Is The London Property Market Feeling The Heat Of Brexit?

Published in Forbes Middle East, 16 November 2017

The London property market has long been a favorite of Gulf investors, but does the Brexit vote and the instability of a minority government in Westminster make the city less attractive?

Political turmoil may be something Middle East investors are used to, but it is also something they like to avoid. That is one reason for the huge amounts of Gulf mon­ey that have been poured into property in cities like Paris and New York over recent years.

London too has benefited hugely due to this investment behaviour. From the Harrods depart­ment store to the Shard skyscraper and countless luxury apartments and homes, Middle East buyers have made their mark on the London property mar­ket. But the threat of the U.K. leaving the European Union (EU) in a ‘hard’ Brexit deal (or even no deal at all), coupled with a general election earlier this year which left Prime Minister Theresa May weakened and without an overall majority in parliament, is tar­nishing the U.K.’s image as a place of stability. Might all this force Middle East investors to look elsewhere when thinking about property in the future?

There have certainly been some signs that wealthy Gulf buyers are shying away from London, both in terms of commercial and residential prop­erties, although the picture is a mixed – not to say confusing – one.

One reason the market is so hard to read is there are several different issues at play. On the one hand, the unstable political climate has caused the value of sterling to plummet, making it cheaper to pick up assets in the U.K. For anyone using dollars – or cur­rencies pegged to the dollar, as most Gulf countries are – prices are effectively 18% lower than they were two years ago.

“The incentive for Middle Eastern purchasers has sharpened in recent months, mostly due to the favourable currency swing,” says Charles Penny, an associate at the London super prime team at Knight Frank, a real estate consultancy.

But prospective buyers need to weigh up cost savings against other negative developments be­fore deciding whether it makes sense to press ahead with a purchase. For example, the stamp duty tax on purchases has increased several times since 2012 and other new taxes have been introduced to cover properties held by corporate owners that had previ­ously avoided stamp duty. Those changes have ar­guably had a greater influence on prices than any nervousness caused by the febrile political atmo­sphere and, while there has not been a crash in pric­es across the city, there is evidence of a slowdown, particularly for new-build developments, many of which have tended to be sold in recent years to buy-to-let investors.

“We have seen a softening of prices in prime central London,” says Naomi Heaton, chief execu­tive of London Central Portfolio (LCP), a real es­tate investment firm. “That’s mainly been due to tax more than Brexit uncertainty.”

When it comes to weighing up these pros and cons, some market participants will have less dis­cretion than others over whether to buy or sell. A wealthy parent may want to acquire a property if a child is coming to London to study, for example, while marriages or divorces might also prompt sales or purchases. Those buying investment properties will have more hard-nosed calculations to make, but it is not an easy call for anyone.

The fall in the value of sterling “definitely does make a difference,” says Fionnuala Earley, residen­tial research director at estate agency Hamptons International. “It makes U.K. property relatively cheaper, but you’ve got to take into account the un­certainty we’re facing because of Brexit and whether that, in the judgement of a buyer, means the U.K. economy is going to go downhill and whether it will take house prices with it.”

All this helps to explain the slowdown in ac­tivity. Hamptons International says this year it has taken an average of 21 weeks to sell a home in London, compared to just seven weeks in 2014. And according to LCP’s analysis of transaction data, the number of deals across the main areas of prime cen­tral London – including neighbourhoods such as Kensington, Chelsea and Westminster – were down 21% in 2016 compared to the year before. Chelsea was hardest hit, with a 12.2% fall in average prices and a 28.5% fall in sales volumes. Price falls were also seen in Kensington (3.9%) and St James’s Park & Mayfair (2.5%).

There are similar trends at play in the commer­cial market, where concerns about the nature of any Brexit deal are even more pressing, as a bad deal could lead to a slump in demand for office space, particularly in the city where the finance industry is concentrated. Here too, Middle East investors ap­pear to be taking a back-seat. “None of the recent major transactions in either the city or the West End have involved Middle East buyers or sellers,” says Kiran Patel, chief investment officer of Savills Investment Management.

“We’re not really seeing that much appetite coming from the Middle East since Brexit,” he adds. “They’re either keeping their powder dry or [pur­suing] opportunities elsewhere. There are some Middle East family offices around, we just haven’t seen them in the market as much. They may be buying the odd small building here and there but they’re not featuring much at the moment.”

Middle East investors are not uniquely affected by these issues. Indeed, European buyers are likely to see Brexit as a more serious concern, as trade flows between the U.K. and the rest of the EU are far more substantial than they are with the Gulf. In ad­dition, Brexit may end EU citizens’ right to live and work in the U.K. without a visa that could potentially dampen demand for real estate from this section. According to Hamptons, the proportion of EU buy­ers has been falling for a year: in the second quarter of 2016, EU citizens accounted for a third of buyers in prime central London but by the first quarter of this year they made up just 8% of buyers. Indeed, they have now fallen below Middle East buyers, who were the largest group of overseas investors in prime central London, accounting for 10% of all purchases in Q1, albeit it in a slower market.

