Even though merger and acquisition agreements have fallen considerably across the GCC, in sync with the global slowdown, the UAE and Saudi Arabia may see most of the agreements happening in the second half of this year as far as the region is concerned.
According to Azhar Zafar, Head of Mergers and Acquisitions at Ernst & Young Middle East, the UAE and Saudi Arabia will see the most number of deals in the Middle East.
Nawal Roy, Managing Partner, Shobhit Capital Group based in the US, sees the UAE as one market where maximum number of deals are expected to happen in the latter part of the year.
"We expect to see M&A activity still subdued in the second half of the year. Early signs suggest there maybe some activity in Saudi, Egypt and the UAE," says Vikas Papriwal, a partner in KPMG's private equity and sovereign wealth funds practice. However, market stabilisation is vital if deals are to happen.
"In the beginning of the year, there was little buyer interest in transactions at any price. With stabilisation in the last couple months, groups are again considering growth investments, but buyers can afford to be selective. We should see some pickup in activity at the year-end as more bids and asks continue to converge," Steve McIntire, Managing Director, Capital Street Partners told Emirates Business.
Agrees Zafar: "M&A deals activity in the coming quarters is dependent on investor confidence – the key driver, which means for companies achieving good operating results as well as on the availability of liquidity," he said.
Experts believe this is a great opportunity to buy but if credit remains limited, most of the deals may be distressed and out of necessity. "It will be more driven either to strengthen or just out of sheer necessity for survival," said Roy.
"If liquidity remains tight, we can expect to see more mergers particularly in the real estate and financial services sectors," said Zafar.
However, deals could be more than just distress, said McIntire. "This is a great time for opportunistic buyers with valuations in many sectors failing to reflect growth inherent in the UAE market. As the market recognises that new consumers will eventually live in all these properties close to completion, there will be bids that appeal to more than forced sellers, at least in non-construction, consumer-driven sectors," he said.
"Sectors that are likely to be more favoured include healthcare, power and utilities and financial services," said Papriwal.
Experts differ on the subject of the sectors that may see the most M&A deals in the coming months.
According to E&Y, most activity is expected in the financial services, telecommunications and the real estate. Roy believes banking sector is very ripe for M&A activity.
McIntire, on the other hand, sees retail and consumer products as the best sectors ripe for deals.
"Retail and consumer products are the broadest markets with the most opportunities. Despite the recent down trend, the UAE consumer market will grow over a five-year horizon. In both consumer product and retail, there is a healthy mix of sellers and buyers along with some interest from financial buyers who recognise the longer-term growth dynamic," he added.
7.6.09
SEI Launches the First Shariah-Compliant Manager of Managers Equity Funds
SEI Launches the First Shariah-Compliant Manager of Managers Equity Funds
SEI Attracts $160m in Assets in First Month
SEI (Nasdaq: SEIC), a leading global provider of asset management, investment processing and investment operations solutions, today announced the launch of the first dedicated Islamic Manager of Managers equity funds. The SEI Islamic Investments Fund Plc (SIIF) is a new umbrella UCITS III fund designed to offer Shariah-
compliant investments.
This represents the first phase of SEI's expansion plans for the Middle
East and Islamic Finance market, where it has already attracted significant
interest in SIIF among High Net Worth investors in partnership with a major
global private bank, gathering $160m in assets in the first month since
launch.
Commenting, Brandon Sharrett, Managing Director of SEI's Global Private
Banking business in the EMEA region said:
"Investors globally are familiar with the Manager of Managers concept
and have been benefiting from this approach for quite some time. This is
the first time Islamic investors will be able to take advantage of our
sophisticated, internationally-recognised Manager of Managers programme.
Our launch of these funds represents SEI's first step towards targeting the
rapidly growing Islamic Finance market."
The SIIF umbrella fund will have four initial underlying Manager of
Managers sub-funds. These are the SEI Islamic US Equity Fund, the SEI
Islamic European Equity Fund, the SEI Islamic Emerging Markets Equity Fund
and the SEI Islamic Pacific Basin Equity Fund. These can be used to build
global asset allocation models and benefit from a rigorous manager
selection process designed to limit volatility, manage risk and deliver
consistent returns.
The adviser for Shariah compliance is HSBC Amanah, the Islamic Finance
Division of HSBC Securities (USA), part of the HSBC Group. Shariah
compliance is specifically included in the investment objective of each
SIIF sub-fund, with customised Shariah guidelines for each underlying fund
manager.
