We Are Never Ever Getting Back Together!

We Are Never Ever Getting Back Together!                                         23 September 2021

For the past week, ending 23 September, Dubai Land Department recorded a total of 1,835 real estate and properties transactions, with a gross value of US$ 1.85 billion. It confirmed that 1,249 villas/apartments were sold for US$ 708 million, and 157 plots for US$ 327 million over the week. The top three transfers for apartments and villas were all for apartments –  US$ 86 million in Burj Khalifa, US$ 73 million in Marsa Dubai, and US$ 52 million in Palm Jumeirah. The top two land transactions were in Al Hebiah Fifth for US$ 52 million, and in Um Suqaim First for US$ 14 million. The most popular locations were in Al Yufrah 2, with 36 sales transactions, worth US$ 8 million, Al Hebiah Third, with 31 sales at US$ 21 million, and Hadaeq Sheikh Mohammed bin Rashid, with 19 sales transactions valued at US$ 90 million. Mortgaged properties for the week totalled US$ 817 million, including a plot for US$ 187 million in Wadi Al Safa 5. 76 properties were granted between first-degree relatives worth US$ 56 million.

Yesterday, 22 September, was a hectic day for the Dubai Land Department, with 266 sales transactions, worth US$ 232 million, and mortgage deals of US$ 91 million; there were also 21 gift transactions, amounting to US$ 7 million. The daily total of realty transactions was US$ 327 million, covering 227 villas/apartments, and 39 land plots, while the mortgages included 51 villas/apartments and 17 land plots. Chesterton’s latest UAE Q2 2021 Market Report, showed that, on the quarter, total Dubai residential transaction value increased by 49.4% to US$ 8.5 billion.

An indicator that the property market is returning to some form of normalcy, and that investors, including a marked increase in those from overseas, are back in force can be gleaned from the fact that off-plan sales are now almost the same as secondary sales, compared to a 30:70 ratio seen in recent times. Another interesting feature is that the average August transaction, at US$ 339k, was 52.9% higher on the year, with villa/town house up 12.1% to US$ 495k, and the median price for off-plan apartments 47.6% higher at US$ 300k. The overall average August sales transaction value increased 1.57% higher to US$ 705 million, with secondary average transaction value 5.91% higher at US$ 858 million and off-plan average transaction value down 1.3% to US$ 519 million. According to Property Finder, the five leading locations for villas/townhouses last month were Dubai Hills Estate, Arabian Ranches, Palm Jumeirah, Damac Hills 2 and Mohammed bin Rashid City. For apartments, the top five were Dubai Marina, Downtown Dubai, Palm Jumeirah, Business Bay and Jumeirah Village Circle. YTD, it is estimated that about 32k units have been completed of which 26k (81%) were apartments, well short of earlier estimates by so-called experts.

The latest report by Zoom Property Insights expects the Dubai villa segment to be 50% higher in Q4, based on trends from the previous three quarters, with one of the main drivers being investors and end-users looking for best options in areas near to the Expo 2020 site. The Dubai-based real estate portal listed Arabian Ranches, Dubailand, Dubai South, Palm Jumeirah, MBR City, Dubai Hills Estate and Damac Hills 2 as prime areas for increased sales in Q4. Sales in the ultra-luxury sector has seen the likes of Palm Jumeirah and MBR City posting price hikes of 18.5% and 10.5%, over the past six months; growth levels in Arabian  Ranches and Jumeriah Park were higher at 21.2% and 19.3%. Zoom expects the market, especially for villas, to continue its recent strong performance, noting the low inventory may result in price increases. The report concluded that Q4 villa prices could be as high as 10%, and, with the economy opening up next year, a sharper up-trend in 2022.

