Skating On Thin Ice                                                                     06 May 2022

With the public sector on a nine-day Eid Al Fitr break, there is no Dubai Land Department weekly property report for the week, ending 06 May 2022.

There is no doubt there are plenty of landlords rubbing their hands with glee as Dubai property prices shoot north. However, many will be disappointed to hear that their percentage returns on rentals will decrease – sometimes dramatically. For example, a US$ 637.6k, (AED 1.8 million), Springs townhouse rented out pre-Covid at 6.5%, would have given a gross return of US$ 31.9k (AED 117.1k). Rera utilises a rental calculator that will show the “market” value of any location in Dubai which is used to regulate the market and stop it from overheating. Some of its parameters include location, size and current rent.

A look at the rental calculator for the Springs indicates that “no rent increase where the rent of the real property unit is up to 10% less than the average rental value of similar units. The rent for a 2 B/R villa in Springs is in range of AED 97k to AED 119k per year, (does not include water, electricity or any other fees)”. Assume the property has gone up 30% to US$ 828k, (AED 2.34 million) and the landlord wishes to raise the rent likewise to US$ 41.5k (AED 152.2k), then no rent increase is allowed. Instead of receiving a 6.5% return, his investment will now yield just 5.0% – and with inflation at over 5%, real income is flat.

The same conclusion will apply with the updated calculation. A rental increase is allowed under the following protocol when prices are lower than the following parameters:

• below 10% – no increase
• between 11% and 20% – a 5% increase
• between 21% and 30% – 10% increase
• between 31%and 40% – a 15% increase
• over 41% – a 20% increase

If a landlord chooses to sell a property, that is being leased by a tenant, the terms of the contract remain intact. To evict an existing tenant, the landlord must provide one of four reasons as to why they are doing so before putting the tenant on a twelve-month eviction notice.

• If the landlord wants to sell the property
• If they wish to move into the property, or wish to move immediate family into the property, provided the landlord does not own a suitable alternative property for that purpose (evidence provided in advance)
• If the property requires extensive modernisation work that would prevent the tenant from living in it while the work is being carried out (evidence of plans or approvals for work provided in advance)
• If the property needs to be demolished (evidence provided in advance)

Theoretically, it appears that a tenant can only be evicted following a twelve-month written notice served upon expiry of an existing tenancy agreement. However, in practice, it seems that the landlord can give the twelve-month eviction notice at any time during a contract period.

If  landlords want to increase the rent, they also need to give a 90-day notice period, unless the contract states otherwise. If no written communication is served, the rental contract is automatically renewed at the same rental price and based on the same conditions as in the previous agreement.

Sheffield Holdings, founded by Abu Ali Shroff, first started construction of Marina 101 in 2007, with a plan for a 2014 completion, but things did not work out. Dubai’s second tallest building, at 425 mt, with 101 storeys encompassing 1.65 million sq ft, is now “close to completion.” Having run out of cash, the developer left the project, in JBR, uncompleted in 2019, with the three main lenders being the Bank of Baroda, the Indian Overseas Bank and Bank of India. At that time, the building was “almost complete … over 95% work is done”. When this happened, and in line with Article No 15 of the law, concerning escrow accounts for real estate development in Dubai, the account trustee at Bank of Baroda, and the investors met with Rera officials. Although there is no proposed opening date announced, it is reported that Rera has contacted entities such as Dewa and RTA, and that a date has been fixed to make a list of the housing units and to commence issuing certificates of completion. Rera has also urged owners who have not paid up to 90% of their due amounts to do so and is “beginning to issue final warnings to those who are violating the payment plan before starting any other legal procedures against the unit owners who defaulted on payments”.

According to a UK survey, Dubai has become the most profitable and expensive global location for Airbnb landlords. It is estimated that local landlords can earn an average US$ 1.15k per night, equating to US$ 339k per annum; based on this estimate, break-even will take only four months. The survey was based on the price of an average 1 B/R, 450 sq ft apartment, (estimated at US$ 139k or AED 510k) divided by the average Airbnb price for one night. However, the report noted that “the average price to buy an apartment in the city is £112,624 (US$ 139k or AED 510k), meaning just 121 nights need to be sold for this cost to be earned back. However, this is only a profitable location for landlords who have a property near Burj Khalifa, as those further away rent for just £181 (US$ 223 or AED 820) per night.” Maybe the researchers should go back and revise these figures which give potential investors such suspect figures!