About SEI
SEI (Nasdaq: SEIC) is a leading global provider of outsourced asset
management, investment processing and investment operations solutions. The
company's innovative solutions help corporations, financial institutions,
financial advisors, and affluent families create and manage wealth. As of
the period ending March 31, 2007, through its subsidiaries and partnerships
in which the company has a significant interest, SEI administers $382.4
billion in mutual fund and pooled assets and manages $190.0 billion in
assets. SEI serves clients, conducts or is registered to conduct business
and/or operations, from more than 15 offices in over a dozen countries. For
more information, visit http://www.seic.com
SEI Attracts $160m in Assets in First Month
SEI (Nasdaq: SEIC), a leading global provider of asset management, investment processing and investment operations solutions, today announced the launch of the first dedicated Islamic Manager of Managers equity funds. The SEI Islamic Investments Fund Plc (SIIF) is a new umbrella UCITS III fund designed to offer Shariah-
compliant investments.
This represents the first phase of SEI's expansion plans for the Middle
East and Islamic Finance market, where it has already attracted significant
interest in SIIF among High Net Worth investors in partnership with a major
global private bank, gathering $160m in assets in the first month since
launch.
Commenting, Brandon Sharrett, Managing Director of SEI's Global Private
Banking business in the EMEA region said:
"Investors globally are familiar with the Manager of Managers concept
and have been benefiting from this approach for quite some time. This is
the first time Islamic investors will be able to take advantage of our
sophisticated, internationally-recognised Manager of Managers programme.
Our launch of these funds represents SEI's first step towards targeting the
rapidly growing Islamic Finance market."
The SIIF umbrella fund will have four initial underlying Manager of
Managers sub-funds. These are the SEI Islamic US Equity Fund, the SEI
Islamic European Equity Fund, the SEI Islamic Emerging Markets Equity Fund
and the SEI Islamic Pacific Basin Equity Fund. These can be used to build
global asset allocation models and benefit from a rigorous manager
selection process designed to limit volatility, manage risk and deliver
consistent returns.
The adviser for Shariah compliance is HSBC Amanah, the Islamic Finance
Division of HSBC Securities (USA), part of the HSBC Group. Shariah
compliance is specifically included in the investment objective of each
SIIF sub-fund, with customised Shariah guidelines for each underlying fund
manager.
About SEI
SEI (Nasdaq: SEIC) is a leading global provider of outsourced asset
management, investment processing and investment operations solutions. The
company's innovative solutions help corporations, financial institutions,
financial advisors, and affluent families create and manage wealth. As of
the period ending March 31, 2007, through its subsidiaries and partnerships
in which the company has a significant interest, SEI administers $382.4
billion in mutual fund and pooled assets and manages $190.0 billion in
assets. SEI serves clients, conducts or is registered to conduct business
and/or operations, from more than 15 offices in over a dozen countries. For
more information, visit http://www.seic.com
TAQA Arabia, the energy subsidiary of Egypt's private equity firm Citadel Capital, said Sunday it won an EUR118 million contract in Libya
TAQA Arabia, the energy subsidiary of Egypt's private equity firm Citadel Capital, said Sunday it won an EUR118 million contract in Libya, its first in the North African country.
Under the contract, TAQA Arabia will connect over 370,000 households in the Libyan cities of Tripoli, Benghazi and Misurata with natural gas through a gas distribution network, the company said in an emailed statement.
The project will be executed through a joint venture between TAQA Arabia and the Libyan Social Economic Development Fund under the auspices of the General People's Committee for Electricity, Water and Gas Distribution, according to the statement.
The joint venture, operating as The Arab Gas Co. (Libya) and to have a paid-in capital of 5 million Libyan dinars ($4 million), will be 49%-owned by TAQA Arabia, while the Libyan Social Economic Development Fund will hold 51%.
"We believe that this contract will be the launching pad for more Libyan projects for TAQA Arabia as well as our other platform companies," said Citadel Capital Managing Director Marwan Elaraby.
TAQA Arabia said it will also draft a strategic plan for the expansion of Libya's gas grid, a project worth an estimated EUR2.5 million.
The company, which was established in March 2006 by Citadel Capital, was previously awarded contracts in the United Arab Emirates, Qatar, Jordan and Syria.
