A Change Will Do You Good!                                                            27 August 2020

A new CBRE report is relatively bullish on the Dubai property sector, indicating a rise in demand for villas and town houses, as many end-users are looking for more space, as well as enhanced amenities. Much of the demand is a result of Covid-19 when many had to work from – and stay at – home and have now recognised the benefits of more space and their own garden. The trend has also been helped by a greater supply of affordable priced housing, historically low mortgage rates and attractive packages. The report also pointed to a potential expansion in green housing developments, with end-users “increasingly motivated to reduce utility costs as they spend more time at home”.

Meanwhile, the emirate’s office market will continue to struggle, despite landlords offering incentives, such as rental deferrals, rent-free periods, lower headline rents, partial rent waivers and increased number of cheques. Rents vary according to location, whilst prices have remained stable in Q2, having fallen by around 4% in Q1, with occupancy at 84%. For example, according to Allsopp & Allsopp, the range of rents in JLT currently stands between US$11 – US$ 60; in Business Bay, the range is between US$ 16 – US$ 27 and in DIFC, US$ 41 – US$ 95. The only exception is Downtown where prices have dropped by up to 30% to an average US$ 35. The short-term future will continue to favour occupiers, with supply continuing to outstrip demand, not helped by the fact that working at home still continues to be favoured by many employees and the growing use of co-working space.

After a slow start to the decade, it seems that the number of new Dubai hotels will show a marked increase in the near future, ahead of the pandemic-delayed Dubai Expo. Analysts estimate that growth will return quicker to city hotels – as opposed to beachfront properties – as business visitors will ensure that the Mice (meetings, incentives, conferences and exhibitions) lead the growth in returning international travellers. A recent Messe Frankfurt study rated the emirate as the safest global location to host international events, with 77% of respondents viewing Dubai as the safest destination to attend exhibitions post-Covid. Colliers expects that, although 8k keys have been delayed this year, 26k rooms will be added to the country’s portfolio before the end of 2022, of which 8k will be added to Dubai’s hotel room tally before the end of next year. However, the days of 80% occupancy, witnessed in recent years, will take at least two years to recover and in the meantime, hotels will have to maintain occupancy rates hovering around 40% just to break even.

The first of forty-seven passenger pods have been installed at the world’s tallest observation wheel, ‘Ain Dubai’. The 250 mt Ferris wheel, located on Bluewaters island, dwarfs its international competition such as the 167 mt High Roller in Las Vegas and the soon to be built 190 mt New York Wheel, planned for Staten Island. Loosely translated as Dubai Eye, the attraction has been in development for several years and before the onset of Covid-10 – and the postponement of Expo 2020 – it was scheduled to open in Q4.

For the sixth month in a row, September UAE fuel prices have again been left unaltered since April. Special 95 petrol will still retail at US$ 0.490 per litre and diesel at US$ 0.561.  (Brent prices on 31 March and 27 August were US$ 26.35 and US$ 45.09 respectively, whilst at the beginning of the year, Special 95 was at US$0.578 with Brent trading at US$ 66.67).

An agreement between Emarat, whose chairman is the country’s energy minister Suhail Al Mazrouei, and Emirates District Cooling sees the state-owned petroleum distributor supplying liquefied petroleum gas to the firm’s entire residential, commercial and industrial portfolio. Dubai customers will be able to utilise an integrated, automated online portal and use contactless payments for delivery of their gas cylinders. It is estimated that Emarat, formed in 1999, has a 50% share of the emirate’s LPG distribution market.

In a move that will surely have a wider impact on the local economy, Nasdaq Dubai has signed an agreement with Hong Kong-based investment bank Zhongtai Financial International and a Beijing-based law firm Tian Tai. The three parties will encourage and support Chinese companies that wish to list on the Dubai bourse, as well as to assist them when it comes to other securities, such as bonds and real estate investment trusts. With the US tightening regulations for Chinese listed companies, and the spin-offs from the Belt and Road initiatives, this could see more Chinese money being invested not only in Dubai’s stock markets and property sector but also on a regional basis. Nasdaq already holds US$ 82.0 billion of US-dollar denominated debt listings, including nineteen debt issuances valued at US$ 11.3 billion from Chinese companies since 2014.