Little surprise to see that Dubai has become a haven for fleeing Russians who would have been badly impacted by the sanctions if they had stayed home. The BBC has reported that

Russian billionaires and entrepreneurs have been arriving in the UAE in unprecedented numbers, with Better Homes reporting property purchases by Russians surging 67% in Q1. There are reports that some 200k Russians had already fled in the first ten days of the sanctions (obviously not all to Dubai). Virtuzone has registered five time the usual number of enquiries from Russians since the crisis stated in late February. Most want to set up in Dubai to avoid the almost inevitable economic meltdown in Russia, as well as to secure their wealth.

In Q1, Mena mergers and acquisitions grew 11% to US$ 21 billion, with deals of under US$ 500 million reaching US$ 4.6 billion, marking the strongest start to a year since records began in 1980. Unsurprisingly, UAE was the most active in the region, with the largest deal being NMC’s US$ 2.25 billion sale to its creditors. Furthermore, the country notched up the most deals, volume wise at 303 transactions, with Saudi Arabia turning over the most money at US$ 47.4 billion. Mena witnessed a 66.5% hike in deals, on the year, at 661 deals and 16.2% higher at U$ 99.0 billion.

Sheikh Hamdan bin Mohammed bin Rashid has launched the Dubai Virtual Asset Regulatory Authority in “The Sandbox” – the first global regulators in the Metaverse, with the Sheikh noting “it is a new model for managing and expanding government business”. The Dubai Crown Prince commented that VARA will provide regulatory and supervisory services to a wide audience that crosses borders and with reliable future technologies; he also expects the authority will build a new, powerful economic sector that contributes to the nation’s economy and creates new investment opportunities. It is another step in government strategy to enhance Dubai’s position as an international leader and to be at the forefront of the technological transformation that is sweeping the world.

At this week’s AGM, Union Properties’ shareholders approved a motion to continue the company’s operations, as well as a revised turnaround strategy that will see the developer tapping into its existing real estate portfolio and adjacent services subsidiaries to capitalise on the current momentum in the Dubai property market. Last year, it posted a US$ 263 million loss, compared to a US$ 55 million profit in 2020, resulting from rectifying the value of its property portfolio that “had been inflated in prior years”. Last October, the Securities and Commodities Authority filed a complaint against its senior executives, accusing them of forgery, abuse of authority, fraud and damage to the interests of the company. Accumulated losses to the capital amounted to 68.3% which meant that the company had to decide within 30 days from the date of disclosure, to convene the general meeting to “consider a decision regarding the continuity of the company’s activity or to dissolve the company prior to the expiry of its term”.

The DFM opened on Wednesday, (after the Eid Al Fitr holiday), 04 May, 369 points (11.0%) up on the previous seven weeks, shed 24 points (0.6%) to close on Friday 06 May, at 3,695. Emaar Properties, US$ 0.39 higher the previous nine weeks, lost US$ 0.02 to close on US$ 1.72. Dewa, Emirates NBD, DIB and DFM started the previous week on US$ 0.77, US$ 4.16, US$ 1.76 and US$ 0.73 and closed on US$ 0.77, US$ 4.11, US$ 1.76 and US$ 0.72. On 06 May, trading was at 96 million shares, with a value of US$ 66 million, compared to 129 million shares, with a value of US$ 89 million, on 29 April 2022.

By Friday 06 May 2022, Brent, US$ 5.84 (5.7%) higher the previous week, gained US$ 5.56 (5.2%), to close on US$ 113.15. Gold, US$ 78 (4.0%) lower the previous fortnight, shed US$ 14 (0.7%), to close Friday 06 May on US$ 1,883.

Oil prices moved higher on Friday, as the 23-producer Opec+ alliance stuck with its output plan and ratified a 432k bpd production increase from next month, despite concerns over weak demand in China and as a result of the ongoing the Russia-Ukraine conflict. Whether the market can add that relatively small amount to the market next month is in doubt, as Opec could only add 10k bpd last month against its targeted 274k barrels.

Despite soaring petrol prices, BP posted a US$ 20.4 billion loss in Q1, after taking a major hit by pulling out of Russia, including divesting its 19.75% stake in Russian oil producer Rosneft, with the reported results including items before tax of US$ 30.8 billion. Its underlying profit of US$ 6.2 billion was double that of the same quarter in 2021. The energy giant advised that it would be investing over US$ 22.5 billion in upgrading UK’s energy system and spending US$ 2.5 billon on a share buyback.

