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First with Financial Comment from Arabia

Abu Dhabi and Dubai bourse merger would boost UAE recovery

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It has long been an anomaly that a relatively small country like the UAE has three stock markets – the Abu Dhabi Securities Exchange, Dubai Financial Market and Nasdaq Dubai – and the logic for consolidation is overwhelming.

Now with the merger between the Nasdaq Dubai and Dubai Financial Market in its ‘very final’ stages, according to officials, there have also been talks about making this a three-way merger.

Government decision

This is clearly a decision to come from the government level. The ADX is 100 per cent government owned and the DFM has only listed 20 per cent of its stock. In December the DFM announced an agreement to buy Nasdaq OMX’s remaining stake in the Nasdaq Dubai in a $121 million deal.

The merger of the Nasdaq Dubai and DFM is actually more complicated than merging with the ADX from a regulatory standpoint as the two Dubai exchanges have different regulators, the Emirates Securities and Commodities Authority for the DFM and the Dubai Financial Services Authority for the Nasdaq Dubai.

Nasdaq Dubai stocks are also quoted in dollars and not the local UAE currency the dirham. After the merger Nasdaq Dubai listed companies will have a choice over whether to trade in both currencies, although the fixed peg to the dollar effectively makes the dirham a dollar proxy in any case.

UAE bourse a big step

But the creation of a unified UAE stock market is a far more important step. It would mark a decisive breach with the past and the disappointing performance of UAE bourses since their crash of late 2005. There would be a sense of a new start, and a start from a low point.

This would also be more than a symbol of the new unity of purpose in the UAE since the savage credit crunch first struck in autumn 2008 and the country dipped into recession last year for the first time in more than a decade.

For global investors a unified UAE stock market would look far more attractive. It would be a deeper and more liquid market. The potential for initial public offerings would be considerable. And this flow of funds into equities would assist the nation in a rapid recovery from last year’s recession.

Written by Peter Cooper

March 31, 2010 at 10:24 am

Property oversupply grows in the UAE, set to reduce prices again

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At night looking back at the Jumeirah Lake Towers from a vantage point at the Montgomerie Golf Club the unlit towers amid this collection of new Dubai skyscrapers is a reminder that the inventory of unused new accommodation continues to grow as the city completes its building projects.

Dubai Holding subsidiary Dubai Properties has reported an increase in its inventory of rental units from 18,000 to 27,000 over the past year. How many of these new units are unsold apartments that are now available for rental is unclear but many must be unplanned inventory additions.

Abu Dhabi completions

Even in supply starved Abu Dhabi the first deliveries of freehold property are about to commence. Reem Island master developer Tamouh is to start handing over 3,440 units in its Marina Square towers just behind Abu Dhabi Mall this May. On completion Mariana Square will be home for more than 8,500 residents.

In the summer rival Sorouh plans to deliver 1,154 apartments and 39 floors of offices in the Sun and Sky towers on Reem Island, according to a report in Gulf News today.

For Abu Dhabi absorbing new accommodation will not be a problem. Indeed, this will be more of a problem for neighboring Dubai from where many workers currently commute. When they leave New Dubai for new apartments in Abu Dhabi that will create additional voids in a city where the excess supply of apartments is mounting by the day.

It is impossible to determine how many more apartments will be added to inventories in Dubai before the buildings of the boom are completed, or indeed how many of these buildings will be actually completed and not abandoned. Certainly forecasts of 10-25,000 over each of the next two years do not look wide of the mark.

Empty property

You can actually see this inventory standing empty now, and there is nothing to suggest that the problem will not get worse before it gets better. The UAE is expected to show very modest GDP growth this year after the recession of 2009. There will not be enough new residents to fill up all the empty properties, although internal migration towards new real estate will be important.

The impact on real estate prices of a rising supply and falling demand will no doubt be further falls in rental and sale prices. But the reaction to the global economic recession last year was so strong in the UAE – with house prices tumbling 50 per cent in Dubai – that the scope for a further slump is limited.

Indeed, at some point in the near future UAE property prices will reach a bottom. Typically stock markets bottom more quickly than real estate, and property price declines do not last much longer than two years. Given the long-term future of this oil-rich country real estate then ought to be a good buy.