Overall, it looks like international investors as a whole are in retreat. Data from estate agency Countrywide released in mid-July shows the pro­portion of overseas-based landlords across Great Britain is now at a record low of 5%, compared to 12% in 2010. London has seen the largest fall with 11% of rented homes now owned by an overseas landlord, down from 26% in 2010. In prime central London, overseas-based landlords owned 31% of all rented homes in 2010, a figure which has fallen to 23% this year. The number of European-based landlords in London has been gradually falling over time and now stands at 28%, ranking them behind Asia-based landlords at 33% but ahead of North Americans (10%) and Middle East landlords (9%).

Despite all this there are some things that have long been – and continue to be – in London’s favor. The city remains a big draw for Gulf buyers who know the landscape and enjoy visiting. And de­spite the uncommonly tumultuous politics of the U.K. in recent years, observers say London contin­ues to be seen as a safe haven, particularly at a time when there is so much turmoil within the Middle East itself.

“London is always one of those global cities that carries with it a cachet that some others do not,” says Earley. “The London prime market has always performed well against other sorts of assets and the Middle East [investors] in general have al­ways favored buying in London, so it would be odd if they didn’t continue to do that. It doesn’t look like they’re scared of what’s happening at the mo­ment, they may just be a little bit wary of where capital values might go.”

Capitalizing On Debt: Middle East Bonds

By almost any measure, Saudi Arabia’s bond issue on October 19, 2016 was a success. While analysts had been predicting an issu­ance of between $10bn and $15bn, the final amount was $17.5bn, setting a new record for the largest ever emerging markets sovereign bond—the previ­ous record had been set by Argentina in April 2016, when it sold $16.5bn.

Rig count moves in line with oil strategy

Published in MEED, 25 October 2016

The Middle East has bucked a global trend for declining oil rig counts, spurred on by Saudi Arabia’s pursuit of market share

In most corners of the oil and gas industry there is a strong, and unsurprising, correlation between energy prices and the number of drilling rigs in use.

When prices were above $100 a barrel, as they were for most of the period from 2011 to 2014, the number of rigs in operation around the world was also high, reaching a peak in February 2012 of 3,900 rigs, according to US oil field services company Baker Hughes. But since the oil price began to spiral downwards in late 2014, so too have the number of drilling platforms. As of September this year, there were 1,584 rigs in operation around the world, some 59 per cent lower than the peak in the space of just four and a half years.

The Middle East, however, has bucked that global trend. When oil prices began to falter in 2014, the number of rigs in use in the region held fairly steady at just over 400. This year their number has slipped back a little, falling to 379 in August before recovering slightly in September to 386. That relative stability has meant the proportion of the world’s rigs that are now in the Middle East has risen from 10 per cent in 2012 to 24 per cent this year.

The unusual trend in the region stems, in large part, from the decision by Saudi Arabia to maintain high output levels even as prices were falling. Riyadh’s aim was to maintain its share of the global market and force other, high-cost producers – principally in the US – out of the market by making it uneconomical for them to continue drilling.

The policy has had only limited success. The US rig count fell dramatically as prices went south, from just over 1,900 rigs in late 2014 to a low of 408 rigs in May this year. Since then, however, the number has been creeping up again, reaching 481 rigs in August and 509 in September, as the oil price has shown some signs of life. Even more importantly, US production levels have remained relatively high – output peaked at 9.6 million barrels a day (b/d) in June 2015, but it was still running at 8.5 million b/d in late September this year, proving that US producers have been far more resilient than many analysts in Riyadh and elsewhere had expected.

Part of the reason for that resilience is that producers in the US have been cutting costs and focusing on lower-risk assets. This too is a global trend. “The new economics of exploration mean that rather than pursuing high-cost, high-risk exploration strategies, the majors have become more conscious of costs,” says Andrew Latham, vice-president of exploration research at UK consultancy Wood Mackenzie. “Smaller budgets have required them to choose only their best prospects for drilling, including more wells close to existing fields.”

Perhaps the biggest problem for the Saudi strategy is that any sign of a rise in the oil price tends to prompt US producers to invest and expand. As Saudi bank Jadwa Investment noted in a September 2016 report, the number of US oil rigs was steadily rising over the course of the summer months. “Oil prices around the $50 a barrel mark are encouraging US producers to add oil rigs,” it said.

Saudi Arabia needs oil prices to be higher if it is to have any chance of bringing its large budget deficit under control, but for that to happen it will also have to accept that it will no longer be the dominant actor in the market. The production cut announced at an Opec meeting in Algiers on 28 September, designed to prop up the price of oil, appears to be a recognition of this reality.

Nonetheless, Saudi Arabia remains the dominant figure in the regional industry. It has, by far, the highest number of rigs in operation and, while other countries have been holding their fleets steady (or seen them decline in the case of Iraq and Egypt), the kingdom has been expanding. From about 80 rigs through most of 2013, Saudi Arabia has increased the number to 124 as of September this year. That is almost twice the figure of the next largest operator, Oman, which has 64 rigs in use. Following them are Algeria with 53 rigs, Abu Dhabi with 49 and Kuwait with 48.

The majority of rigs in the Middle East today are onshore, accounting for about 87 per cent of the total. However, the picture varies considerably from country to country. In Abu Dhabi only 55 per cent of rigs are onshore, while in Algeria, Iraq, Kuwait and Oman, all of them are. In Saudi Arabia, the vast majority, 88 per cent, are on dry land.