Q1 saw Shell reporting its highest ever quarterly profits at US$ 9.1 billion – almost threefold higher than in the same period in 2021 – but announced a loss of US$ 3.9 billion from pulling out of its operations in Russia. Shell’s rivals, including BP and TotalEnergies, have also reported a sharp rise in underlying profits, with Norway’s Equinor, which supplies a quarter of the UK’s gas, also posting record earnings this week.  Oil prices were already rising before the Ukraine war, as economies started to recover from the Covid pandemic, but the war in Ukraine – and its impact on supply – has sent prices through the roof

Two US oil giants returned impressive Q1 results on the back of surging oil prices. Chevron saw profits skyrocket over fourfold to US$ 6.3 billion, as revenue jumped 70% to US$ 54.4 billion. Although ExxonMobil’s Q1 profit more than doubled to US$ 5.5 billion, it would have been greater if it had not written off more than US$ 3.4 billion, as it withdrew from the vast Russian Sakhalin offshore oilfield; revenue rose 52.4% to US$ 87.7 billion. However, it appears that both have yet to increase their capex budgets to fund drilling and development, as ExxonMobil announced an increased spending on share buy-backs by US$ 20 billion, and Chevron doubling its share buy-backs to US$ 10 billion. There is every possibility that, as the oil market tightens with demand moving higher, the market will suffer from a supply shortage because of prior years’ reduced capital expenditure leaving suppliers unable to meet any increase in demand.

This week saw global airlines’ capacity reach its highest level this year, 2.9% (2.5 million seats) higher at 88.5 million passengers, driven by an increase in Chinese traffic despite the recent shutdowns there. In Q2, it is expected that the numbers will gradually move to pre-pandemic 2019 figures of 109 million seats a week. International airlines are ramping up operations, as demand rebounds on the back of easing travel restrictions. It is noted that there were 43% more seats available than in the same week in 2021. NE Asia, driven by China but also with Japan and South Korea moving higher, is the fastest-growing regional market this week, expanding 10% in capacity on the week. South Asia, Central Asia and Central America have had more capacity available in the week than they did in 2019, with India 10% higher than two years ago.

Airbus reported a 237% annual jump in Q1 net profit of US$ 1.3 billion, as revenue rose 15%, on the year, to US$ 12.0 billion, on the back of a solid performance in its commercial aircraft, helicopter and defence businesses. Guillaume Faury, chief executive of Airbus, was confident of future results, noting that “looking beyond 2022, we see continuing strong growth in commercial aircraft demand driven by the A320 family,” but commented that “the risk profile for the rest of the year has become more challenging due to the complex geopolitical and economic environment.” In Q1, the plane maker delivered 142 commercial aircraft – 109 A320s, sixteen A350s, eleven A220s and six A330s – and is looking at increasing monthly production of its workhorse A320 to seventy-five by 2025; it hopes to reach sixty-five a month by 2023. Airbus had a 7k backlog of commercial aircraft at the end of Q1 and saw a 60% increase, to US$ 3.3 billion in the first three months of 2022. The company aims to achieve 720 commercial aircraft deliveries for the whole of this year.

IAG, BA’s owner, posted a Q1 US$ 1.13 billion loss – a slight improvement on the US$ 1.5 billion recorded in the same period in 2021. The airline cited “normal seasonality, the impact of Omicron and costs associated with ramping up operations” for the disappointing figures but noted an improvement in business travel and an uptick in the overall proportion of seats filled on flights. BA expects to return to profitability in Q2 and for the rest of the year, with demand “recovering strongly”.  Q1 flight capacity, at 65% of pre-pandemic levels, is expected to rise to 80%. The carrier also accused Heathrow of underestimating passenger numbers, which means there is  “a lack of resources” at the airport, making it “impossible to operate the capacity that we have in our minds”.

Uber has posted a surprise US$ 5.9 billion Q1 loss due to its share value in other companies, such as China’s Didi and SE Asia’s Grab, plunging US$ 5.3 billion on the New York Stock Exchange this year, since their 2021 listing. In 2016, Uber, having struggled to get a foothold in the world’s second biggest economy, sold its business there to Didi in exchange for an 18% stake. Since it US$ 4.4 billion debut on the New York bourse, its market value has tanked by over 80%, not helped by the Chinese internet regulator ordering online stores not to use the Didi app, claiming it was illegally collecting users’ personal data. In a similar manner to the 2016 Didi agreement, Uber sold its businesses in SE Asia to Grab for a 27.5% stake in the Singapore-based company. Since Grab’s December New York IPO, its market value has collapsed by 75%. To add to its investment woes, Uber acquired a stake in Indian food delivery firm Zomato, in 2020 , in exchange for its Uber Eats operations in India; since going public last July, its shares have almost halved in value.