Written by Peter Cooper

March 31, 2010 at 9:01 am

Posted in Dubai Property

Three days official mourning after tragic death of ADIA boss

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Mortality is the biggest enemy of all investors and the managing director of the Abu Dhabi Investment Authority, Sheikh Ahmad bin Zayed Al Nahyan who died in a tragic glider accident last Friday, was arguably the greatest investor of all time with the world’s largest sovereign wealth fund under his control.

A five day search ended yesterday with an announcement from the Emirates news agency WAM that divers had discovered his body in the lake south of Rabat in Morocco where his glider crashed. Flags will be kept at half mast across the UAE but there will be no closure of government offices.

Sheikh Ahmad was a younger brother of the UAE President Sheikh Khalifa bin Zayed Al Nahyan, and listed by Forbes magazine as the 27th most powerful man in the world.

His recent efforts to increase the transparency and openness of the formerly secretive ADIA had been widely praised (see this article) and his death at just 41 years old is a major loss to the nation.

Written by Peter Cooper

March 31, 2010 at 8:19 am

Posted in Banking, UAE Stocks

Nakheel board sacked as debt rescheduling talks continue

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The Government of Dubai has sacked the entire board of Nakheel, the developer of the Palm islands trilogy and other ambitious real estate developments, whose $24.8 billion debt mountain is now the subject of intense restructuring negotiations.

Nakheel chairman Sultan Ahmed bin Sulayem has been replaced by Mashreqbank vice-chairman, Ali Rashid Lootah. Other new board members appointed yesterday include Khalid Mohammad Salim Bakheit, Khalil Eisa Ahmed Awad, Adel Khalifa Al Shaer and Ebrahim Hussain Al Fardan.

O’Donnell dismissed

CEO Chris O’Donnell was also dismissed from the board, and his position is now subject to the approval of the new board. No CEO could continue without the support of a new board.

The dismissal of the old Nakheel board was not unexpected in the wake of the proposal made to reschedule the group’s $24.8 billion debts last week. Indeed, the banks were bound to insist on new board, management team and business plan for Nakheel before they agree to the new terms.

The banks will want no confusion as to what the loans are for, or who is in charge of fulfilling this plan. So far the indications from banking sources over their reaction to last week’s rescheduling proposal has been mixed, with some banks concerned about the unequal treatment of Nakheel bond and loan creditors.

Business plan

Solid proposals for the future of Nakheel, of which changing the board is a first step, are likely to go a long way to convincing the banks that the proposals are worth supporting.

Aidan Birkett, the chief restructuring officer or administrator, has said the new debt deal will put Nakheel on ‘a stable financial footing’. But the banks will hardly be writing blank checks for Dubai to pursue more mega projects with their money. A solid business plan is needed, most likely with management not associated with the previous excesses.

It is not clear if the banks will be able to reach a settlement before the next $980 million Nakheel bond that falls due on May 13 or whether Dubai will again have to dip into the funds it received from Abu Dhabi to pay this debt.

Some more news on management structure and business strategy might speed things up.

Written by Peter Cooper

March 31, 2010 at 7:56 am

Gold buying from Arabia will likely outpace China

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The latest report from the World Gold Council, ‘Gold in the Year of the Tiger’, concludes that Chinese gold consumption could double in the next decade if its economy continues to grow at a rapid pace.

China is presently the world’s second largest gold consumer after India with 11 per cent of global demand. Last year China consumed more gold than it produced: 423 tonnes versus 314 tonnes with investment and jewelry the main sources of demand for the yellow metal.

1970s gold boom

But in the 1970s gold boom the Middle East was the market that drove gold prices higher and higher. The region is still a huge gold market and consumed 250 tonnes last year, admittedly down 28 per cent on the year before due to the economic recession that hit Gulf expatriates especially hard.

However, it is one thing to read the official statistics about gold. The real market for physical gold is quite different both globally, and locally in the Middle East.

In November 2008 ArabianMoney reported on a record $3.5 billion purchase of gold by Saudi Arabian investors (click here). Many of these gold deals go unreported and are metal deals between individuals, often of very substantial size.

Rumors of gold hoards buried in the Arabian desert may not be so wide of the mark. But the scope for con-men to hone such stories into believable investment opportunities is legendary and due diligence is called for in any such transaction.

What certainly seems to have happened among the super-rich of Arabia is that gold has become very popular as a safe haven asset without third party risk. In the wake of global banking and investment crises and scandals the absence of a third party is particularly desirable.

