Archive for the ‘Private Equity’ Category
Anybody who thought this city might be destitute ought to have looked around Art Dubai last weekend. Most of the city’s leaders certainly did so.
18 months post-crash
For 18 months since the $20 million party to open the Atlantis Hotel on The Palm Jumeirah symbolized the height of excess, Dubai is a more sober city. But there is still an awful lot of creative and entrepreneurial spirit in Dubai, and that magic ingredient to commerce, money.
Many investors may have lost their shirts in the real estate boom. Yet the splendid modern infrastructure of the city remains. Art Dubai was held in the Madinat Jumeirah, a sprawling complex of beautiful Arabian themed hotels and a souk, opposite the iconic Burj Al Arab hotel.
It was not clear how much art was being sold, although ArabianMoney saw one elderly national buying three ladies in black several AED500,000 hand-painted watches. The artist who painted these time-pieces was giving a display of painting under the microscope.
Yet the surrounding hotels obviously benefited from this modern art fair. The sponsors HSBC and Abraaj Capital benefited from the prestige of association. And Dubai has an event that will probably gradually morph into something like the Royal Academy Summer Exhibition. It is another leap forward for a city that had no defining annual art show until four years ago.
Boom and bust
Of course, it will be some years before anything like the recent Dubai real estate boom can happen again. These booms do tend to be once-in-a-generation transformations that are followed by long consolidation periods.
But if anybody doubts that a global hub city like Dubai is going to bounce back then they should have taken a look at Art Dubai 2010.
Modern art is also presently in recession with auction prices on the floor. So it makes sense for the galleries to come to their potential buyers rather than expect them to journey to overseas.
Increasingly, multinationals and banks are also going to relocate to Dubai for the same reason, and to avoid taxes and take advantage of much lower real estate costs. That is the new vision for Dubai.
It said JP Morgan, Citibank and Standard Chartered are working with the Abu Dhabi debt management office on the issue but no date has been set. Abu Dhabi requires debt finance both for its ongoing construction program and to assist Dubai in its debt restructuring process.
Dubai debt details
More details continue to emerge about the extent of the Dubai debt problem from the latest report from the International Monetary Fund.
Morgan Stanley told its clients that it reckons the bilateral debts of Dubai government related companies amount to between $10 billion and $20 billion, while the new total for syndicated debt from the IMF is $109 billion. This brings the total Dubai Inc debt to a maximum of $129 billion.
Then The National newspaper cites a study from UBS that notes Dubai Inc will not to want to leave half-built projects. UBS estimates another $60 billion is required to foot this bill. Total liabilities then top $189 billion.
And who is owed this money? UBS points out that the biggest liabilities are with Dubai banks which are owned at least in part by Dubai Inc. Thus the idea that the Dubai Government can somehow shed its liabilities is seriously compromised.
As UBS concludes: ‘Such a large ownership share by domestic financial institutions, the largest of which are majority-controlled by the government, may make it easier to reach majority-based consensual agreement, which reduces the risk of involuntary debt restructuring or outright default’.
On the other hand, it makes a recapitalization of the local banking sector look more and more likely, and perhaps at least part of the money from the first-ever Abu Dhabi sovereign debt issue will have to go into the local banking sector.
However, as a visiting banker from JP Morgan told ArabianMoney yesterday the debt problems of the UAE are actually among the simplest in the world to understand and resolve. They are debts against investment projects that have gone wrong, not runaway government budget deficits.
Things are becoming clearer and more transparent, and the IMF report is a major contribution to identifying the scale of the problem. Yet even with the wealth of Abu Dhabi this is a tricky circle to square.
Abu Dhabi raising money on its good credit to bailout Dubai, whose international credit standing is among the lowest in the world right now, would likely be a contribution to the final solution, although all this is still speculation at this stage.
The $300 billion Greek debt crisis has thrown the spotlight on government debt as an investment class. Greece cheated Brussels into thinking its debt was lower than now proves to be the case, hence the nasty surprise.
But actually a huge question mark hangs over the viability of long-term investment in almost any government bond at the moment. Put simply it is a matter of pricing: are bonds priced too low for the inflation outlook?
Inflation as we normally understand it means upward price revisions for goods and services. But inflation is always a matter of the money supply. Too much money chasing too few goods equals inflation.
And where does the money supply come from? Well, actually the bond markets that allow commercial banks to create credit.
And what do we know that governments all over the world have been doing to counter the global financial crisis? They have been issuing more and more bonds, and even buying their own debt in a bizarre process called quantitative easing. So the money supply is rising, even if commercial credit is still actually shrinking.
Eventually that new money will find its way into global financial markets and cause inflation. How long will that take?