 The latest initiative from the Dubai Multi Commodities Centre, in association with India’s CropData Technology, sees an agricultural trading platform, connecting Indian farmers with UAE food companies. The agri-commodity trading and sourcing platform, known as Agriota, cuts out the middlemen and aims to boost food imports from the sub-continent. It will aid Indian farmers to deal directly with UAE companies and also boost UAE’s food security. The country imports 90% of its food and is targeting to increase local food production by 40%.

Last year, Jebel Ali Free Zone posted a 24% growth in food and agriculture trade and a 7% increase in its customer base which includes famous brands such as Alokozay, Bayara, Heinz, Hunter Foods, Nestle and Unilever. Jafza has a 1.57 million sq ft dedicated food and agriculture cluster, with 550 companies employing over 6k; it has also introduced a Halal Incubation Centre to encourage traders to launch their halal business in the emirate and the region. H1 saw Dubai’s external food trade volumes top nine million tonnes, representing US$ 8.7 billion in total, whereas Dubai’s food imports touched US$ 6.0 billion.

There was no surprise to see that the Manghat brothers, Prasanth and Promoth, have categorically denied any involvement in siphoning off millions of dirhams, from NMC Health and Finablr, as a report, commissioned by founder BR Shetty, seems to have concluded. The Manghats were both senior managers in the two entities; it is claimed that Prasanth, who was chief executive of NMC, “made payment transactions on the personal account of Mr Shetty at the Bank of Baroda, without having any authority or delegation on the account and sent transfer orders attributed to Mr Shetty”. A further claim made is that the then chief executive of Finablr, Promoth Manghat, and another employee, opened an account with a UAE bank using “a forged account opening form” in Mr Shetty’s name that gave them the authority to run the account. The biggest creditor, ADCB, has begun legal proceedings against Mr Shetty, who is apparently ensconced in India, whilst the Credit Europe Bank has filed a claim that has seen the DIFC issuing a global freezing order on Mr Shetty’s assets. It is estimated that the restructuring of NMC – covering the consultancy and legal costs of more than ten advisory firms – could reach US$ 140 million.

According to the latest Alvarez & Marsal report, the top ten UAE banks posted a 21.2% hike in Q2 net profits, driven by enhanced cost efficiency and a reduction in impairments. The professional services firm sees the banks focussing more on improving their efficacy in H1 and reducing their costs – hopefully not at the expense of their service levels. Because of a myriad of factors, including sound liquidity, strong capitalisation, low levels of non-performing loans and a bigger ratio of non-interest-bearing deposits, the banks are among the most profitable in the world.

Depa, has secured a US$ 55 million order, via its German unit Vedder, to fit out a superyacht. The Dubai-based company, listed on Nasdaq Dubai, has shown recent signs of improvement but still carries retained losses of US$ 148 million; its H1 loss of US$ 46 million was 18.8% lower than its deficit over the same period in 2019. Its assets as at 30 June were 7.9% lower at US$ 349 million.

The bourse opened on Monday 24 August and, 185 points (9.0%) higher the previous three weeks moved up a further 33 points (1.5%) on the week, closing on 2,269 by 27 August. Emaar Properties, US$ 0.09 higher the previous three weeks, closed up a further US$ 0.01 to US$ 0.80, whilst Arabtec, dumping US$ 0.10 the previous fortnight, lost a further US$ 0.03 to US$ 0.17. Thursday 27 August saw the market trading at 339 million shares, worth US$ 102 million, (compared to 336 million shares, at a value of US$ 85 million, on 20 August). 

By Thursday, 27 August, Brent, US$ 6.73 (17.6%) higher the previous six weeks nudged US$ 0.08 higher to US$ 45.09. Gold, having lost US$ 109 (5.3%) the previous week, shed a further US$ 27 (1.4%) to close on US$ 1,933, by Thursday 27 August.

Along with voluntary staff departures, American Airlines has announced a further 19k redundancies for October, when a government wage support scheme, worth US$ 5.8 billion to the airline, comes to an end. (Conditions of the government bailout barred airlines from making significant job cuts before 30 September). This would lead to the world’s largest airline with a 100k workforce, 30% lower than it was pre Covid-19.  It expects that in Q4 it will be flying at 50% capacity, whilst international flights will be 25% of last year’s returns. Global carriers are all in the same boat with the likes of United, Lufthansa and BA warning of cuts of up to 36k, 22k and 12k respectively. IATA has recently estimated that the pandemic will result in global airline losses of US$ 84 billion in 2020.