Starbucks posted a 2.3% hike in quarterly net income, ending 03 April, to US$ 675 million, driven by an improvement in US returns. Launched in 1971, it is the world’s largest coffee chain, with more than 34.6k outlets, in over eighty global counties, of which 51% are company operated and the balance, licensed stores. 61% of the stores are to be found in the US (15.5k) and China (5.7k), and by the end of the reporting period it had opened 313 net new stores. Along with other major US service companies, Starbucks is facing a major unionisation push and has announced US$ 1 billion investment for the fiscal 2022 on salary rises, employees’ training and store improvements but will not offer new benefits to workers at the cafes that have voted to unionise; to date, fifty company-owned stores have voted in favour of unionising. Because of China’s lockdowns, (which have seen store sales 23% lower), escalating inflation and new investments in its stores and employees, Starbucks suspended its fiscal 2022 financial forecast.

G-III Apparel Group, which already has the likes of Levi Strauss & Co and Tommy Hilfiger in its line-up, has bought the remaining 81% stake that it does not already own in Karl Lagerfeld in a US$ 210 million cash deal. As well as expanding G-111’s global presence, it is expected to add US$ 200 million to its top line and generate “in excess of US$ 2.0 billion in sales to end consumers”. The deal also includes Karl Lagerfeld’s existing 10% stake in its established joint venture in China.  Last year, global revenue in the apparel segment was 10.9% higher on the year, with 2022 estimates at US$ 1.7 trillion, rising to US$ 1.95 trillion in 2026.

UK convenience store chain McColl’s has collapsed into administration, putting 16k jobs and 1.4k shops, at risk, with the company confirming that lenders did not want to extend banking agreements in the present economic climate. Appointed administrator, PriceWaterhouseCoopers, will look for a buyer “as soon as possible”, with supermarket giant Morrisons having already proposed a rescue deal to try to safeguard the chain. McColl’s already has a wholesale tie-up with Morrisons, as well as Martin’s newsagents, with a strategy centred around an image of a “neighbourhood retailer”. There is also a chance that EG Group, owner of Asda, has proposed a deal to McColl’s lenders which involved injecting funds to keep the struggling retailer open.

Bernie Ecclestone has been dragged into a court case involving money laundering operations worth millions of dollars to guarantee a series of gold transactions that made “no commercial sense”. The F1 mogul, who has not been accused of any wrongdoing, provided a US$ 12.3 million personal guarantee for a gold deal for his then son-in-law, James Stunt. Prosecutors claim that he and seven others laundered US$ 328 million cash, banked by NatWest, from criminal activity. A financing arrangement, provided by Canada’s Bank of Nova Scotia, was intended to help in paying for branded gold bars and coins, but only a few branded bars were ever made, and no F1 gold coins were minted. It appears that the money was used to acquire gold that would be later melted and broken up.

Despite moves to unseat him as chairman of Berkshire Hathaway, Warren Buffet maintained the position he has held since 1965. The 91 year old also holds the position as chief executive and steps to remove him were also not carried by the meeting, despite the largest US company supporting move; Calpers had earlier in the week invested US$ 460 billion. It also helps that he holds 16% of Berkshire’s stock and controls 32% of its voting power. It is expected that the nonagenarian’s son, Howard, already a Berkshire director, will become non-executive chairman when his father is no longer in charge. The shareholders also rejected moves that the company should disclose more about its climate-related risks and efforts to improve diversity among its diverse portfolio of companies. The chairman also commented on Berkshire investing in Chevron and “Call of Duty” game maker Activision Blizzard, (after Microsoft agreed to buy the company for US$ 68.7 billion); it has now boosted its investment in the two companies sixfold to US$ 31 billion. Its Q1 operating profit was flat at US$ 7.04 billion.

The Suez Canal, which accounts for almost 10% of global trade, has posted its highest ever revenue record, of US$ 629 million, last month – a 13.6% increase on the previous year. It also recorded its highest ever volume of cargo, at 114.5 million tonnes, and this despite the war in Ukraine and surging energy prices. Twice this year, the SCA has already raised passage tolls for transiting vessels, including fuel tankers, and these fees are one of Egypt’s main sources of foreign currency revenues. The country has been badly impacted by the war in Ukraine – as well as other economic factors that have hit the global economy – as its foreign reserves dipped US$ 3 billion to US$ 37 billion. Further worrying economic data sees the pound losing 18% of its value in March and inflation topping 12%. The Sisi government is in loan discussions with the IMF which has already approved three separate loans, totalling US$ 20 billion, over the past six years.

It is certain that UK house prices, which hit a fresh record for the tenth straight month at US$ 353k (GBP 286k), will begin to slow, as the double whammy of increased mortgage rates and surging inflation takes hold and gnaws into household spending. Halifax reckons that house prices rose 1.1% in April and by 10.8% over the past twelve months. Interest rates rose to their highest level since 2009 and even before this week’s 50 bp increase, the house price to income ratio was already at its highest ever level. What is currently stopping any fall in property prices is the lack of supply in the market, with the biggest demand for larger, family homes. If you are thinking of buying property in the UK, wait until the autumn when many of the economic indicators will be in free fall and property prices will be a lot lower.