As has been the case for many years, roughly three-quarters of the region’s rigs are used to pump oil rather than gas. The two countries where gas rigs account for a more sizeable minority are Algeria, where it is 34 per cent of the total, and Saudi Arabia (43 per cent).

The fall in global rig counts over the past two years means there is now significant oversupply in the market, which is leading to a sharp fall in costs, according to analysts. “Rig utilisation, vessel utilisation has plummeted and day-rates have fallen in some cases by more than 60 per cent,” says Steve Robertson, director of the research centre at UK energy consultancy Douglas-Westwood. “Oversupply will take some time to work its way out of the system as older units are scrapped.”

The future trajectory of the market depends, as ever, on factors such as oil prices and the balance between supply and demand, but some at least are predicting that activity and investment levels should start to pick up in the coming years. Douglas-Westwood forecasts that global expenditure on onshore oil field equipment is set to rise by 8 per cent a year between now and 2020, from $61bn in 2016 to $83bn in 2020. Most of the activity will be focused on onshore sites, with investment in more expensive offshore operations likely to decline from $67bn this year to $43bn by 2020. For Middle East producers, that could mean that competition will be getting tougher in the years to come.

The Data Will See You Now

Published in Forbes Middle East, 20 October 2016

How to securely handle sensitive personal health information is becoming a critical issue for the region’s health services as they go digital.

Over the summer months in 2016, Emirates Integrated Telecommunications Company (Du) will be taking a step into a whole new area, with a project to provide secure access to patients’ electronic healthcare records (EHRs) in local hospitals and clinics. It may seem a strange move for a telecoms firm, but such initiatives are going to become increasingly common in the future.

The amount of data being collected in every area of our lives is proliferating, and finding a way to handle it safely and smartly is as critical an issue for the healthcare sector as for any industry. Patients need to know their health records are both accurate and secure. The Du project, which will test a system for sharing EHRs using block chain technology, might go some way to ensuring that is the case.

“Electronic health records are fantastic to have, but they generate a problem in terms of security because the information in the system can be accessed by people in hospitals or externally. They can be malicious, they can be mistaken” says Jose Valles, vice-president of enterprise commerce, new business and innovation at Du. “It is important to provide another layer of security. Block chain provides that. We are able to track changes in the EHR. We are going to be able to have alerts in case something is changed. You are going to know who is doing what when.”

If you’ve heard of block chain before, it is almost certainly in relation to the virtual currency Bitcoin, which uses it as the basis for its entire system. Block chains are essentially public databases, which allow users to share and verify information without the presence of a central authority. While virtual currencies have already harnessed its potential, advocates of the technology say it has far wider potential and can help in any situation where critical information is exchanged, from contract exchanges to voting.

The Dubai authorities have latched onto the idea with enthusiasm, setting up the Global Block chain Council in February which will launch a series of projects to test the technology. The Du project is merely one of the first. The project isn’t a complete leap into the unknown though. Du is working with Amsterdam-headquartered Guard time, which has already rolled out the technology in the Estonian health service.

“Today in Estonia every single healthcare record is backed by block chain,” says Mike Gault, chief executive officer of Guard time. “If there is any access or any change to a healthcare record, that digital activity is registered in the block chain. That does several things. It allows citizens to verify what happened to their healthcare record and it prevents hackers manipulating those records. It becomes impossible for insiders in the hospital or outsiders to get in there and cover up their tracks. You have this transparency, this accountability that has never been possible before.”

Even so, the health authorities in the U.A.E. are not rushing in and the Du project is very much a proof of concept rather than a full roll-out. The precise details of it haven’t been revealed, but only a small number of clinics and hospitals will be involved at first.

“The authorities are exactly the same here as they are in the U.K. or Spain or anywhere,” says Valles. “They are interested but they are cautious, because at the end of the day they are handling something that is very important. But there is a willingness to adopt technologies in the U.A.E. that I don’t see in other places. So hopefully after the results of the pilot they’re going to embrace it. Right now, they’re observing, which is wise.”

The whole project is an interesting case of how technology is becoming an integral part of healthcare systems. In part, the expansion of technology is being led by patients, using smart watches, mobile phones or other wearable devices like Fitbit to monitor their health. Data from these devices isn’t typically shared with doctors yet, but it could be in the future. But the healthcare system is itself also generating ever large quantities of data.

“Astoundingly large amounts of data are generated in healthcare in structured, semi-structured and unstructured formats,” says Lina Shadid, healthcare leader for IBM Middle East and Africa. “The ability to use insights from this big data will be the key to improving patient care and the sustainability of health systems in the coming years. We believe that getting the right insights from that healthcare data into the hands of health practitioners will dramatically improve outcomes for patients. Big data can also help manage population health, identifying at-risk population segments for early proactive intervention and care.”

At the moment, the region and the industry are in the early stages of figuring out how best to achieve these aims, and it is not just in the Gulf where initiatives are being tested. US technology firm Cisco has been working with the Jordanian government on a ‘telehealth’ project, which links specialists at the Prince Hamzah Hospital in Amman with patients in two rural locations, at Al-Mafraq and Queen Rania Governmental hospitals.