Dubai Holding Real Estate announced plans to sell about 6k units over the next fifteen months, (1.5k this year and 4.5k in 2022) to capitalise on the continued recovery of the UAE property market; it will also start new phases of master developments. The developer is an amalgam of the consolidation of Dubai Properties and Meraas as well as two other entities – North25 and Ejadah – last year. It has several master developments under construction, including Port de la Mer, City Walk Central Park, Mudon, Villanova and Madinat Jumeirah Living. In the first eight months of 2021, Dubai saw sales transactions totalling 37.5k, (35.4k in the whole of 2020), worth US$ 24.0 billion, up 22.6%, compared to last year’s twelve-month total.

HH Sheikh Mohammed bin Rashid Al Maktoum has created the Dubai Integrated Economic Zones Authority, an independent legal entity, with financial and administrative autonomy, which will take over the supervision of Dubai Airport Free Zone, Dubai Silicon Oasis and Dubai Commerce City. Effective from 10 January 2022, the law will take effect with HH Sheikh Ahmed bin Saeed Al Maktoum as Chairman and Dr Mohammed Ahmed Al Zarouni as CEO. The aim of the exercise is to introduce new frameworks for further improving services provided to businesses and investors, which in turn will help accelerate economic growth, with objectives of making Dubai the destination of choice for global investors and a major focal point for global commerce. Under the new DIEZA, with a company base in excess of 5k employing 30k, those with licences will be exempt from all taxes, including income tax, for fifty years, and will not be subject to the regulations of Dubai Municipality or Dubai Economy, with minor exceptions.

The Dubai Ruler also issued Law No. (18) of 2021, regulating the services related to the mediation of disputes applicable to anyone involved in the business of settling civil and commercial disputes through mediation. The new law seeks to encourage the adoption of alternative dispute resolution methods and enhance the speed and efficiency of mediation procedures. The law also outlines the procedures followed by the ‘Centre for Amicable Settlement of Disputes’, with the centre hearing and adjudicating disputes referred to it by a decision issued by the President of Dubai Courts. The court will delegate one or more judges to supervise mediation procedures and hearings and approve settlement and agreements.

The Dubai Chamber of Commerce and Industry estimates that the retail e-commerce market will reach US$ 8.0 billion, by 2025, from its current balance of US$ 3.9 billion, a year on year 53% rise; in 2020, the sector accounted for 8.0% of the country’s GDP, driven by a change in consumer shopping habits, arising from the impact of Covid and subsequent restrictions. The forecast growth will be aided by numerous other factors, including high incomes, government support, a more enhanced digital payment protocol, higher internet penetration and a young IT-knowledgeable generation.

The Department of Economic Development expects Dubai’s economy to grow by 3.1%, this year, nudging 0.3% higher to 3.4% in 2022. HH Sheikh Hamdan, Dubai’s Crown Prince, noted that “Dubai has successfully overcome the pandemic’s global shockwaves,” and that Dubai’s position as a major economic capital has been supported by clear goals, flexibility and speed in responding to changes.

In line with the recently announced federal government’s NAFIS programme, Majid Al Futtaim is planning to employ up to 3k Emiratis across its group companies in the ME, Africa and Asia. The programme is that private companies will have to employ more Emiratis in their workforce so that within five years, ‘locals’ will make up 10% of every private company’s payroll, employing 2% a year until the figure is reached. The government initiative is expected to see up to 75k Emiratis joining the private sector.

Following an agreement between Empower and Mitsubishi Heavy Industries Thermal Systems, the Dubai district cooling company will double the number of its centrifugal chillers, equivalent to a cooling capacity of 200k RT, over the next two years. The new units will be located in plants being built in Zabeel, Business Bay, Madinat Jumeirah and Dubailand.

There is no doubt that the UAE is positioning itself to become a global leader in blue hydrogen, with Adnoc already producing 300k tonnes of hydrogen a year, as it looks to achieve self-sufficiency in natural gas and tap the growing market for low-carbon fuel. Dr. Sultan Ahmed Al Jaber, the federal Minister of Industry and Advanced Technology as well as the MD and Group CEO of Adnoc, noted that “by leveraging our existing gas infrastructure and commercial-scale CCUS [carbon capture utilisation and storage] capabilities, the UAE can and will become a major player in the emerging blue hydrogen market”. In 2020, eighty trillion cu ft of shallow gas reserves were discovered in an area between Abu Dhabi and Dubai – the biggest discovery in fifteen years. With a global Covid recovery gaining traction, LNG and broader gas markets are tightening and prices moving north at an alarming rate – 36% higher on the month and 96% YTD. Almost 25% of the global energy supply is down to gas and this will continue to grow in the future.