April Turkish consumer prices surged almost 70% on the year, hitting a two-decade high, with

transport, food prices, (89.1% higher over the past twelve months), and household furnishings, (up 77.4%), recording the highest increase in annual inflation, with transport costs more than doubling over the year; in April, prices came in 7.3% higher. Its economic problems have not been helped by President Recep Tayyip Erdogan prioritising exports over currency stability, and his reluctance to raise interest rates to temper inflation surging – since last September, rates have dropped from 19% to 14%, but have remained flat over the past four months. It seems that the rest of the world’s rates are heading in the other direction and that Erdogan is the only global leader swimming against the tide.

Initial Q1 estimates show that the Saudi economy grew at its fastest pace in a decade, up 9.6%, on the year, driven by a 20.4% hike in oil activities, with a 3.7% increase in non-oil activities and a 2.4% rise in government services.

Not before time, Ursula von der Leyen, the president of the European Commission, has finally unveiled a proposal to impose an EU-wide ban on Russian oil imports. Whilst Ukraine bears the brunt of the Russian might, it seems that some EU nations are still in easy street when it comes to sanctions, as the proposed embargo gives member states up to six months to phase out purchases of Russian crude. The EU, which last year spent almost US$ 77 billion on Russian oil, (and a total of US$ 108 billion in total energy imports), buying around 3.5 million barrels of crude and refined products on a daily basis, is not showing much of being a united bloc. To the outsider, it does seem that the EU is waiting for the time until Germany, which imported 35% of its oil from Russia before the war, is better prepared to cope. Other member states have raised concerns that a total Russian ban would have on their economies, including Hungary and Slovakia, which are highly dependent on Russian oil. Italy, Greece and Austria will need more time to adapt their energy supply chains, while Malta, Cyprus, Belgium and the Netherlands were worried about losses to their respective shipping sectors. There is no doubt that, if the war drags on, the whole European economy, and the world, will suffer from double digit inflation and a period of deceleration.

US markets ended April in a financial quagmire, as Amazon and other major tech companies witnessed a sell-off, with the Nasdaq down over 4% last Friday as investors began to worry that the inevitable collapse may have started. With the bourse tanking 13%, April has become the worst month for the tech-heavy index since the 2008 GFC. The other two major US indices did little to boost investors’ hopes, with the S&P having its worst one-day decline since June 2020, and almost 14% lower YTD, whilst the Dow Jones Industrial Index fell 5% in the  month and 9% YTD. There is no wonder that global markets are having jitters, not helped by the quadruple whammy of surging inflation, (at forty-year highs), rising energy prices, ongoing supply chain problems, and the war in Ukraine. On top of these factors, there is the reoccurrence of Covid, with China bearing the brunt having to close down major parts of their two major cities – Shanghai and Beijing.

Another country trying – better late than never – to combat surging inflation is Australia which lifted its cash rate to 0.35% yesterday; the rise is the first hike in rates for more than a decade. The move is to try and combat inflation which is the highest seen since the turn of the century. This increase may be a game changer in the upcoming general election later in the month as any rise will impact on household budgets – with the rising cost of living being a major player. This could prove Prime Minister ‘s Scott Morrison’s swansong.

As expected, on 04 May, the US Federal Reserve announced a 50bp increase on the Interest on Reserve Balances – a day a later, the Central Bank of the UAE did likewise with the Base Rate applicable to the Overnight Deposit Facility effective from Thursday, 05 May 2022. To fight the Covid impact, the bank probably purchased too many assets, including US government debt and mortgage-backed securities, to boost the economy. Next month, it will start reducing its holdings by US$ 47.5 billion a month until September and thereafter doubling that monthly amount to US$ 95.0 billion. The Fed is another central bank that has arrived late to the party, with the country’s inflation of 8.5% at forty-year highs. Like the BoE, its inflation target had been pegged at 2.0% for far too long! Finally Fed Chair, Jerome Powell has had to admit that “inflation is much too high and we understand the hardship it is causing,” and that “we are moving expeditiously to bring it back down.” The aim of the exercise is to contain spiking costs, which are affecting all the world economies, but this move is definitely too little too late. The Fed has messed up its policies of late and if it continues with its error-ridden moves, the US economy will inevitably slow down and could easily land in recession by next year. The Fed need to get their options spot on as they are now Skating On Thin Ice.