There is presently no immediate fear. Indeed, the most immediate prospect is a downturn in global equity markets that will rally the dollar and boost bond purchases, at least for a short time. Some think central banks are about to cause a stock market crash for that very reason.
But look at a 10-year British Gilt paying four per cent interest, or for that matter Greek bonds paying not much more. You have to be a bit of a loony to think that will represent a good buy over a decade.
In the 1970s bonds were dubbed ‘certificates of confiscation’ because inflation eroded their real value and gave them a negative yield after inflation. This time will not be different.
Bond yields are presently very low and bond prices therefore exceptionally high. What has gone up in price will go back down, not up further, or not for very long.
Deflation versus inflation
The confusing mixture is first deflation as house prices and equities fall, then inflation as governments overdo their rescues and finally something bordering on hyperinflation to eliminate debts. Timing this is very difficult.
If you are a bond holder then you hold debt, and that is not a position you want to have when inflation really roars and destroys debt.
In previous major financial crises this has always been the penultimate phase, and when the bond market implodes then comes the final, or ‘ultimate’ bubble as George Soros calls it, in gold and silver.
Thus while owning short-term bonds and cash makes sense in a stock market crash, a swift move into precious metals thereafter should be contemplated.
You do not have to go back far in history to find government bond defaults. Think Russia 1998, Argentina 2001. The wonder is surely that investors continue to believe governments have some kind of magic as creditors.
The celebrated demographics forecaster Harry S. Dent Jr forecasts a stock market crash by the end of February in his New York Times Bestseller ‘The Great Depression Ahead: How to prosper in the debt crisis of 2010-12’.
From around 10,000 today he has two scenarios for the Dow Jones in 2010: one, a fall to 3,300-4,600 in a broad crash also taking down real estate and commodities, including gold and oil; second, for the Dow to go even lower to 2,200-3,500.
Both are apocalyptic for stock market investors. Harry Dent made his name in the early 90s with a counter-consensus and very accurate, super bullish prediction about the outlook for stocks. His specialty is the study of demographics, or population trends, as a means of forecasting the future.
In his current book he apologizes some past errors, with a real howler being a stock market bubble in the late 2000s that just never happened or came close. Indeed, he is almost humble about noting the complexity of intermingled cycles that make forecasting tough.
Yet he has made some good calls in the past and his use of demographics is original and based in solid statistical information about population trends. There is also truth in his contention that the broad trends he mapped in his first forecasting coup in the early 90s did include an big downturn in 2009-2012.
Aside from his demographic analysis, Mr. Dent stands as a deflationist. He cooly says that all the government spending in the world will not offset the deflationary impact of a private sector collapse in business activity and trade, driven by falling consumption and a house price implosion.
Sometimes the simplest observations prove to be the best guides to future stock movements. For if this statement on deflation stands up then financial markets are currently way overvalued and heading for an imminent fall.
What is surely interesting for stock market investors is that Harry Dent is standing back from the day-to-day noise of the market. He is not talking about Greek or Dubai debt. He is not worrying about the latest unemployment or housing figures. His analytical model saw this coming twenty years ago.
For the full analysis you should read his very cogent book. But the obvious immediate implication is that stock market investors should sell now and not dally around. It is probably too late to sell real estate but certainly do not buy anymore.
Mr. Dent is negative on the immediate outlook for gold as he thinks the yellow metal will suffer along with all commodities in a rush to cash and short-term bonds. Thereafter Dent thinks there will be some great opportunities to buy long-term US bonds at high yields but curiously he does not foresee a rush to gold as bonds crash.
Harry S. Dent has been very wrong in his forecasts in the late 2000s but he seems on much more solid ground now with the Dow dipping under 10,000 last week. It is just very hard to come up with a positive alternative scenario that would save the long rally.
Despite the Dubai debt crisis of last December and much lower property sales there is still a downside risk to Dubai real estate in 2010, according to a panel of experts convened for a breakfast conference by Cityscape Dubai today.
This downbeat assessment of the outlook for local real estate also provided an insight into the opportunities that await patient investors.
Asteco Property Management CEO Elaine Jones told the seminar that business infrastructure now marked Dubai well ahead of its regional rivals, and that lower office and residential rentals meant that the city was unlikely to lose another major financial relocation to Singapore like Credit Suisse.
ING Investment Management’s head of equities, Fadi Al Said thought Dubai property prices still had some way to fall but that a bottom might be reached towards the end of the year. He pointed out that in many market corrections the bottom occurs below the cost of construction but that equities touch bottom six months ahead of real estate and might be close to the bottom right now.
Al Tamimi lawyers’ property head Lisa Dale cited a series of ongoing legal reforms that should gradually strengthen the real estate sector in 2010 – from regulations to protect property investors to strata law regulations and a trust law for real estate.