Following an 80% reduction in passenger numbers, Gatwick Airport will cut 25% (600) of its workforce; currently, 75% of staff are on the government’s furlough scheme. Running at about 20% of its normal August capacity – and with only the North Terminal open – the airport was already struggling before Covid-19 and had already announced the loss of 200 jobs in March and had taken out a US$ 390 million bank loan.

STA Travel has become the latest UK travel firm to fall victim to the Covid-19 pandemic and has stopped trading, with the loss of 500 jobs and closure of fifty outlets. Its Swiss-based parent company noted that the pandemic had “brought the travel industry to a standstill”. The Association of British Travel Agents (ABTA) indicated that the majority of flights and holidays sold by STA would be protected by the Atol scheme. Founded in 1971 as Student Travel Australia, and later Student Travel Association, STA Travel specialised in long-haul, adventure and gap year travel – a sector that has been battered by complete lockdowns in Australia and New Zealand. 

In the UK, with job losses already nearing 40k, the travel industry has called for further government support to stem job losses, which will worsen significantly when the furlough scheme is lifted in October. The travel industry trade body ABTA estimates that about 65% of travel firms have had to make redundancies and noted that many of them had not yet restarted after the lockdown, with cruise firms and school travel operators still closed for business. At the macro level, UN Secretary-General Antonio Guterres has warned that as many as 100 million direct tourism jobs are at risk, and that global GDP could fall by 2.8%, as export revenues from tourism fall.

Rolls-Royce has announced a record H1 pre-tax loss of US$ 7.3 billion, caused by a marked slump in demand for air travel. Although it has an operating loss of US$ 2.2 billion it lost a further US$ 3.3 billion on its currency hedging programme and US$ 1.8 billion on other restructuring costs. Furthermore, the engineering giant confirmed the closure of both its Lancashire and Nottinghamshire factories, with the possible loss of 2k jobs, as it consolidates UK production at its Derby factory. Its latest restructuring program, that started before the onset of the pandemic, sees RR reducing the number of its global sites from eleven to six. This year, the company expected to deliver 500 engines but now that number has been halved, so it has had no alternative but sell assets to maintain its liquidity. Consequently, it plans to raise about US$ 2.6 billion by divesting its Spanish unit ITP Aero and other assets. However, this amount is not enough to satisfy its cash needs so it is highly likely that a share issue is on the cards and maybe some government support. More worryingly, was the forecast that it did not expect demand to return to pre-Covid levels until 2025! Rolls Royce has still got to come to terms with the impact of Covid-19 has had on its business as well as solving technical problems, with design glitches on the Trent 1000 engine and cracks in compressor blades in a “small number” of its XWB-84 engines.

Mike Ashley’s Frasers Group has paid US$ 49 million to his long-term nemesis Dave Whelan to acquire 46 leisure clubs and 31 retail outlets from DW Sports Fitness. The deal will see 54% of the 1.7k payroll numbers saved, as DW had owned 75 retail stores and 73 gyms before going bust earlier in the month. Fraser’s also owns Lillywhites, Evans Cycles and House of Fraser and will add its new acquisition to complement its own gym and fitness club portfolio, under its Everlast brand. DW also owns the Fitness First gym chain which is unaffected by this administration.

Aimed at saving part of its struggling business, Pret A Manger is to slash 3k jobs, equivalent to over a third of its workforce; most of the jobs will go across its outlets, with ninety being retrenched from its support centre. Earlier in the year, the sandwich chain announced that it would close thirty of its 367 stores. With many of its customer base working from home during the lockdown, demand plummeted and even now, trade is 60% lower than it was in 2019, with its boss Pano Christou saying “the pandemic has taken away almost a decade of growth at Pret”. Its weekly August sales, at almost US$ 7 million, have been less than they were in 2010, when the chain was considerably smaller. (About 80% of hospitality firms stopped trading in April and 1.4 million workers were furloughed).

