However, with borders remaining closed until next year – and the collapse in global air travel – “international travel revenue” has sunk almost without trace. Currently, with the exception of New Zealand, all overseas flights have been cancelled until October at the very earliest and probably well into 2021. Apart from the payroll number reductions, other cost cutting measures introduced include raising a further US$ 1.3 billion in equity, as well as grounding up to 100 planes, including its A380 fleet, and deferring the purchase of new planes.

Bain Capital has reached an agreement with Virgin Australia’s administrators to take over the airline after its private equity rival Cyrus Capital Partners withdrew its offer. However, bondholders, who stand to lose a large part of their US$ 1.4 billion investment in Virgin as a result of its collapse, are still considering whether to put an offer directly to Virgin Australia’s creditors at their meeting to vote on the Bain deal.

Covid-19 could play a big role in the possible demise of two of Australia’s retail giants – David Jones and Myer. This comes after the country’s largest trade credit insurer, QBE, announced it would no longer cover the two department stores because they estimate that the default risk is too high. Both department stores reject the risk of default, but analysts say voluntary administration remains a real option for them as they struggle to survive Cobvid-19. A glance at their finances shows how bad things have become. Six years ago, Woolworths South Africa acquired David Jones for US$ 2.2 billion and now its value has more than halved. Myer, whose latest revenue is roughly the same as it was ten years ago, has seen its share value 94% lower, at US$0.17, than its price when first listed in 2009. Both retailers have been struggling for several years and were probably on life support even before the onset of Covid-19. The three final nails in their coffins could well be the growing influence of e-commerce, the rise of speciality stores and the high property leases.

The Fair Work Commission has raised the national minimum wage by US$ 9.10 a week, (a 1.75% increase), which will see two million Australians benefit starting 01 July; this equates to a minimum weekly wage of US$ 525, as the nation deals with its first recession since 1991. The commission was also concerned that the Covid-19 had had an “unprecedented” shock on the job market but considered an increase a necessity because, if not, some families could be forced into “poverty”.

Reality is beginning to hit home in Australia, as it has started to dawn on some that the government debt could top US$ 700 billion, five times more than the balance immediately following the 2009, and this will have to be repaid. At the onset of the pandemic, the federal government was already hocked to almost US$ 400 billion, at a time when the housing market was experiencing high levels of owner-occupier mortgage stress. There is no doubt that Australia has so far managed to put a lid on the virus but now it has to deal with an economic pandemic exacerbated by the fact that all its trading partners are being impacted in the same way. Global consumer confidence will be at an all-time low because of the massive effect it is having on the worldwide economy and on its major trading partners, so global trade will remain sluggish for some time. This is a depression that Australia does not need.

One country that also depends heavily on tourism for its economic survival is Thailand which now sees a Covid-19 driven slump in future visitor numbers; in 2019, the sector contributed 18% to the country’s GDP, this year, it is expected to be only 6%. Tourist chiefs are now changing their strategy, targeting big spenders, seeking privacy and social distancing, rather than the mass tourism of the past. Initially it is thought that visitors may be required to pass Covid-19 screenings, both before travelling and upon arriving, and will have to remain in a single location for a minimum time period before being allowed to travel to other islands. This year, the target is for just 10 million visitors – compared to 40 million in 2019 – generating US$ 39.6 billion, 59% lower than last year’s return. The Thai government has introduced stimulus packages, equivalent to 15% of the country’s GDP.

It has been estimated the US administration has pumped in US$ 2.6 trillion, equating to about 14% of the country’s output, since Covid-19 reared its ugly head in the country. Bizarrely, the Treasury actually managed to pay a massive US$ 1.4 billion to dead people because it did not check death records  when posting stimulus cheques to the population; to date, 160 million pandemic cheque payments have been made, totalling US$ 280 billion, equal to about 11% of the total already injected to shield the economy. There are also worries that the Paycheck Protection Program for small businesses – a low-cost loan fund that accounts for 26% of US pandemic spending – could be prone to fraud or inflated applications.

A recent UK survey concluded that lower-income households are twice as likely to have increased their debt levels, since the start of Covid-19, as they have been using their savings and borrowing more. The Resolution Foundation also noted that workers in shut down parts of the economy have average savings of US$ 2.4k, whereas those working from home had a buffer of US$ 5.8k. The think tank also discovered that the country’s wealth gaps had grown, with London and the SE accounting for 38% of all wealth – up from 28% over the past decade.

A word of caution for the UK Chancellor as he mulls over whether to cut the UK VAT rate in an attempt to boost flagging consumer confidence. Germany has already knocked 3% off its VAT rate and the temptation for Rishi Sunak is to do likewise, as it is easy to implement almost immediately and can then be reversed with the same ease. At the time of the GFC, the then Chancellor Darling knocked 2.5% off VAT. A study found that it was an expensive exercise, with an upfront US$ 15.6 billion cost over two years, equating to 50% of the Chancellor’s stimulus package. Perhaps the government will take a selective stance and target any cuts to pubs and restaurants and leave current rates for on-line sales. If the High Street returns to trading with mega sales and big discounts, then a 2.5% VAT reduction may have little impact on actual sale volumes.

After borrowing a record US$ 68.5 billion in May (nine times higher than last year), the UK debt, standing at US$ 2.4 trillion, is now worth more than the country’s economy. Whilst the government coffers have continued to suffer from falling receipts – including Income from tax, National Insurance and VAT – public spending has soared. The UK financial year starts in April, and the first two months, April and May, have already seen a record deficit of US$ 128.3 billion, compared to just US$ 20.7 billion for the same period in 2019. Latest estimates show the deficit at the end of the financial year, 31 March 2021, will be US$ 368.6 billion – an amount that somehow has to be repaid.  Chancellor Rishi Sunak has a fine balancing act in front of him – he has to kick start the economy but in a gradual and safe fashion. Even when the lockdown is eased further, there is every chance that more public money will be needed. Whether this means tax cuts, or more direct spending, remains to be seen but it will be deemed as necessary as lack of any action will only damage the scarred economy even further. Tough choices lay ahead for the Chancellor and the question to him and the UK government is Do You Know Where You’re Going To?