-By Tahani Karrar,
Under the contract, TAQA Arabia will connect over 370,000 households in the Libyan cities of Tripoli, Benghazi and Misurata with natural gas through a gas distribution network, the company said in an emailed statement.
The project will be executed through a joint venture between TAQA Arabia and the Libyan Social Economic Development Fund under the auspices of the General People's Committee for Electricity, Water and Gas Distribution, according to the statement.
The joint venture, operating as The Arab Gas Co. (Libya) and to have a paid-in capital of 5 million Libyan dinars ($4 million), will be 49%-owned by TAQA Arabia, while the Libyan Social Economic Development Fund will hold 51%.
"We believe that this contract will be the launching pad for more Libyan projects for TAQA Arabia as well as our other platform companies," said Citadel Capital Managing Director Marwan Elaraby.
TAQA Arabia said it will also draft a strategic plan for the expansion of Libya's gas grid, a project worth an estimated EUR2.5 million.
The company, which was established in March 2006 by Citadel Capital, was previously awarded contracts in the United Arab Emirates, Qatar, Jordan and Syria.
-By Tahani Karrar,
6.6.09
Foreign capital floods back to the Gulf
Foreign capital is flooding back to Gulf equity and debt markets as international investors who fled the region last year reload on local stocks and bonds.
International investors bought shares worth about Dh6.3 billion (US$1.71bn) on the Dubai Financial Market last month, up more than 20 per cent on April, helping the market advance last Wednesday to its highest close since November. Debt markets are also receiving a boost as foreign investors withdraw from other asset classes such as US treasuries and seek higher returns from Gulf corporate and sovereign bond sales, analysts say.
But the rapid gains of the past week could lead to a significant correction across regional stock markets later this month as investors take profits, according to analysts based in Dubai.
“From our side, we’ve seen a marked increase in foreign participation in the local equity and debt markets,” said Ali Khan, the managing director of Arqaam Capital. “There’s been a shift to more positive sentiment for our markets from international investors.”
International investors retreated from Gulf markets in the second half of last year while a global lending squeeze hit regional bond and syndicated loan sales. Emerging markets have risen for the past three weeks on speculation that the worst of the recession is over, encouraging investment flows to return to economies driven by oil and other commodities.
The return of international capital has also triggered activity in the region’s private equity market, where activity has slowed over the past six months. Gulf Capital, a buyout group based in the UAE, last week launched a Dh1.75bn fund that was heavily subscribed by foreign investors.
“It was an eye-opener for us,” said Karim el Solh, the chief executive of Gulf Capital. “If you look at most of the funds launched here, they were raised locally. We were very surprised to see that international money is chasing opportunities in the Gulf. If you put it in perspective, the Gulf is expected to grow by 4.5 per cent over the next two years. It’s not the 6 to 7 per cent we saw over the past five years, but still respectable by any measure.”
But regional companies may need to become more transparent and communicate with potential investors more effectively if markets are to attract further inflows and build on recent gains.
“That’s the area of concern at the moment, there needs to be more progress in terms of reform and development for companies in the GCC in order for us to see more capital inflows,” said Mohieddine Kronfol, the managing director of Algebra Capital.
The GCC’s $100bn debt market almost ground to a halt in the previous two quarters as bond spreads widened and liquidity was unavailable. Analysts say the recent success of sovereign debt issuances helped revive interest in local bond sales. Mubadala Development, Abu Dhabi’s strategic investment arm, launched a $1.75bn bond programme in April and Qatar raised $3bn through a bond issue on April 3.
Qatar Telecom said last week it received $13bn worth of bids for the sale of $1.5bn in debt. Aldar Properties, the largest developer in Abu Dhabi, was also oversubscribed for a $1.25bn bond sale last month. The growing appetite for sovereign and quasi-sovereign debt sales is reflected in narrowing spreads on government credit default swaps, analysts say.
“This is an indication that flows are coming back, perhaps not to the same extent as [last summer], but spreads were very wide and they are narrowing now,” said Florence Pisani, an economist with Dexia Asset Management.
Equity markets are also seeing a revival, especially in Saudi Arabia and Dubai, which became the world’s third-worst performing exchange last year, losing 70 per cent of its value by the end of the year from retreating international investors.