To boost sustainability and achieve its water security goals, the country is developing three new water desalination projects in Dubai, Abu Dhabi and Umm Al Quwain; they will have a combined daily capacity of 420 million imperial gallons of water per day. All three will be commissioned within two years and will increase the country’s daily water desalination capacity to 1.69 million imperial gallons, in line with the UAE Water Security Strategy 2036. Three main aims of the strategy are to reduce total demand for water resources by 21%, increase national water storage capacity by up to two days and increase the reuse of treated water to 95%.

In a bid to speed up its expansion plans, the Gargash Group has acquired Deem Finance for an undisclosed amount. Its MD, Shehab M Gargash, commented that “this is a transformational transaction that will allow us to reimagine financial services in a way that the success of our brands is aligned with the financial success of our customers.” The Abu Dhabi-based digital financial services supplier provides a range of financing solutions, including personal loans, credit cards as well as wholesale deposit products to UAE corporate clients. The acquisition will complement Gargash subsidiary, Daman Investments, which also provides investment management and advisory services, including asset management, securities brokerage and wealth management.

As part of its strategy to support the SME sector in the UAE, the Emirates Development Bank is joining with UAE-based fintech, YAP, and has indicated that it will extend US$ 8.2 billion (AED 30 billion) in financial support to SMEs over the next five years. The EDB Business Banking app, launched earlier in the year, offers SMEs access to 24×7 secure, convenient, on-the-go digital banking services. The account, with no minimum balance criteria, is free to all, without paying additional fees.

Amazon announced that it would be adding 1.5k new jobs in the UAE, where it currently has two fulfilment centres, eight delivery stations, three sorting centres and a network of delivery service partners. The US tech giant did not disclose the value of the investment but did note that its latest expansion plan includes creating a “pipeline of new openings” and “closure of older buildings and upgrades, designed to deliver a better experience for customers”.

In June, Dubai developer, Hussain Sajwani announced plans for his investment company, Maple Invest, to take over Damac Properties, the listed company that he launched in 2002 and was the principal shareholder. At the time, it was stated that the offer would remain at US$ 0.354 (Dhs 1.30) per share, and that Maple Invest “plans to own a minimum of 90% and up to 100% of Damac”. This week, it confirmed that was relaunching a bid to take Damac private and at close of Thursday trading one share was worth US$ 0.338 (Dhs 1.24). The company has a market value in excess of US$ 2.0 billion and that in H1, it had delivered 2.7k units and had booked sales of US$ 708 million; revenue was 35.5% lower at   US$ 200 million.

In a US$ 114 million deal, Union Properties has signed an MoU with an unnamed real estate developer to take over the ownership of a shopping centre under construction in Motor City in Dubai.

The DFM opened on Sunday 19 September, 11 points (0.3%) lower the previous fortnight, shed a further 61 points (2.1%) to close the week on 2,840. Emaar Properties, US$ 0.06 lower the previous fortnight, gained US$ 0.02 to close on US$ 1.11. Emirates NBD and Damac started the previous week on US$ 3.88 and US$ 0.34 and closed on US$ 3.81 and US$ 0.34. On Thursday, 23 September, in a very low trading environment, 55 million shares changed hands, with a value of US$ 30 million, compared to 192 million shares, with a value of US$ 127 million, on 16 September.

By Thursday, 23 September, Brent, US$ 5.18 (7.3%) higher the previous fortnight, gave back US$ 2.43 (3.2%), to close on US$ 73.25. Gold, US$ 42 (2.3%) lower the previous week, lost US$ 12 (0.7%) to close Thursday 23 September on US$ 1,740.  