Gold as money

In short, there is nobody between you and your money. Gold is money. The recent rally in global stock markets has also been treated with much skepticism in Arabia. It would be surprising if investors here emerged as net buyers of global equities rather than sellers into this rally.

It would also not be surprising if Arabian investors were secretly amassing gold hoards, and just doing it on the quiet to avoid sending the price up when news of their massive transactions emerged.

Could it be that gold buying from Arabia will outpace China in the future, if it is not already actually doing so behind closed doors? It is perfectly possible, especially if the Chinese economic miracle proves to be yet another bubble waiting to burst.

To order click on this link.

Written by Peter Cooper

March 30, 2010 at 8:39 am

Posted in Banking, Gold & Silver

Tourism will lead the economic recovery in Dubai

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Yesterday three large cruise liners were docked at the new Port Rashid terminal that opened in January this year. Perhaps around 5,000 day trippers got off these ships to explore Dubai.

At the same time hotel occupancy in the city is sharply up on the depression of a year ago. Beachfront hotels are running close to capacity again. Only the room rates are down by an average of 14 per cent on a year ago.

Cheaper meal deals

Restaurant promotions have also brought back the local diners who had become disgusted with the high food and beverage prices of the boom years. Many local credit cards bring substantial discounts in restaurants now.

No doubt trade has also picked up in the Dubai ports and free zones this year. But the turnaround is probably not as dramatic as in the tourism sector. This time last year the Atlantis Hotel on The Palm, Jumeirah was practically empty except for security guards, now the hotel is heaving with tourists.

The opening of the Burj Khalifa, the world’s tallest building, in January has certainly helped. This brought a wave of positive publicity after the negative press of the Dubai debt crisis in December.

But there is an old saying that no publicity is bad publicity, and Dubai is certainly well known these days. Indeed, it appears that as hotel rates have fallen people who could not afford Dubai before have decided to come and see what all the fuss is about.

Impressing visitors

Yesterday ArabianMoney met a couple of visitors from The Arcadia docked in Port Rashid and showed them around. They seemed dazzled and amazed by the infrastructure now available in Dubai. It is not just the best in the region but world-class.

People who live and work in Dubai probably become rather immune to the city’s charms and tend to focus on their daily problems. It is sometimes good to be reminded by visitors about the quality of what has been built here.

Perhaps after all the investment in tourism over the past decade, and the fabulous new airport facilities and Emirates Airline should also be included, it should not be surprising if tourism is the sector that leads the economic recovery in Dubai.

Written by Peter Cooper

March 30, 2010 at 8:02 am

Posted in Culture, Hotels, Travel

Abu Dhabi non-oil imports down 10% in January

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New official trade figures showed that non-oil imports into the UAE capital declined by 10 per cent in January to $10 billion, confirming that even Abu Dhabi is feeling the impact of the global economic slowdown.

Total non-oil foreign trade in January declined by a lesser four per cent to $15 billion as exports and re-exports actually grew by 21 per cent while imports declined.

Rebalancing trade

Acting director general of the Federal Customs Authority Khalid Ali Al Bustani told Gulf News that this represented an ‘improvement in the balance of trade between the UAE and the outside world during the reviewed period’ and ‘highlights the growing competitiveness of UAE exports despite the repercussions of the global financial crisis’.

However, it is also undoubtedly true that the big drop in imports is also due to a slowdown in real estate and construction in Abu Dhabi, and falling consumer demand for big ticket items like automobiles.

It is something of a myth that Abu Dhabi has not been impacted by the global financial crisis. In particular the sudden stop and real estate crash in neighboring Dubai has impacted private sector construction projects. Credit has become more difficult, and off-plan property sales have dried up.

Not that the Abu Dhabi Government has slowed its expansion program. It is mainly the private sector that is feeling the downturn, although government hotels have seen revenues fall from the boom times.

Oil revenues

The big question for this year will be how oil revenues hold up in Abu Dhabi. Last year saw a swift recovery in prices. There is the possibility of a double dip recession this year that would hit oil revenues again.

All the same, Abu Dhabi has huge reserves in its sovereign wealth funds and is one of the few nations of the world to have ample savings for a rainy day. It can also draw down funds to invest when other nations are unable to do so and when asset prices are down.

So whatever the trade figures tell us, and they are a reminder that Abu Dhabi is also a part of a globalized world, there is little cause for concern, unless you are an importer.

Written by Peter Cooper

March 29, 2010 at 8:29 am