Dubai shares on Wednesday advanced to their highest level since December after Bank of America (BofA) said the stocks offered the best value in the region. The value of shares traded last month reached Dh14.9bn, an increase of 6.9 per cent compared with Dh13.9bn in April, according to data supplied by the DFM.
Net foreign investment in DFM-traded shares more than doubled last month to Dh540.7 million as stocks gained 17 per cent. NASDAQ Dubai also saw trading volumes surge, rising 67 per cent to 331.3 million shares from 198 million shares in April.
Dubai shares are the best in the region to own for a short-term “trade” because the market’s valuation is 56 per cent lower than that of the MSCI Emerging Markets Index, based on the price-to-book ratio, according to a BofA report.
Last week, stocks advanced across the region, gaining 13 per cent in Dubai, 5.4 per cent in Abu Dhabi and 4.5 per cent in Saudi Arabia. Analysts warn that a correction could follow the huge gains of the past month.
“Equity markets have rebounded due to positive fund flows and increasing risk appetite. But our view is that there will be profit-taking in the short-term, resulting in markets in the region erasing a portion of the gains generated so far this year,” said Fahd Iqbal, a research analyst at EFG Hermes.
Sara Hamdan and Asa Fitch
International investors bought shares worth about Dh6.3 billion (US$1.71bn) on the Dubai Financial Market last month, up more than 20 per cent on April, helping the market advance last Wednesday to its highest close since November. Debt markets are also receiving a boost as foreign investors withdraw from other asset classes such as US treasuries and seek higher returns from Gulf corporate and sovereign bond sales, analysts say.
But the rapid gains of the past week could lead to a significant correction across regional stock markets later this month as investors take profits, according to analysts based in Dubai.
“From our side, we’ve seen a marked increase in foreign participation in the local equity and debt markets,” said Ali Khan, the managing director of Arqaam Capital. “There’s been a shift to more positive sentiment for our markets from international investors.”
International investors retreated from Gulf markets in the second half of last year while a global lending squeeze hit regional bond and syndicated loan sales. Emerging markets have risen for the past three weeks on speculation that the worst of the recession is over, encouraging investment flows to return to economies driven by oil and other commodities.
The return of international capital has also triggered activity in the region’s private equity market, where activity has slowed over the past six months. Gulf Capital, a buyout group based in the UAE, last week launched a Dh1.75bn fund that was heavily subscribed by foreign investors.
“It was an eye-opener for us,” said Karim el Solh, the chief executive of Gulf Capital. “If you look at most of the funds launched here, they were raised locally. We were very surprised to see that international money is chasing opportunities in the Gulf. If you put it in perspective, the Gulf is expected to grow by 4.5 per cent over the next two years. It’s not the 6 to 7 per cent we saw over the past five years, but still respectable by any measure.”
But regional companies may need to become more transparent and communicate with potential investors more effectively if markets are to attract further inflows and build on recent gains.
“That’s the area of concern at the moment, there needs to be more progress in terms of reform and development for companies in the GCC in order for us to see more capital inflows,” said Mohieddine Kronfol, the managing director of Algebra Capital.
The GCC’s $100bn debt market almost ground to a halt in the previous two quarters as bond spreads widened and liquidity was unavailable. Analysts say the recent success of sovereign debt issuances helped revive interest in local bond sales. Mubadala Development, Abu Dhabi’s strategic investment arm, launched a $1.75bn bond programme in April and Qatar raised $3bn through a bond issue on April 3.
Qatar Telecom said last week it received $13bn worth of bids for the sale of $1.5bn in debt. Aldar Properties, the largest developer in Abu Dhabi, was also oversubscribed for a $1.25bn bond sale last month. The growing appetite for sovereign and quasi-sovereign debt sales is reflected in narrowing spreads on government credit default swaps, analysts say.
“This is an indication that flows are coming back, perhaps not to the same extent as [last summer], but spreads were very wide and they are narrowing now,” said Florence Pisani, an economist with Dexia Asset Management.
Equity markets are also seeing a revival, especially in Saudi Arabia and Dubai, which became the world’s third-worst performing exchange last year, losing 70 per cent of its value by the end of the year from retreating international investors.
Dubai shares on Wednesday advanced to their highest level since December after Bank of America (BofA) said the stocks offered the best value in the region. The value of shares traded last month reached Dh14.9bn, an increase of 6.9 per cent compared with Dh13.9bn in April, according to data supplied by the DFM.