“Licensed healthcare professionals staff the remote location and assist with patient examinations while critical data on patient information can be instantly accessed by the specialists through the network-connected medical devices,” explains Mike Weston, vice-president of Cisco Middle East. “Given the choice between an appointment in Amman or a scheduled specialist consultation at the telehealth clinic, patients are increasingly choosing the local option. To date, over 110,000 patients have benefited.”

But making the most of the possibilities requires heavy investment. Research firm IDC estimates that, globally, the quickest rise in IT spending in the next few years will be in the healthcare sector. In a report issued in February it said healthcare IT spending would grow by 5.5% a year between 2015 and 2019.

The growth rate will be even faster in the Middle East, at 7.1%. Qatar, Saudi Arabia and the U.A.E. will see the fastest growth of over 8.5% annually. This year alone, total IT spending by the healthcare sector in the Middle East will reach $1.24bn, of which half is being spent in the GCC. They have a lot of catching up to do though. According to Nino Giguashvili, lead healthcare analyst for the Middle East at IDC, less than 20% of hospitals in the Middle East currently use some type of ‘big data’ technology.

Perhaps more than anything else all this data also needs to be secure. If not, patients will start to lose confidence in the entire system. Given that risk, the use of blockchain and other technologies is likely to be a critical feature of the healthcare systems in the years ahead.

“The balance between access to and portability of health information and the need for confidentiality are obvious. As with credit card and bank account data, the risk of losing the privacy of your health data is critical,” says Shadid. “The risks include security, data breach and data hacking. These risks are amplified with the increase of mobile devices and apps which collect personal health information.”

The use of data to manage healthcare issues has a long history and it has at times been controversial. In 1902, insurance companies in the U.S. got together to form the Medical Information Bureau to share data on their customers’ health conditions. It has garnered plenty of criticism over the years, often because of the secrecy surrounding it, but the companies involved insist that it means health insurance is cheaper for U.S. consumers.

But technology and big data don’t work miracles every time. A much-hyped project by Google to try and predict where flu and dengue fever outbreaks were likely to happen next, based on people searching for related terms on their computers, was set up in 2008. But it was dropped in 2015 when it proved to be of no use. More information is not in itself a useful thing unless it can be analysed properly, much like a doctor looking at an EHR.

Securities lending in the UAE: the race is on

Published in Global Investor, 27 September 2016

In early August last year, the National Bank of Abu Dhabi (NBAD) became the first institution in the UAE to be handed a licence to carry out securities lending and borrowing activities within the country’s capital markets. The Securities and Commodities Authority (SCA), the regulator that granted the approval, stated at the time that the move would offer several benefits, including helping to bolster the local securities industry, increasing the market’s depth and encouraging more investment in the capital markets from both local and foreign institutions.

Under the system, clients temporarily transfer ownership of their securities to a borrower that can then use the shares in its market making activities. Collateral is posted to the lender, either in the form of a cash guarantee or a bank guarantee or by using other securities. The lender in turn has the chance to earn revenues from the use of their shares. The borrower is obliged to return the securities to the owner at an agreed date in the future or on demand, depending on what is agreed.

The lending of securities is a common activity in many parts of the world, including Europe, Asia and the Americas, but it is still rare in the Middle East region. It has not happened quickly in the UAE and although it is nearly a year since the first licence was granted, the process is still not quite complete. 

The SCA board first set out its conditions and requirements for potential licence holders in August 2012, with decision no. 47 “concerning the regulations as to lending and borrowing securities”. The country’s main stock market, the Dubai Financial Market (DFM), approved the practice in January 2014 and the Abu Dhabi Securities Market (ADX) followed a few months later in May. Maryam Fekri, chief operating officer of the DFM, described the move as “an important development for the market… diversifying the range of products to be offered and increasing the UAE’s attractiveness for investments.” 

However, it is still a work in progress. NBAD has still not yet launched the product in the market and it is keen to keep expectations in check about what sort of an impact it might have, in the short term at least.

“Eventually, this will be a product which increases the liquidity and the depth of the market and will unlock additional value in the long equity positions of many of our institutional investors, but we are just getting started,” says Jonathan Titone, executive director and head of product development at the bank. “There have been a few setbacks in our journey, and it has taken a bit longer than we had hoped to start the lending and borrowing activity, but we are working very closely with the markets to launch this and they are nearly ready.”

Restrictions remain

One critical factor that he points out is likely to limit the take-up of the product in the months following any launch is the ongoing restrictions on short-selling of stocks in the UAE.

“Market makers are currently the only investors to have any demand to borrow as they are the only investors that are allowed to short sell in the market,” he says. “Other investors face preverification requirements by the stock exchanges whereby securities must be available in their account prior to trade execution. If the shares are not available, the trade cannot be executed. So other than short selling through market making, there is little demand or purpose to borrow shares. Because of this, we must manage expectations in terms of the limited demand and initial financial returns.”

NBAD says it has received positive interest from potential clients who are keen to explore ways to turn their longterm holdings into another source of revenue. In the longer term, the process could prove to be a handy way for some investors to hedge their positions. Other market participants say that it could also play a useful role in paving the way for other innovations in the future and to support other products. 