Partly funded by the German government, BMW has developed a hydrogen prototype car based on its X5 SUV and will build a test fleet of up to one hundred vehicles by next year. Furthermore, Audi has assembled a team of more than one hundred mechanics and engineers to research hydrogen fuel cells on behalf of the whole Volkswagen group and has already built a few prototype cars. There is no doubt that hydrogen is currently far too costly and is so far behind battery-powered vehicles, but it must be remembered that not so long ago, diesel was the future until the 2015 Dieselgate emissions scandal put it on the back burner and into virtual extinction. Battery power may be the current frontrunner to become the car technology of the future, but do not rule out the underdog hydrogen.

The latest report from the OECD forecast that prices in the G20 bloc of developed nations will rise quicker than pre-pandemic levels for at least two years, driven by higher commodity prices and shipping costs, constraints on the supply of goods and stronger consumer demand. It is expected that the UK will have the fastest rate of the advanced economies – at 3% – whilst there will be declines expected in the US, France, and Germany.

Following its latest US$ 1.5 billion funding round, including Abu Dhabi’s Mubadala Investment Company, Goldman Sachs-backed CityFibre, will use the funds to support and accelerate the rollout of full fibre to a third of the UK market by 2025. (Full fibre networks run fibre optic connections directly from an exchange to the home, allowing much faster transmission speeds). CityFibre, now the UK’s third largest national digital infrastructure platform, behind BT and Virgin Media, provides broadband to 650k UK homes and is aiming to hit a million by the end of 2021.

A JV between Next, (51%) and struggling Gap (49%), sees the US fashion giant’s UK website being managed by the UK retailer. Last July, Gap announced that it would close all its UK outlets but now Next will manage some of their concessions in several stores, keeping some sort of physical presence in the country. Next will expand its ‘Total’ platform where it will run

 other fashion brands’ e-commerce operations, including customer service, payment systems and logistics. Victoria’s Secret and Childsplay are two brands already on board.

During the first lockdown, Pret A Manger Pret had to make 33% of its 9k staff redundant and now eighteen months later, with the economy almost at pre-pandemic levels, the coffee and sandwich chain has announced that it will open two hundred outlets, with many located in train stations, bus stations and motorway services, over the next two years and recruit 3k by the end of 2022. Furthermore, it is planning to expand into five overseas markets over the next two years. Last year, it posted a 57.8% fall in revenue to US$ 407 million. To finance this latest growth strategy, Pret has received a US$ 137 million funding from JAB and Pret founder Sinclair Beecham. Earlier in the month, it announced that café workers would receive at least a 5% pay rise, which will raise their hourly rate from the legal minimum of US$ 12.14 to US$ 12.91, and that all team members, including managers, will get a raise.

August was the fourth consecutive month that UK retail sales fell, this time at the slower rate of 0.9%, compared to a much higher 2.8% in July. One of the main reasons proffered for the 1.2% decline in food store sales was that with the lifting of restrictions, people spent more time eating and drinking in bars and restaurants, but other drivers were ongoing labour shortages, (mainly lorry drivers and fruit pickers), and supply chain problems which will be a sector disruptor for some time. Pre-pandemic online sales in February 2020 were at 19.7% and since then, have risen to 27.7% last month, (27.1% in July). Department and clothing stores were the two more badly hit by the disruption, down 18.2% and 11.1% respectively.

Last week’s blog indicated that the ‘Just in Time model’ was struggling to remain a viable management tool for many companies, amid disrupted supply chains that leave the end user with little or no stock. A similar problem is rattling the UK energy sector with the classic law of supply and demand – a theory that explains the interaction between the sellers of a resource and the buyers for that resource. There has been a surge in UK gas prices, exacerbated by the fact that the UK has scant storage facilities amid surging demand. How dramatic the shortfall in supply can be seen when comparing UK’s gas storage of 8.9 terawatt/hours with Spain, Germany and Italy storing 166.2 TWh, 147.1 TWh and 113.7 TWh respectively. The UK imports more than 50% of its pipeline gas and LNG, with the four main providers being Norway, Qatar, US and Russia, with totals of 266k Gigawatt hours, 97k GWh, 53k GWh and 25k GWh.