Net foreign investment in DFM-traded shares more than doubled last month to Dh540.7 million as stocks gained 17 per cent. NASDAQ Dubai also saw trading volumes surge, rising 67 per cent to 331.3 million shares from 198 million shares in April.
Dubai shares are the best in the region to own for a short-term “trade” because the market’s valuation is 56 per cent lower than that of the MSCI Emerging Markets Index, based on the price-to-book ratio, according to a BofA report.
Last week, stocks advanced across the region, gaining 13 per cent in Dubai, 5.4 per cent in Abu Dhabi and 4.5 per cent in Saudi Arabia. Analysts warn that a correction could follow the huge gains of the past month.
“Equity markets have rebounded due to positive fund flows and increasing risk appetite. But our view is that there will be profit-taking in the short-term, resulting in markets in the region erasing a portion of the gains generated so far this year,” said Fahd Iqbal, a research analyst at EFG Hermes.
Sara Hamdan and Asa Fitch
ADIC eyes investments in South Korea, Asia
ADIC eyes investments in South Korea, Asia
State-owned Abu Dhabi Investment Company (ADIC) said yesterday it is diversifying investments into South Korea and Asia as it seeks also to attract inward investment.
ADIC, Korea Development Bank (KDB) and the Korea Trade Promotion Agency (KOTRA) signed an agreement to help increase investment flows between South Korea and the Middle East and the North Africa region, ADIC said in a statement.
The agreement lays the groundwork for cooperation in many areas, including cross-border mergers and acquisitions, private equity, infrastructure and portfolio equity investment.
State-owned Abu Dhabi Investment Company (ADIC) said yesterday it is diversifying investments into South Korea and Asia as it seeks also to attract inward investment.
ADIC, Korea Development Bank (KDB) and the Korea Trade Promotion Agency (KOTRA) signed an agreement to help increase investment flows between South Korea and the Middle East and the North Africa region, ADIC said in a statement.
The agreement lays the groundwork for cooperation in many areas, including cross-border mergers and acquisitions, private equity, infrastructure and portfolio equity investment.
2.6.09
Markaz expects 50% surge in Saudi demand after mortgage law
Markaz expects 50% surge in Saudi demand after mortgage law
Makkah and Jeddah will see higher growth compared to other cities. (AFP)
By Parag Deulgaonkar on Wednesday, June 03, 2009
The total demand for residential units in Saudi Arabia will be in the range of 500,000 to 800,000 during the period 2009-13, with the economy expected to get back on the growth track next year as oil prices rise, according to a new report.
"The demand will experience a 50 per cent upward shift from its current levels if the mortgage law comes into force, thereby turning ar-ound from the historic trend of waning investment in residential real estate and lack of home ownership affordability for the younger generation," Ku-wait Financial Centre (Markaz) said in its June report on real estate.
The currently planned organised supply will provide about 73,000 units during 2009-13 and the rest will be tapped by current and future projects by smaller size developers and major projects planned in future.
The younger generation, in the age group of 20 to 35, is currently deprived of real estate ownership and they live with the elder generation, which also leads to the choice of villas as preferred housing units. They have to face a rental cost at 45 per cent of their current income levels or a monthly mortgage at 41 per cent, should they decide to move out. The higher equity levels of 50 per cent on an average, which is the result of lower mortgage penetration, also magnifies the lack of affordability.
"The mortgage law, if and when passed, will include them in the target market and expand the potential for residential real estate in Saudi Arabia thereby turning around the waning investment trend seen in the past decade," the report said.
Supply scenario, currently dominated by projects worth less than $50 million (Dh183m) apiece, is slowly drifting towards more organised supply due to the planned mega cities. However, completions will happen in a phased manner with major completions planned during the middle of the next decade, thus providing attractive opportunities for developers of smaller size projects and also for big projects.
The current major cities of Riyadh, Jeddah, Makkah, Al Khobar and Dammam will remain the centre of activity for the next five years till the boom gets shared by the planned mega cities.
Rentals and prices contracted on an average by 10 per cent, much less than other cities in the region, driven mainly by a fall in risk appetite.
"We expect rentals and prices to bounce back again following economic recovery and re-emergence of risk seeking. We expect Makkah and Jeddah to experience a much higher growth compared to other cities mainly due to the current pent-up demand," Markaz said.
