The release of British researcher Matthew Hedges after a presidential pardon was a relief to those who know him, but his ordeal is not the only sign of tension between London and Abu Dhabi – and the unfortunate student is not the only person to have recently been targeted by the UAE authorities
Despite Gulf producers’ success in forcing the price of crude up to around $70 a barrel, the strains of several years of lower oil prices are ever more apparent, even for the richest Gulf states. Adding to the pressure, several governments have had to shoulder the burden of huge military expenditure in Yemen and the cost of unprecedented diplomatic and other ‘soft power’ initiatives, as hydrocarbons revenues dropped away. These trends have driven a new burst of policy-making creativity in the UAE. Mindful of the need to generate more revenues, the authorities have launched a renewed drive to boost the economy’s competitiveness amid signs of sluggish growth.
Two of the six GCC members have met the 1 January deadline to introduce the sales tax – the others will learn from their initial problems when they implement their versions of a very Gulfi tax reform
To get an idea of where growth is coming from in the UAE’s tourism industry, one only needs to look at the focus of its airlines. Over the summer, Dubai’s flag carrier Emirates upgraded its flights to Moscow, Beijing and Shanghai to all-A380 services, with the switch to the superjumbo adding 1,000 seats a week on the Moscow route alone. In September, low-cost airline Flydubai doubled its capacity on routes to Russia.
The 2009 bailout of Dubai by neighbouring Abu Dhabi might seem a long time in the past, but issues around the debts of some government-related entities (GREs) continue to cast a shadow on aspects of the business world in the emirate.
Sharjah-based Dana Gas has come in for pointed criticism in the High Court of Justice in London for breaching a number of court orders issued as part of an increasingly complex legal case involving its sukuk. The dispute involves legal proceedings in Sharjah and London, as the energy company tries to gain approval to cancel $700m worth of sukuk and replace them with new instruments with lower yields (GSN 1,039/10). The issue is time-sensitive as the sukuk are due for repayment on 31 October.
The worst may now be over for the UAE economy. After a slowdown in 2016, the country looks to be in line for a modest rebound in activity in 2017, with Dubai expected to lead the way.
There is a slowdown afoot in the northern emirates. According to real estate agency Cluttons, rents in Sharjah in the first quarter of this year were down by more than 8% year-on-year. That followed a 2.4% fall in the 12 months to December 2015. The drop at the start of this year was steepest in villa rental prices, which are down 9.6% over the past 12 months, while apartment rents fell by 7.7% over the same period. The real estate firm expects rental costs to drop a further 3-5% over the course of this year.
Yet, despite this weak outlook, significant new developments are still going ahead, both in Sharjah and beyond. In fact, some of the most ambitious real estate schemes the northern emirates have ever seen are currently being pursued.
In Umm al Quwain, Dubai-based Sobha Group is developing the Firdous Sobha scheme, a mixed-use island development that will have villas, apartments, hotels, shops and leisure facilities with a total value of around $6.8 billion. The scheme was announced in late April and will cover 4.9 square km.
Further north, in Ras al Khaimah, there are two major schemes underway. Al Marjan Island, a man-made archipelago stretching 4.5km out to sea, will be home to more than 20 hotels and resorts with the capacity to host up to 20,000 guests once completed, including properties from Anantara, Crowne Plaza and Marriott.
Elsewhere in the emirate, the local Al-Hamra Real Estate Development is working on its $272 million Falcon Island project, which will contain 150 villas and a marina on an island divided in two by a central canal. The larger Al Hamra Village scheme, which the island is part of, covers 77 million square feet and includes more than 1,000 villas and townhouses and nearly 2,500 apartments as well as five hotels, a golf course and a shopping mall.
Meanwhile, in Sharjah itself new developments are also under construction, such as the $654 million Tilal City gated residential scheme, which is open to foreign buyers and will be house up to 65,000 residents once complete. The project is being developed by Tilal Properties, a joint venture between Sharjah Asset Management and Eskan Real Estate Developments. The first plots of land are due to be handed over before the end of this year, with a second phase of plots to be handed over in December 2017.
Collectively, these projects add up to a big bet on the future potential of the northern emirates. Overall, there are more than $6.5 billion worth of construction projects planned or underway in the five northern emirates and a further $1.8 billion worth of hospitality projects, according to Dubai-based MEED Projects, which tracks such activity around the region.