“The implementation of securities lending and borrowing is an important development for the market because it diversifies the range of products that are up for offer,” says Mihir Kapadia, CEO and founder of Sun Global Investments, a wealth management company with offices in Dubai, London and Mumbai. “It is a key piece of market infrastructure for the development of other market products such as exchange traded funds.”

However, there are some reasons to doubt whether the product will prove quite as popular as it has in some other, more mature markets, given the nature of the region’s shareholders. In particular, some observers say there are many firms in the UAE that have no interest in doing anything with their shares other than holding on to them. It is likely to take some time to educate such investors and persuade them of the benefits of lending their shares.

“You have some clients that have large positions in firms and they may be interested, but for the most part the investor base that own the more established publicly-listed institutions don’t want to do anything with those shares outside of just hold them for dividend payments,” says one Dubai-based executive.

Instead, if the authorities want to improve liquidity in the market, they may be better off focusing on opening up the market to international investors. That has been gradually happening, encouraged by the MSCI upgrade in May 2014, when the UAE was included in the firm’s emerging markets index. 

In June last year, the UAE federal government decided to lift its ban on non-UAE investors owning shares in local telecoms giant Etisalat. The change went ahead in mid-September, with a 20% ceiling on foreign ownership. Rival telecoms outfit Emirates Integrated Telecommunications Company (Du) has been touted to follow suit by investment bank Arqaam Capital.

Predicted demand

The fact that no other licences have yet been awarded for securities lending and borrowing suggests that other institutions are at best cautious about the potential for this product. Nonetheless, Titone appears confident that there will be plenty of demand from clients wanting to lend their shares and that, in time, others will want to follow NBAD into the market. That optimism stems in part from the fact that the regulator is expected to loosen the restrictions on short-selling in the future. Whether that transpires is still a moot point, but there is optimism in the industry.

“There is strong interest on the client side to lend their shares,” says Titone. “We expect other market makers to enter the market soon, and the regulator and markets are also planning to introduce short selling for investors, other than market makers, in the near term. Once this is possible, demand will increase exponentially, and we expect even more competition to enter the market. We believe there will be significant demand in the medium term."

Furthermore, says Titone, there are large institutional investors holding large blocks of very attractive securities. “These investors have no intention to sell the positions any time in the near future, and these positions can be used to generate additional yield.”

The idea of securities lending and borrowing should receive a further boost early next year from another development in the region. In early May this year, the Capital Market Authority (CMA) in Saudi Arabia announced that it will soon permit the practice for trades on the Saudi Stock Exchange (Tadawul). It is due to issue the necessary regulations during the first half of 2017. What happens in the kingdom, the Middle East’s largest economy, invariably affects other Gulf states. 

Securities lending has been a long time to arrive in these countries, but once the product is available in the market it ought to find a loyal and growing following. The race is on. 

Private trumps public in GCC schools sector

Published in MEED, 26 July 2016

Private education is still a minority pursuit, but poor results from state-run schools mean its popularity is growing in most parts of the region

Last year, the number of students in the GCC education system was about 12.6 million, according to Dubai-based Alpen Capital. The figure is growing by 3.6 per cent a year and is projected to reach 15 million by 2020. That fast rate of growth puts pressure on the authorities to provide ever more classrooms and teachers. More than 7,000 new schools need to be built in the next five years alone, most of which are needed in Saudi Arabia.

Underlying those overall figures are some other critical trends. The vast majority of students attend a state school, but their numbers are only expected to grow by 2.6 per cent a year between now and 2020. In contrast, student numbers at private schools are expected to rise almost twice as fast, by 5.1 per cent a year. By 2020, there will be some 3 million students in private education versus 2.3 million now.

Even those numbers do not tell the full story. The private sector is particularly strong in some corners of the region, but relatively weak in others. Private schools are dominant in the UAE and Qatar, while in Saudi Arabia, Bahrain, Kuwait and Oman the public sector is the main education provider. In the UAE the private sector educates about 70 per cent of pupils, but in Dubai, the most advanced market, 90 per cent of students attend a private school. In Saudi Arabia, the reverse is true, with less than 13 per cent of pupils in private schools. Things are changing there, but very slowly. The proportion of Saudi students in public schools fell from 89 per cent in 2009 to 87.3 per cent in 2014.

Better education

Private schooling is not necessarily better than public education, but in the Gulf it often is. The state system tends to provide poor teaching, based on outdated curriculums that emphasise rote learning above critical thinking and do little to prepare pupils for working life. The Swiss non-profit foundation World Economic Forum rates GCC education systems badly compared with the rest of the world. Out of 133 countries ranked by quality of education, Saudi Arabia is rated 45, followed by Bahrain (68), Kuwait (71), Oman (72), the UAE (90) and Qatar (91). In that context, it is not hard to understand why private schools are so popular.

“In this part of the world, the government has been spending a lot of money on education; about 20-25 per cent of the budget is invested in education,” says Mahboob Murshed, managing director of Alpen Capital. “But the results are not very encouraging in terms of people being prepared for the jobs market. There is still a long way to go.”