A little good employment news for a change from the UK, with Tesco creating an additional 16k new jobs after lockdown led to “exceptional growth” in its online business; these will include 10k to pick customer orders from shelves and 3k delivery drivers. The supermarket chain estimates that online numbers have jumped 67% to 1.5 million from the start of the pandemic at which time only 9% of sales were online – now it stands at 16% – and growing rapidly with such sales expected to contribute US$ 7.2 billion to Tesco’s top line by the end of 2020.

Scotland’s leading producer of farmed salmon has not only had to deal with the ramifications of Covid-19 but also fish disease, higher costs and the escape of 50k fish when the farm’s pens broke free from their moorings in the recent Storm Ellen. Now its Norwegian parent company, Mowi, has warned of a 10% reduction in its 14.5k global headcount, of which 800 work in Scotland. Management is particularly concerned with its Scottish operations, (which accounted for 40% of the country’s output of 166k tonnes), about disease and sea lice and has reported that it expects production to be 12% lower than originally forecast, due to “biological challenges”. Q2 earnings per kilo of harvested Scottish salmon have declined by over 65%, compared to the same period in 2019, whilst the spot price of benchmark Norwegian salmon has more than halved to under US$ 11 per kg since the start of the year.

US Secretary of State Mike Pompeo has taken a swipe at HSBC for apparently not allowing executives at Next Media, a pro-democracy media group, to access their bank accounts and accusing it of abetting China’s “political repression” in Hong Kong. Part owner of the media firm, Jimmy Lai, was arrested the other week under the territory’s controversial new security law. The last time the US administrator criticised China was in July when he was not happy when the bank gave its backing to the security law and accused China of “browberating” the bank and using “coercive bully tactics”. This time, he said the bank was “maintaining accounts for individuals who have been sanctioned for denying freedom for Hong Kongers, while shutting accounts for those seeking freedom”.

Ant, 33% owned by Alibaba, is planning to have a dual share listing on both the Hong Kong and Shanghai bourses that could raise a record US$ 30 billion, (higher than the US$ 29 billion raised at Aramco’s IPO last year) which would value the company at around US$ 300 billion; this would see its value higher than many of the US banks. Largely unheard of in the rest of the world, it owns Alipay, China’s dominant mobile payments business.  To put this in perspective it is estimated that Ant, along with TenCent, processes US$ 28.8 trillion of payments and transfers annually – this represents more than that of MasterCard and Visa combined.

With banning threats by the US President due to come into effect mid-September, TikTok’s chief executive, Kevin Mayer, has quit his job having only joined the Chinese tech firm in June from his Disney role as head of streaming services. Having been accused of being a national security threat, TikTok was given ninety days to be sold to an American firm or face a national ban. His surprise appointment seemed to indicate that the Chinese company wanted an American front who would probably be able to discuss matters with the Trump administration, better than a Chinese chief executive, and further help TikTok’s entry into the US market. That strategy soon fell off the rails when it was realised that the intense pressure from the administration meant that Donald Trump wanted the Chinese out one way or the other.  The two front runners to acquire TikTok, maybe with a value of US$ 30 billion, are Oracle and a Microsoft/Walmart venture.

The omnipotent tech giants continue to take governments for a ride, with Facebook the latest, making a mockery of French tax legislation, having agreed to pay the French government a paltry US$ 120 million in back taxes, going back to 2009. Just to add salt to the Gallic wounds, Facebook agreed to pay 2020 taxes of US$ 10 million – 50% higher than a year earlier – adding  that “we pay the taxes we owe in every market we operate.” The other three tech conglomerates – Amazon, Apple and Google – have previously reached similar agreements with the French tax authorities. Ironically, Mark Zuckerberg saidhe recognised the public’s frustration over the amount of tax paid by tech giants. Last year, France announced a new digital services tax  – being 3% of their French revenues – on multinational technology firms, but in January, the country said it would delay the tax until the end of 2020. This move upset the Trump administration which retaliated with US$ 2.4 billion worth of tariffs on French goods, including champagne and cheese, that were later withdrawn when the French tax was delayed.

Facebook royally pushed the UK’s face in the dirt by managing to pay only US$ 38 million in 2018 on record sales of US$ 2.2 billion. The Johnson administration has taken some belated action by levying a 2% Digital Services Tax in April. This involves any digital services operating in the UK having to pay the tax in connection to social media services, internet search engines and online marketplaces. This will remain in place until the OECD come up with a global agreement on how these behemoths are taxed on the global stage.