Residential real estate is one major type of capital asset and a sustainable trend in its share in the overall capital formation is essential for the prevalence of equilibrium conditions in the economy.
Residential real estate investment has been growing at a much slower compound annual growth rate (CAGR) of four per cent in the past decade in nominal terms compared to the 10 per cent growth in overall investment. In the past five years, marked by high nominal capital and gross domestic product growth, overall capital formation grew at a CAGR of 16 per cent in nominal terms while residential real estate grew by a much smaller six per cent.
The better growth in non-residential real estate capital, which was at a decadal CAGR of 15 per cent and by 25 per cent in the past five years, should not be construed for commercial and retail real estate assets as this includes the infrastructure capital spending as well.
Investment in residential real estate marked by years of relative and absolute under investment.
Besides, residential real estate's share in the total capital investment also came down from its high of more than 20 per cent during early 2000s to 13 per cent in 2008 due to shortages in ownership financing. This is corroborated by a 100 basis points contraction in mortgage lending as a percentage of total credit during the past three years.
According to the report, the primary cause of the dramatic fall in the residential real estate capital build-up is the lack of mortgage lending. The effect of the current economic slowdown hit bank lending hard, which has resulted in lending contraction.
"Given the historic dismal lending to real estate and construction sector, we can expect no significant changes in the trends in bank lending to real estate. Mortgage lending as a percentage of total residential real estate capital formed stood at a meagre average of three per cent in the past five years. Though it has grown up to 5.5 per cent in 2008, it still indicates dismal penetration," said the Markaz report.
Saudi Arabia is among the least levered countries in the GCC, measured in terms of bank credit to private sector as a per cent of nominal GDP, and hence is not a highly levered economy. This scenario warrants the necessity for the passage of the mortgage law, which would remove these impediments while a further delay could put the sector in a gridlock till the time it is passed, the Markaz report said.
Kingdom urged to focus on housing supply gap
Saudi Arabia needs to give priority in its massive investment programme to tackling the housing supply constraints within efforts to bring inflation rates to normal levels, the kingdom's largest bank said yesterday.
The National Commercial Bank (NCB) estimated the investment programme being carried out in the world's oil superpower at SR2.4 trillion (Dh2.35trn), covering planned projects and those under way.
It said such projects, mostly infrastructure, are intended to expand the supply capacity in the kingdom and ease inflationary pressure in the long term.
Citing official data, NCB said inflation in Saudi Arabia, which controls a quarter of the world's recoverable oil deposits, declined to about 5.2 per cent in April from six cent in March, its lowest rate since the historic high of 11.1 per cent in July.
But the report noted that the main cause of the decline was a sharp fall in food and beverage prices, which tumbled by 10 per cent during that period. In contrast, the rental component of the cost of living index in the kingdom slipped by only about 1.2 per cent, the report said.
The report attributed the plunge in food inflation to the drop in imported inflation from major trading partners, as a result of the rapid decline in global commodity prices. In rental, the decline was minimal due to the domestic supply crunch.
"In the kingdom, the demand for residential housing is estimated at nearly 155,000 units per annum that will require a significant investment outlay of about SR68 billion during 2009-2014," NCB said in its weekly bulletin, sent to Emirates Business. "Bottom-line, priorities should be in place to direct both public and private resources towards relaxing such capacity constraints and to counterbalance the spillover effects of external shocks by capitalising on the windfall of oil resources, which will mitigate inflationary pressures in the long-run."
Saudi Arabia, which pumps nearly 10 per cent of the world's oil supply, has already announced it would invest more than $400bn (Dh1.47trn) in infrastructure development in the next five years.
The government also announced a record budget of SR475bn for 2009 in a bid to stimulate the economy that has been largely stifled by the global financial distress.
Inflation in Saudi Arabia climbed to its highest annual rate of about 10 per cent in 2008 because of a surge in food prices and rents, a weakening in the US dollar to which the Saudi rial is pegged, and strong domestic demand after oil prices soared to their highest average of nearly $95 per barrel.
The rate last year was more than double the 4.1 per cent inflation average recorded in 2007 and five times the rate of 2.1 per cent in 2006. Independent estimates expect the rate to tumble below six per cent this year.