The growth of international private schools in places like Dubai has been fuelled by the presence of expatriates, most of whom are keen to give their children an education similar to the one they received; the tax-free environment means many of them have enough disposable income to make it affordable. But locals are also increasingly keen. For them, the private sector is often perceived as providing better quality education and there is a desire to give their children internationally recognised qualifications and a good grounding in foreign languages, particularly English.

International curriculums

“Parents are looking for international education for their kids. Locals who can afford to, at least in the UAE, Kuwait and Qatar, send their children to private international schools,” says Murshed. “The ultra-rich send their kids overseas for education at the school level, not just at the university level.”

The popularity of different international curriculums varies from place to place. In Dubai, the British curriculum is most popular, while in Abu Dhabi the American syllabus tends to win out, partly as a result of the presence of US oil companies. In Saudi Arabia, the US curriculum is also popular due to the desire of students to study at American universities, but the International Baccalaureate is also gaining in popularity, as it is elsewhere around the region. Across the GCC there are also schools catering for expatriates from Japan, France, India, Pakistan and elsewhere, offering the curriculums from those countries.

All this presents a clear opportunity for private sector operators of schools and universities, as well as the investors that support them. According to Alpen Capital, some 500 education schemes are currently under way around the region, with a total value of more than $50bn.

It is not always plain sailing, however. Teacher recruitment is an ongoing issue for all providers. “The recruitment of staff, especially experienced staff, becomes more competitive annually,” says Clive Pierrepont, a spokesman for Taaleem, which runs 11 schools in the UAE. “Salary packages are important, but teachers are also looking for professional development and career progression.”

The staffing issue is particularly tricky for operators in Saudi Arabia, where social conditions make it hard to persuade international teachers to come. Another issue is fees, particularly with the slowing economy and a rise in job insecurity. The downturn in the region’s oil and gas industry in particular means some families have left and there is now overcapacity in school places in the UAE, prompting some school operators to resort to discounting of fees, sometimes disguising them as scholarships or special rates for newly opened schools.

Right ecosystem

According to Ashwin Assomull, managing partner at UK-based consultancy Parthenon EY, the long-term health of the private schools sector relies on having variety and making it easy for school operators. “To have an affordable and varied school sector, you need to make it easy for schools to open up, but also for teachers to come and live there,” he says. “If you create the right ecosystem to attract the schools to come and make it easy for teachers to come, you can provide education at various price points to satisfy the whole market.”

Around most of the GCC, those conditions are being met to some extent or other. The one major exception is Saudi Arabia, and not just because of the difficulty with recruitment. School operators complain that the kingdom’s regulatory system is inconsistent and many potential local investors are too driven by the pursuit of short-term profits rather than the idea of building a sustainable long-term business. Unfortunately, it is the one country that arguably needs the investment more than any other. In the current outlook, most of the thousands of new schools that will be needed in Saudi Arabia will have to be built by the government.

The Gulf's pivot to Asia

Published in MEED, 15 March 2017

King Salman’’s tour through Malaysia, Indonesia and Brunei is the latest sign of how keen Gulf governments are to strengthen economic ties with Southeast Asia

As he toured around five Southeast and East Asian countries in February and March, Saudi Arabia’s King Salman bin Abdulaziz al-Saud captured the attention of headline writers as much for the size of his retinue as for any deals signed or speeches made. In many ways, it was a return to the pre-austerity days, with the supply of five-star hotel rooms in the cities he visited drying up and locals gossiping about how many luxury cars were being hired and how much money was being spent by the 1,500 Saudis that formed the delegation.

But amid all the chatter, there was some serious business to be done too. Southeast Asia is a vital market for Saudi crude oil, a fact that is increasingly important as Riyadh battles for market share against US shale and the return of Iran to the international energy market.

That helps to explain the decision by Saudi Aramco to invest $7bn in the 300,000-barrel-a-day (b/d) Refinery & Petrochemical Integrated Development (Rapid) project being developed by Petroliam Nasional Berhad (Petronas) in Malaysia. Aramco will meet most of the crude feedstock requirements of the refinery, while Petronas will supply the natural gas, power and other utilities. The plant, which is due to be up and running by 2019, will produce gasoline, diesel and feedstock for an integrated petrochemicals complex, which will have a capacity of 3.5 million tonnes a year.

The agreement followed a deal announced with Indonesia’s PT Pertamina in December under which Saudi Arabia will pour $6bn into a similar project, the Cilacap refinery, giving Aramco a 45 per cent stake. Aramco has also held talks with PT Pertamina on an upgrade of the Bontang refinery, in the East Kalimantan region of Indonesia, although that currently seems less likely to go ahead.

Such deals help to ensure future demand for Saudi crude exports in the region and there was little surprise when Aramco CEO Amin Nasser said at the signing of the Rapid project that “the Southeast Asia region offers tremendous growth opportunities.”

Investment in oil and gas projects is the dominant theme in GCC involvement in southeast Asia and Riyadh is not the only one to get involved. Kuwait Petroleum International, the overseas arm of Kuwait Petroleum Corporation (KPC), owns a 35 per cent share in the 200,000-b/d Nghi Son refinery in Vietnam. Construction began in October 2013 and is now close to completion – the first deliveries of Kuwaiti crude are due to be made in May.