Victoria is bearing the brunt of the pandemic as the number of payroll jobs fell 2.8%, whilst July Australian payroll jobs only dipped 1%. The state entered stage 3 coronavirus restrictions earlier in the month whilst the state capital moved one notch higher to stage 4. Many are of the opinion that the situation will deteriorate as research indicated that by mid-April job losses had hit their peak but bounced back by the end of June, as 39% of jobs lost then had bounced back in line with restrictions starting in March and largely out of them in May. The trouble started again in July before a hard lockdown was introduced in early August, by which time the 39% mark in June had fallen to 12% in August. The extent of scarring to the economy can be gleaned from the 8% fall in Victoria’s payroll (and 5% for the whole country) and that payroll jobs worked by people aged under 20 increased 1.5% nationally but decreased 5.6% in Victoria, driven by restrictions on sectors like retail and hospitality that employ a lot of young people.

NAB’s latest forecast has forecast a 5.7% decline in the national economy this year and although a 3% rise is expected in 2021, it will be less than 1% in year-average terms; it will be early 2023 before the economy returns to its pre-Covid-19 levels. Unemployment will remain a problem for some time, expected to peak at 9.6% early next year and will still be around 7.6% by the end of 2022. The triple whammy of rising supply, slowing population growth and reduced consumer spending could result in house prices falling as much as 15%. Not surprisingly, commercial property especially retail and office space in the Sydney and Melbourne CBDs, will be hit hardest.

It is estimated that over the past three months, about 25% of Australian entities have reduced or cancelled their investment plans, mainly because of concerns relating to potential business uncertainty and future demand. Capex fell by 5.9% in the June quarter, after a 2.1% decline in the previous quarter, with annual contractions of 20% and 18% recorded in New South Wales and Victoria, respectively. The Bureau of Statistics Business Impacts of COVID-19 survey also found that small businesses (35%) were almost twice as likely as large businesses (18%) to be in severe financial strife and that a third of companies are expecting to struggle to meet future financial commitments.

It seems that the Chinese government is to investigate claims by its local wine makers that Australia is dumping its produce on the cheap in China and that the industry is being subsidised by the Australian government. These claims have been refuted by both Australian wine exporters and Chinese importers. Over the past four years, it is notedthat sales of Chinese wine in its home market have dipped from 75% to 50%; over the same period, exports of Australian wine grew more than six-fold from US$ 194 million to US$ 1.27 billion.

Lebanon is still reeling from the horrific 04 August explosion in Beirut, which killed at least 180 people and injured more than 6k. Before this disaster, it had seen its currency lose more than 80%, against the greenback, on the local black market, its issuer rating downgraded by Moody’s to C, its lowest grade, which is on par with Venezuela, and had defaulted on a March US$ 31 billion eurobond repayment. Now analysts, initially expecting a 15% contraction in the country’s GDP this year, has revised this to 24%. It has also released its July inflation rate, topping 112% (up from 89% the previous month), as prices for furnishings/household equipment/routine household maintenance items, clothing/footwear and non-alcoholic beverages skyrocketed by 517%, 409% and 336% respectively on an annualised basis. August figures will be even higher as the impact of the explosion will be felt in the market with prices set to rise even higher. It is hoped that things do not get much worse for Lebanon and that it works on rooting out endemic corruption, as well as introducing much needed political and financial reforms. Only then, will donors have the confidence to invest again in the country, with stability and confidence returning to put the past political and economic upheavals into the pages of history.

In a bid to shore up government funds, Prime Minister Narendra Modi has released plans to initiate an IPO for the sale of up to 15% of defence contractor Hindustan Aeronautics that could bring in US$ 680 million; retail investors will receive a 5% discount on the US$ 13.54 floor price; Wednesday’s closing price was US$ 15.93, a 17.6% premium. India is the world’s largest defence importer and now wants to boost local manufacturing including the Indian-made Tejas, a light combat aircraft, the Su-30MKI under licence from Russia’s Sukhoi, as well a medium lift helicopter and an unmanned aerial vehicle for the navy. Although India is the world’s third-biggest military spender, its defence forces are using largely obsolete equipment and weapons, whilst its air force of thirty-one squadrons of mainly Rafale fighters manufactured by Dassault Aviation is eleven squadrons down on actual requirements.