The demand surge for gas is not unique to the UK and is seen all over Europe, where demand is also rising. Last winter was one of the coldest on record which resulted in increased demand which in turn depleted supplies; these have not been replenished because suppliers had to carry out major maintenance that had been curbed because of earlier lockdowns. The situation was worsened because calmer weather reduced the amount of electricity generated by wind power and the deteriorating situation just became worse. Consequently, wholesale gas prices have more than quadrupled over the last year and with the UK being one of Europe’s biggest users of natural gas, with 85% of homes using gas central heating, the country has been badly impacted. It is expected that there will be no let up until Q2 next year because prices will not fall until storage facilities fill up again. Any effect from Brexit – and the UK leaving the bloc’s Internal Energy market – has been minimal. It so happens that the country will be hit by more than a double whammy, with gas prices skyrocketing, labour shortages in certain key sectors, higher food prices, empty supermarket shelves and inflation topping 4.0%, this could turn into a winter of discontent.

With real estate accounting for 10% of its GDP, Chinese administrators and global economists are closely monitoring the fallout from Evergrande, failing to repay US$ 84 million in interest payments, exacerbating the possibility of a default. If this were to occur, its impact would have global implications affecting foreign direct investment. However, it seems that analysts have been premature to announce the demise of China’s second-biggest property developer by sales, and despite all its financial woes, and being on the brink of default with a huge US$ 300 billion debt, it is unlikely to spread globally. S&P considers this to be a domestic Chinese problem and is more than likely to be settled locally. Property has always been a problem in China, with lax regulations, loan sharks, dodgy building standards and a host of other illegal activities associated with a massive property bubble.

Even before the announcement, earlier in the month, that warned that it may default on debt repayments if its efforts to refinance and sell assets fall short, the company was already talking with creditors and stakeholders trying unsuccessfully to sell their debt by up to 70%. The fear is that in a fire sale, Evergrande may have to sell its vast portfolio of apartments, at heavy discounts, which in turn could really damage the industry by undermining prices and putting smaller competitors out of business.

Last year, Beijing introduced what it called the Three Red Lines Policy for property developers, so as to reduce debt within the industry, curb runaway property prices and lift standards. This was a belated government attempt to take more control over a sector that was running wild as the government were more concerned with economic growth at all costs and turning a blind eye to the excesses seen in relation to the building industry.  It is apparent that the housing boom in China is in the throes of an implosion and the hope is that the property bubble is deflated slowly and methodically so as not to leave its debris scarring the rest of the economy. Considering Evergrande owns more than 1.3k projects in 280 or more cities in China, serving about 12 million homeowners, with its property services arm, which listed on Hong Kong Exchanges and Clearing in December 2020, having about 2.8k projects in more than 310 Chinese cities, this will not be an easy exercise.

It appears that most banks have limited exposure to the troubled developer except for the affiliated Shengjing Bank and national Minsheng Bank, which may go under without government support. Other stakeholders impacted include home buyers, investors, bondholders, suppliers and contractors. There is a belief that if a contagion effect were to occur, the government would get involved if that were to cause a systemic risk to the economy; it would also look at reducing the risk to home buyers and minimising economic losses. However, the high-net-worth individuals, and institutional investors, may see a bigger percentage of their investment disappearing.

According to its Chair, Jerome Powell, the Federal Reserve could start tapering its asset purchasing programme as early as November, with complete closure by mid-2022, whilst emphasising that this was not meant to be a direct signal on the timing of the beginning of interest rate hikes. At this week’s meeting, their updated quarterly projections were released indicating that officials are now evenly split on whether or not it will be appropriate to begin raising the federal funds rate as soon as next year; their previous forecast in June had indicated no rate increases until 2023; their projected median rates rose by 0.4% to 1.0% for 2023 and to 1.8% the following year. It also unanimously voted to maintain the target range for its benchmark policy rate at zero to 0.25% and continue purchases of Treasuries and mortgage-backed securities at a pace of US$ 120 billion per month.