In January this year, another KPC subsidiary, Kuwait Foreign Petroleum Exploration Company (Kufpec), agreed to invest $900m in offshore oil assets in Thailand. The deal gives it a 22 per cent interest in the Bongkot gas and condensate field and other concessions in the Gulf of Thailand, previously owned by UK/Dutch Shell Group.

Abu Dhabi-based International Petroleum Investment Company (Ipic) also has interests in Southeast Asian oil and gas fields, through its wholly-owned Spanish subsidiary Compania Espanola de Petroleos (Cepsa). The latter owns Cayman Islands-registered Coastal Energy, which has onshore and offshore assets in Thailand and Malaysia.

Such deals may be the most significant aspect of Gulf-Southeast Asian relations these days, but there is activity in other sectors too. King Salman’s time in Malaysia also saw memorandums of understanding agreed in areas including scientific and education cooperation, labour, and trade and investment cooperation. When his delegation reached Indonesia, there were further deals agreed around health, housing, tourism, aviation and fishing.

“An important focus for Saudi officials on this trip, and in policymaking more generally, is to identify and expand markets for non-oil exports,” says Kristian Coates-Ulrichsen, fellow for the Middle East at Rice University’s Baker Institute.

Other Gulf investments in the region range from financial services to telecoms and real estate development. Examples include Qatar National Bank’s majority holding in QNB Indonesia and Kuwait Finance House (KFH)’s wholly owned subsidiary KFH Malaysia. Qatari telecoms firm Ooredoo won a mobile telecoms licence in Myanmar in 2013 and also has operations in Indonesia, Laos and Singapore.

In the real estate arena, both KFH and Abu Dhabi-based Mubadala have invested in Medini, a project to create a new city of up to 300,000 people at the southern tip of peninsula Malaysia, just across the Straits of Johor from Singapore. Medini is part of a series of efforts to develop the Johor region – the Aramco-backed Rapid refinery is another important element. Indeed, those involved in Medini think the oil and gas project could have some benefits for their own scheme.

“The Aramco deal is good for us,” says Khairil Anwar Ahmad, CEO of Iskandar Investment Berhad, an offshoot of the state-owned Kazanah Nasional Berhad, which is driving the development of the region. “They’re investing in this big oil and gas and petrochemicals complex and it’s just next door, so we’re hoping that… there will be some spill-over to Medini as well. We’re hoping that we can attract some people looking for back office services, middle office support and things like that.”

As is evident from the above examples, a few countries in Southeast Asia have been the focus of much of Gulf activity in the region. Partly as a result of their cultural and religious affinity, but also because of their relatively large economies, Malaysia and Indonesia have drawn a lot of interest and investment.

At times this has been negative though, in particular the ongoing scandal around Malaysia’s sovereign wealth fund 1Malaysia Development Berhad (1MDB), which involves questionable payments to senior Malaysian politicians and their associates from a number of Gulf sources. The situation continues to cause difficulties for some Gulf businesses. In October last year, Abu Dhabi-owned Falcon Private Bank had its licence in Singapore stripped from it by the Monetary Authority of Singapore because of what the latter described as “serious failures in anti-money laundering controls” surrounding transactions associated with 1MDB.

Despite such difficulties, trade between the Gulf and SE Asia undoubtedly has the potential to expand much more. The steady growth of the big Gulf airlines’ route networks in the region could be an enabler for further development. The latest addition will come in July, when Emirates is due to start daily flights between Dubai and the Cambodian capital Phnom Penh. The airline says it expects garments and textiles to be a significant export in the future.

Until now, ties with Cambodia have mainly involved aid projects, such as the Cambodia-Kuwait Friendship Hospital, which opened in the southern Kandal province last year, although there has been the occasional commercial investment too. For example, in 2011 Kuwait’s Pima International formed a joint venture with India’s D&D Pattnaik to invest in exploration for gold and iron in Cambodia.

The relationship between the regions is not just about crude oil and money flowing from the Gulf into Southeast Asia though. Another central element is the supply of labour from South and Southeast Asia, without which the Gulf economies would cease to function. And as part of efforts to diversify their economies, Saudi Arabia and other Gulf countries are also keen to boost investment from Asia into their own markets. With that in mind, King Salman’s tour has also included conferences designed to attract investment from Asian businesses into Saudi Arabia.

The promise of more business opportunities is keeping locals keen. There is a tight battle being fought among Asian stock markets for the rights to host a listing of shares in Aramco, for example. Among those hoping for a cut of the action are the Singapore, Hong Kong and Tokyo bourses. In that at least, there is continuity with the long-term relationship between the Gulf and Southeast Asian regions. Coates-Ulrichsen says the past decade has seen the ties expand but “energy continues to form a linchpin of the relationship”.

Real estate investment in Medini

The Gulf’s enthusiasm for real estate is at the forefront of a large project in southern peninsula Malaysia, just across the causeway from Singapore. The project’s three shareholders include Dubai-based United World Infrastructure (UWI), alongside the Malaysia state-owned investment fund Kazanah Nasional Berhad and Japan’s Mitsui & Co. The development has also attracted investment from Abu Dhabi-based Mubadala and Kuwait Finance House (KFH).