The motivation for many of the larger schemes is a desire to inject some life into the local commercial and tourism industries by attracting more outside investment. The individual emirates themselves are certainly not large enough to support these developments on their own. The latest census for Ras al Khaimah, for example, which was carried out in 2015, showed it had a population of 345,000 people, almost 100,000 lower than previous estimates. Credit ratings agency Fitch Ratings noted in a report released in early May that “Hotel capacity is set to increase 50% over the next three years and a key challenge will be to develop Ras al Khaimah as a destination to capitalise on the planned new capacity.”
Tourism is a key element for the residential units being built as well. Given the distance from the main cities and the small size of the local economies, many potential buyers will be the sort of people who look to the northern emirates as a leisure destination rather than a place to live and work full-time. “People are going to the northern emirates, but more for holidays or weekends away from Dubai or Abu Dhabi,” says Suzanne Eveleigh, head of Sharjah at Cluttons. “People aren’t buying in terms of moving and living there, they’re buying property as a holiday home.”
The northern emirates do have some factors in their favour as they try to attract international money and visitors. In particular, the relatively low cost of property compared to the big cities of Dubai and Abu Dhabi is one element that they can exploit. Sharjah is well placed in this regard, being closest to the bigger cities and having long acted as a dormitory town for Dubai. The price differential is certainly large at the moment. A three-bedroom villa in Sharjah costs around $24,500 a year to rent, compared to anywhere between $32,600 and $92,500 in Dubai, according to Cluttons.
The other emirates further north also have an eye on the potential and are keen to stress how simple the process of buying property can be. “It’s very easy for foreigners to buy property in Ras al Khaimah. It’s become quite attractive because the price of property is a lot lower than comparable properties in Dubai or the other emirates,” says Haitham Mattar, chief executive officer of the Ras al Khaimah Tourism Development Authority. “You can still buy a property that is on the beach front or sea-facing at a fraction of the price that you’d pay in the other emirates.”
Mattar says that the two key source markets for those buying in Ras al Khaimah are the U.K. and Asia. For some of these buyers it’s simply a matter of investment, with the property being rented out thereafter, but others are more interested in buying a relatively cheap holiday home.
Yet alongside all these grand schemes, there is also a shortage of affordable housing for local buyers, many of whom cannot afford the prices attached to villas and apartments in the new high-end developments. In late February, Sheikh Mohammed bin Rashid al Maktoum, vice-president and prime minister of the U.A.E., visited the east coast of the country and approved $1.9 billion worth of infrastructure projects being planned by the Ministry of Infrastructure Development. The schemes will be developed across the northern emirates and include a substantial investment in housing. Some $1.3 billion of the total will be put into 12 compounds over the coming five years, providing homes for 42,000 people.
“Housing is an essential service and is every citizen’s right and a priority for the government,” he said at the time. These days it’s also a priority for a lot of developers in the northern emirates, even if they are targeting a different set of buyers.
The real estate developers were putting a brave face on it, saying they had been remarkably busy, but there was no hiding the fact that the Dubai Property Show in London in mid-May was both small and, at least on the first day of the show on Friday afternoon, sparsely attended. Around a dozen developers including Dubap Properties, Tebyan Real Estate Development and Binghatti Developers filled part of the Olympia West exhibition hall, which was dominated by a Nakheel stand in the centre.
It was certainly a far cry from the likes of the Cityscape show in Dubai, but that’s perhaps to be expected. London is after all a long way from the U.A.E., and the gloss has come off Dubai’s real estate scene of late. Prices are down by 15% from their mid-2014 peak and confidence is low in the light of the oil price slump.
In addition, the rise of the U.A.E dirham (and other Gulf currencies pegged to the dollar) means that inward investment into the region is becoming more expensive for a lot of potential buyers. And while expat residents in the Gulf who are earning money in the local currency are not affected, the regional economic slowdown also means that some of them are losing their jobs, selling up and leaving the country.
Craig Plumb, head of research at estate agency Jones Lang LaSalle (JLL), says the rising value of the dirham has “definitely been a factor” for international investors in the residential market. “The volume of residential sales in Dubai over the first half of 2016 is down by around 30% compared to the same period last year,” he says.
But such trends do not mean the whole system is about to come crashing down. In broad terms, the market for cross-border real estate investment continues to be fairly vibrant, even if these days the bulk of the deals involve Gulf investors putting their money in international markets, rather than overseas buyers picking up properties within the region. Plumb says Middle East investors bought almost $9.5 billion of real estate outside the region in the second quarter of this year, compared to $2.3 billion of capital flowing into the region.