From early next month, the UK government will scrap its controversial traffic lights system, seeing the end of the green and amber lights, whilst retaining the red-light list, in England. People who have had double jabs will not need to take a pre-departure test before leaving any country not on the red list and will also be able to replace the day two PCR test with a cheaper, rapid lateral flow test. The change in policy has been a “shot in the arm” for the sector and mostly welcome in the travel industry, with Airlines UK noting that it “moves us much closer to the reopening of UK aviation”. The acid test for Dubai is to see how many UK travellers visit for the next school half-term in October now travel restrictions have largely been lifted by the Johnson administration.

The day after the announcement of the so-called Aukus pact, between Australia, UK and US, that rattled the Chinese administration, the country has applied to join CPTPP, a key Asia-Pacific trade pact, as it attempts to strengthen its position in the region. The focus of the tri-nation pact is for Australia to build nuclear-powered submarines for the first time, using technology provided by its two partners, with China describing it as “extremely irresponsible” and “narrow-minded”. The Chinese foreign ministry commented that the alliance risked “severely damaging regional peace… and intensifying the arms race”.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership was signed in 2018 by eleven countries, including Australia, Canada, Chile, Japan and New Zealand; since then, both the UK and Thailand have expressed their desires to join, with China now indicating its wish to be added. It started life as the Trans-Pacific Partnership, promoted by the then US president, Barrack Obama, in a move by the US to challenge/counteract China’s growing economic influence in the region. If the Chinese application is accepted by the current members, it will be a significant boost for China’s position on the world stage and comes less a year after it joined the Regional Comprehensive Economic Partnership – the world’s largest free trade agreement, with fourteen regional nations, including seven members of the CPTPP, Australia, Brunei, Japan, Malaysia, NZ, Singapore and Vietnam.

In 2016, Naval Group, a global and major French contractor, and an industrial group that specialises in naval-based defence, was awarded a contract by the Australian government for the design of twelve future submarines for the Royal Australian Navy; the contract was cancelled last week, and the decision was not well received by the Macron government who were set to lose a US$ 90 billion deal.  The French company issued a statement “taking note of the decision of the Australian authorities to acquire a fleet of nuclear submarines in collaboration with the United States and the United Kingdom”. Meanwhile, French Armed Forces’, Florence Parly, indicated that the government would look to ensure any financial hit to Naval Group from a cancelled Australia submarine deal is limited.

To the outside observer, it does make sense that a nuclear submarine is more preferable to diesel and Australia has made the right decision, even though the decision is bad news for some Australian companies who were lining up for contracts worth over US$ 1 billion from Naval Group – and employing 500 – in Q4. Even though the design phase of the project had not yet started, some work was already being contracted and hundreds of people employed in Adelaide. There is a warning of a ‘valley of death’ relating to these companies and how they will survive until work starts in 2024. Questions are being asked why the French contractor was not asked to switch to the existing nuclear version of the Barracuda design, especially because there were lots of companies that already had Naval Group’s contracts. Furthermore, France will not be in the mood to be offering any contracts to the UK and this may have repercussions for the UK defence sector.

It is reported that the EU is contemplating the postponement of a major cooperation summit with the US on trade next month. The reason behind this comes on the back of the US entering a new alliance involving the UK that would deliver Australia at least eight nuclear-powered submarines which led to Canberra cancelling an existing contract with France for twelve diesel-powered submarines. The EU-US Trade and Technology Council (TTC) was announced in June and was meant to signify a new era of cooperation between the two sides. So much for the EC then stating that the TTC “will serve as a forum for the United States and European Union to coordinate approaches to key global trade, economic, and technology issues and to deepen transatlantic trade and economic relations based on shared democratic values.” It seems to the outsider that the other 26 members are bowing to the whims of a furious, upset and bitter French administration. An irate Emmanuel Macron seems to be of the opinion that We Are Never  Ever Getting Back Together!

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