Plans to develop the site began in 2007, when it contained little more than abandoned palm oil plantations. Today, roads have been laid, utilities put in place, and the first homes and offices handed over to their owners, but much remains to be done. The population is around 20,000 at the moment but, when complete, the site will house as many as 300,000 people, according to Imran Markar, principal of UWI.

The building of an entire new city – complete with homes, businesses, entertainment facilities, schools and hospitals – owes much to the past experience of UWI executives in the Gulf, where they have been involved in the development of the Dubai International Financial Centre (DIFC), Dubai Media City and other projects.

“The Dubai experience and the idea of economic clusters was very useful,” says Markar. “One of the other key learnings from Dubai was that the infrastructure has to be ahead of the game. If it lags behind, catching up is an exercise in futility, you’ll never do it. So when the masterplan was drawn, it laid out exactly what’s going to happen in every plot.”

Markar suggests that Medini could provide a template for other developments elsewhere in the world. “For us the challenge is how replicable this is in other parts of the world, and we feel it is to a large extent,” he says.

Is this the future of banking in the UAE?

Published in Gulf News, 28 February 2016

The rapid growth of mobile apps raises questions about what banking might look like in the UAE in the future

Just like cash or a debit card, the future of banking can fit into the palm of your hand. Smartphone banking apps are reaching an ever wider audience and creating novel pressures for the country’s banks. Not only do they have to compete with each other to continually improve their digital services but they are also faced with tricky questions such as what to do with their branch networks. The answers they come up with will shape the UAE’s banking landscape for years to come.

Not all banks in the country have launched a smartphone app but the number is growing all the time. Those that have range from giants such as Emirates NBD and National Bank of Abu Dhabi (NBAD) to smaller players like RAK Bank. Typically, their apps allow customers to transfer money between accounts, pay utility and other bills, and locate nearby ATMs and branches. 

Simply launching an app is not enough though. Once out there it needs to be regularly improved. Mashreq, for example, launched its first mobile app in 2008 and earlier this year released its fourth major upgrade. “The biggest change we have done is to the user experience,” says Aref Al Ramli, Head of Electronic Business and Innovation at Mashreq. “We have taken a bold step in animating the design. We’ve looked at it from the customer experience, making it easier to access with fewer clicks.”

While banks are investing in their digital services, they still have to make up ground. According to a November survey of 2,000 GCC bank customers by EY, 34 per cent of UAE respondents use a mobile banking service but only 45 per cent are happy with it. When asked why they don’t use mobile banking more, 51 per cent said they found it difficult to access. Other common gripes included slow transaction speeds and a non-intuitive user experience.

“Mobile banking has been a spectacular failure so far in the GCC,” says Ashar Nazim, Financial Services Customer Leader for the Middle East at EY. “The journey is still starting. There is a long way to go.”

While there is room for improvement, the direction of travel seems clear enough, with more and more customers using digital channels instead of visiting a branch. And banks are discovering that consumers have clear preferences for using different platforms for different things.

“While internet banking remains the platform of choice for service requests such as statements, applications for new products and information requests, mobile banking is becoming the platform of choice for transactions,” explains Sagheer Mufti, Chief Operating Officer at Abu Dhabi Islamic Bank. “We [saw] an increase of 71 per cent in the number of transactions conducted on the mobile app in 2015.”

In addition to straightforward banking apps, a few institutions have been experimenting with other services delivered via apps. Emirates Islamic Bank, for example, has developed the EI World app where, in return for carrying out transactions such as paying utility bills, users can accumulate points that can be redeemed for vouchers. Abu Dhabi Commercial Bank and Emirates NBD offer similar offerings.

Potentially more interesting are the moves to develop services via other online platforms and apps, including social media networks like Facebook and Twitter. In October 2014, Commercial Bank of Dubai opened a branch on Facebook that offers many of the same functions as a dedicated banking app. Last year, Emirates NBD started offering balance enquiries and other services on Twitter.

There are security concerns that tend to limit the scope of such initiatives, but all banks need to keep an eye on such developments lest they lose ground to their rivals, particularly among the next generation of customers. However, not everyone is convinced there is enough demand.

“We’re not hearing any strong signals from our customer base that they need us to facilitate their banking on their social media channels,” says Suvrat Saigal, Managing Director and Head of Global Retail at NBAD. “We’re focusing our resources on where we know our customers want us to improve, rather than take a me-too approach to channel investment.”

However, what seems inevitable is that digital channels will become ever more important for banks and, as smartphone technology becomes increasingly sophisticated, more people will want to bank via their phones. This, in turn, raises a question about the role of traditional physical branches and whether banks even need them. Most executives insist there is still a role for branches, particularly when it comes to dealing with more complex services such as investment advice, but at the very least the expansion of branch networks is likely to slow down.

“Branches will continue to be important,” says Mosabah Al Qaizi, Head of Electronic Banking Services at Dubai Islamic Bank.  “We envision that they will be leaner in size with a focus on performing more complex transactions. 

“Our aim will also be to continue opening more technologically advanced express banking centres and expanding our full function ATM network, while we see a slowdown in opening large brick-and-mortar branches.”

Through the longer term, the need for branches could be even further eroded. The EY survey found that 60 per cent of customers in the UAE would willingly switch to a digital-only bank.