However, she noted that there is no concept of trading while insolvent within UAE law and that this is inhibiting the liquidation of insolvent companies, and making it ‘easy to stick your head in the sand’.
In response to a question from ArabianMoney about possible insolvencies and liquidations ahead in the Dubai property sector the panel was evasive, although the precedent of most real estate cycles is for substantial bankruptcies at this stage.
The general feeling was that Dubai is working through its real estate crash and the aftermath, and that Abu Dhabi is both somewhat protected and just later in this cycle. Clearly for those investors who get their timing right there are opportunities, and the major downturn in the UAE is already over.
So while downturn risk remains in Dubai property, the greater risk is now probably excessive pessimism and missing out on the upturn which cannot be far away.
Consider the curious case of Karl Rabeder, a self-made businessman from Austria who is giving away his $4.5 million fortune because he found being rich was making him unhappy. Is he mad or just eccentric?
Only The Daily Telegraph could come up with such a story. His fabulous $2.3 million home in the Austrian Alps (pictured above) is to go and his $1 million farm house in Provence. The interior furnishings business that made him rich has already gone.
Well earned riches
Most people in similar circumstances feel that they have worked very hard for what they have got, and generally think it should have been more or that they were cheated in someway. Mr. Rabeder apparently believes he will be happier living in a small hut and giving his money to charities in Central and Latin America to help the very poor.
The tipping point came on a three-week holiday staying in a five-star hotel in Hawaii that Mr. Rabeder and his wife thought soulless with themselves and the staff just actors on a stage.
Yet it would take a lot more than a bad holiday in America to persuade most people that being a multi-millionaire was not worth the candle. What about the financial security for the future?
If the big homes are a burden then downsize to something simpler and more practical. For most people this looks like a simple failure of imagination. They would have a Ferrari and be done with it. Mr. Rabeder is even selling his Audi A8.
But then again the whole point of being wealthy is to be free to do what makes you happy. If giving your money away to enrich the poor gives you satisfaction then why not?
It is perfectly true that you can only live in one house at a time, drive one car and eat so many five-star meals without feeling sick. But this seems a curious allergic reaction to materialism and good living, a sort of personal communist revolution.
Perhaps in future years The Daily Telegraph will care to report back on their Karl whose Marxist credentials would have pleased the master, or will he be forgotten now that he is just another average citizen of modest means. Mad is the word.
Anybody looking back over their life can recall moments that marked a turning point, or just sheer good luck. Dubai’s announcement that is has found a new offshore oilfield and will start production within a year appears to fall into this category.
Dubai has certainly had its run of misfortunes since the oil price drop in July 2008 and the financial crisis of that September. The worst moment was probably the debt crisis of mid-December last year that ended in an anti-climax with Abu Dhabi stumping up the cash.
We do not yet know how big or what production can be expected from the new Al Jalila oilfield, named after the daughter of the Ruler of Dubai and UAE Prime MInister Sheikh Mohammed bin Rashid Al Maktoum. But state news agency WAM said it ‘would give a strong impetus to all sectors of the local economy and provide a new source of income enhancing the comprehensive development of Dubai’.
Dubai oil production is understood to have dwindled to 50-70,000 barrels per day out of the UAE’s total of 2.3 million barrels per day which makes the country the world’s third largest oil exporter. This remains a useful cash flow for the emirate.
Any new income will be welcome to help service the debts amassed by Dubai Government and state-owned companies in the boom years, variously estimated at between $85-170 billion. $22 billion in loans to Dubai World have been suspended pending a rescheduling of debts by the end of May or a liquidation of its real estate units Nakheel and Limitless.
Having struck oil last week Dubai will be hoping that good luck will come in threes, as the old superstition suggests. It is probably true that the emirate is already close to or at the bottom of its recent misfortunes.
A classic sign is an over-exaggeration of the negative, and international news comment has been heavily negative since the debt crisis. It is perhaps overlooking the obvious fact that in the event there was no debt crisis as the bills were paid up. That tends to suggest wealthy friends if nothing else.
It also emerged in The National last week that conditions applied to the money given to Dubai World from the Abu Dhabi bailout may make the Dubai Government a preferred creditor, above the banks, in any liquidation. That puts more pressure on the banks to settle, and would transfer assets from one government-owned entity to another in a liquidation.
More luck coming?
But after 18 months of bad luck, striking oil is a welcome piece of good fortune. What could reasonably follow?
One prospect is that the global stimulus plans produces higher general inflation levels though their printing of money, and that this results in another oil boom. This is what happened in the late 1970s and the economic conditions are not that dissimilar.
A third unexpected piece of good luck would be some kind of a breakthrough in the regional peace discussions. Dubai will always benefit as the regional commercial and financial hub city if business picks up in the Gulf.