Following news that its economy contracted by a revised 9.7% in Q2,  and that the number of Covid-19 cases rose to 1.5k on Wednesday to a total of 238k cases, the Merkel administration has extended, by a year, ‘Kurzarbeit’, the scheme that tops up pay for workers, affected by the pandemic, as well as continuing short-term work subsidies (until 31 December 2021) and financial help for SMEs until the end of this year. It is estimated that the additional cost will be over US$ 11 billion. Other countries are still considering the way forward, but the UK has already indicated there will be no extension to its Coronavirus Job Retention Scheme, which allows firms to put workers on furlough without making them redundant, when it is finally closed in October.

UK government debt jumped to US$ 2.62 trillion (GBP 2 trillion) trillion for the first time as the Johnson administration ramped up spending to support the economy battered by the pandemic. The July figure was 11.3% higher – or US$ 298 billion – than a year earlier and the first time in sixty years that public debt has been above 100% of GDP. The past four months have witnessed the four highest borrowing months ever recorded, as YTD borrowing (for the four months from April) has topped US$ 197 billion and is close to the US$ 207 billion deficit recorded for the 12-month financial year to March 2010, the previous largest cash deficit in history. The simple explanation for this spending explosion is that government revenue (via tax) is well down, as people and businesses earn and spend less, at the same time as government spending has necessarily exploded with programmes such as the furlough scheme. The only good pointer for the government is that interest rates are at historic record lows, so that borrowing costs are low so that it is spending less on servicing its debts than had been forecast before the coronavirus crisis.

There is every likelihood that negotiators will not iron out a post-Brexit trade deal between the UK and the EU, with David Frost speaking of little progress being made, whilst his EU counterpart, Michel Barnier, not a friend of the UK,  indicating that he was “disappointed” and “concerned” about the lack of progress. The UK has made it clear that it will not extend talks if an agreement cannot be reached by the December deadline and if that were to happen then bi-lateral trade will be on WTO (World Trade Organisation) terms; this would result in UK goods being subject to tariffs until a free trade deal was introduced.

One of the major stumbling blocks is that the intransigent EU negotiators have been insisting that differences over state aid and fisheries have to be resolved before “substantive work can be done in any other area of the negotiation, including on legal texts”. It seems that the EU side find it difficult to believe that the UK wants to “ensure we regain sovereign control of our own laws, borders, and waters”. The Europeans are frustrated by what they see as the UK wanting the benefits of the single market, without paying the membership fee or signing up to its rules. The ex-French politician, who has been the EU’s chief negotiator with the UK since 2016, has also been adamant for a level-playing field approach – “a non-negotiable pre-condition to grant access to our market of 450 million citizens”; this should include sectors such as workers’ rights, environmental protection, taxation and state aid.

Although global stock markets are rocketing dangerously high, it seems that dividend pay-outs are heading in the other direction with more than US$ 108.1 billion (22.0%) being wiped off in Q2, to a total of US$ 382.2 billion. Every region in the world posted falls, with the exception of North America, with the worst affected being the UK and Europe. For example, the UK and France saw dividend payments slump 54.1% to US$ 15.6 billion and 65.4% to US$ 13.3 billion respectively. Many global conglomerates – including UK’s Royal Dutch Shell, Boeing and Australia’s Westpac – have either suspended, axed or cut dividends to ramp up their balance sheets.

The dividend blows for UK investors and retirement savers have been increasing in recent times and will continue to worsen for the foreseeable future. BP – for so long the darling of the pension funds by traditionally generating the largest dividend payment of all FTSE 100 companies – has halved this year’s payment, whilst Shell cut theirs for the first time since WW2; on top of that, UK banks have suspended their pay-outs for this year.  Historically, these two sectors, oil and banking, make up 38% of the market yield and if they are taken out of the equation, then the historic average yield of 6% dips to below 4%. Some analysts predict a 40% decline in the total amount of pay-outs by UK firms this year. Those investors that have relied on dividends for most of their income (and want to continue with that sort of investment) would be better advised to start looking and investing in companies with strong balance sheets and low valuations. For some investors, especially pensioners who have relied on ‘traditional’ dividends for their annual income, A Change Will Do You Good!