“There has been a shift in the nature of [outbound] investments, with private investors becoming relatively more important compared to the major sovereign wealth funds,” he adds. “But the desire to invest in real estate assets outside the region remains.”
This trend has been developing for a couple of years. According to CBRE, another real estate consultancy, a total of $14.1 billion of investment flowed from the Gulf to other parts of the world in 2014, with Qatar leading the way with $4.9 billion of purchases, followed by Saudi Arabia ($2.3 billion) and the U.A.E. ($1.6 billion). The total was down on the $16.3 billion a year before but it still made the Gulf the third largest source of capital in the world after North America ($66.5 billion) and Asia ($28 billion).
While much of the outward investment has historically been done by sovereign wealth funds, in the wake of lower oil prices they have been drawing down some assets to help plug their government’s budget deficits. That leaves them with less to invest. However, that trend is being partly balanced by the fact that rich individuals are showing more inclination to invest overseas. CBRE predicts that while sovereign wealth fund investments in global real estate will fall from $9-11 billion a year to around $7-9 billion a year going forward, non-institutional investments from the Middle East will rise to an annual figure of $6-7 billion, up from an average of around $3 billion in 2010-2013.
London has long been the most enticing market for Middle East investors and it still holds the top spot, but it is not as dominant as it once was. In 2014, the U.K. capital city accounted for 32% of all outbound investment, compared to 45% in 2013. Other large Western cities followed it in popularity, including Paris ($2.2 billion), New York ($1.3 billion) and Washington ($481 million).
More recent events have altered the landscape, in particular the vote by the U.K. in June this year to leave the European Union. That is pushing investors to re-evaluate their position. A recent survey by financial advisory firm DeVere Group found that 69% of its clients, including some in the U.A.E. and Qatar, intended to decrease their investment exposure to the U.K. following the Brexit vote.
“High net worth investors are overwhelmingly considering rebalancing and diversifying their portfolios following the U.K.’s decision to leave the EU,” says Nigel Green, chief executive officer of the firm. “These investors are seeking to reduce their exposure to U.K.-based assets in the wake of the impending Brexit.”
Nonetheless, the motivation to invest in overseas markets still remains strong, whether because investors want to diversify their portfolios away from their home market and from dollar-denominated (or dollar-pegged) assets, or simply a desire to buy a residence for themselves or family members in overseas cities.
That helps to explain the results of another survey released earlier this year by property consultancy Cluttons, which found that 61% of high-net-worth individuals (HNWIs) in the GCC were likely to invest in their preferred location in 2016, against 25% who said they were unlikely to (the remaining 14% said they weren’t sure). Of those, London was the preferred city for 13% of investors, followed by New York and Bangalore in India. Half of these investors were targeting residential property, while 22% favored commercial property and 28% were looking for a mixture of both.
They are not just investing in distant lands though. Just over half (53%) of HNWIs in the U.A.E. told Cluttons that Middle East locations were among their top three investment targets for the year ahead. Dubai and Abu Dhabi were, perhaps unsurprisingly, the most popular, cited by 30% and 23% of respondents respectively. They were followed by Sharjah (8%), Muscat, Kuwait City, Doha and Riyadh. The reasons for the U.A.E. cities’ popularity stem from the country’s role as both a trading hub for the region and also—particularly in the case of Dubai—its position as a safe haven.
That too has been one of the long-term attractions of London. And although the political uncertainty caused by Brexit has unnerved some investors and led them to postpone or cancel some deals, demand is expected to recover before long. For one thing, the rise of the U.A.E. dirham and other Gulf currencies pegged to the dollar over the past few years means that it is now far cheaper for Gulf investors to buy U.K. property than it was previously, all the more so following the slump in the value of the pound after the Brexit vote.
As a result, many real estate agents say they are expecting interest in London to recover in the second half of the year.
“One of the key things of benefit to buyers from the Gulf is the fact that the majority of them, except for Kuwait, maintain a fixed exchange rate with the U.S. dollar. That means they’re effectively purchasing in dollars, so for them London property became 12% cheaper overnight on 23 June [the date of the referendum],” says Faisal Durrani, head of research at Cluttons. “Since the referendum, some of our offices in locations like Belgravia and Chelsea have reported an upturn in interest from buyers from the Gulf.”
Whether the investments follow remains to be seen but, for everyone involved, the ups and downs of recent years in Dubai and London alike is at least a useful reminder of the inherent volatility in real estate investment no matter where you are in the world.
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.”
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.
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.