Like in other Gulf oil producing countries, the global financial crisis has ended nearly six years of an economic boom in Saudi Arabia after sharply depressing crude prices and forcing the kingdom to trim oil output in line with an Organisation of Petroleum Exporting Countries' accord. This has led to a liquidity shortage, weakened domestic demand and slashed the kingdom's income, prompting it to use part of its massive overseas assets. (Nadim Kawach)
Makkah and Jeddah will see higher growth compared to other cities. (AFP)
By Parag Deulgaonkar on Wednesday, June 03, 2009
The total demand for residential units in Saudi Arabia will be in the range of 500,000 to 800,000 during the period 2009-13, with the economy expected to get back on the growth track next year as oil prices rise, according to a new report.
"The demand will experience a 50 per cent upward shift from its current levels if the mortgage law comes into force, thereby turning ar-ound from the historic trend of waning investment in residential real estate and lack of home ownership affordability for the younger generation," Ku-wait Financial Centre (Markaz) said in its June report on real estate.
The currently planned organised supply will provide about 73,000 units during 2009-13 and the rest will be tapped by current and future projects by smaller size developers and major projects planned in future.
The younger generation, in the age group of 20 to 35, is currently deprived of real estate ownership and they live with the elder generation, which also leads to the choice of villas as preferred housing units. They have to face a rental cost at 45 per cent of their current income levels or a monthly mortgage at 41 per cent, should they decide to move out. The higher equity levels of 50 per cent on an average, which is the result of lower mortgage penetration, also magnifies the lack of affordability.
"The mortgage law, if and when passed, will include them in the target market and expand the potential for residential real estate in Saudi Arabia thereby turning around the waning investment trend seen in the past decade," the report said.
Supply scenario, currently dominated by projects worth less than $50 million (Dh183m) apiece, is slowly drifting towards more organised supply due to the planned mega cities. However, completions will happen in a phased manner with major completions planned during the middle of the next decade, thus providing attractive opportunities for developers of smaller size projects and also for big projects.
The current major cities of Riyadh, Jeddah, Makkah, Al Khobar and Dammam will remain the centre of activity for the next five years till the boom gets shared by the planned mega cities.
Rentals and prices contracted on an average by 10 per cent, much less than other cities in the region, driven mainly by a fall in risk appetite.
"We expect rentals and prices to bounce back again following economic recovery and re-emergence of risk seeking. We expect Makkah and Jeddah to experience a much higher growth compared to other cities mainly due to the current pent-up demand," Markaz said.
Residential real estate is one major type of capital asset and a sustainable trend in its share in the overall capital formation is essential for the prevalence of equilibrium conditions in the economy.
Residential real estate investment has been growing at a much slower compound annual growth rate (CAGR) of four per cent in the past decade in nominal terms compared to the 10 per cent growth in overall investment. In the past five years, marked by high nominal capital and gross domestic product growth, overall capital formation grew at a CAGR of 16 per cent in nominal terms while residential real estate grew by a much smaller six per cent.
The better growth in non-residential real estate capital, which was at a decadal CAGR of 15 per cent and by 25 per cent in the past five years, should not be construed for commercial and retail real estate assets as this includes the infrastructure capital spending as well.
Investment in residential real estate marked by years of relative and absolute under investment.
Besides, residential real estate's share in the total capital investment also came down from its high of more than 20 per cent during early 2000s to 13 per cent in 2008 due to shortages in ownership financing. This is corroborated by a 100 basis points contraction in mortgage lending as a percentage of total credit during the past three years.
According to the report, the primary cause of the dramatic fall in the residential real estate capital build-up is the lack of mortgage lending. The effect of the current economic slowdown hit bank lending hard, which has resulted in lending contraction.
"Given the historic dismal lending to real estate and construction sector, we can expect no significant changes in the trends in bank lending to real estate. Mortgage lending as a percentage of total residential real estate capital formed stood at a meagre average of three per cent in the past five years. Though it has grown up to 5.5 per cent in 2008, it still indicates dismal penetration," said the Markaz report.
Saudi Arabia is among the least levered countries in the GCC, measured in terms of bank credit to private sector as a per cent of nominal GDP, and hence is not a highly levered economy. This scenario warrants the necessity for the passage of the mortgage law, which would remove these impediments while a further delay could put the sector in a gridlock till the time it is passed, the Markaz report said.
Kingdom urged to focus on housing supply gap
Saudi Arabia needs to give priority in its massive investment programme to tackling the housing supply constraints within efforts to bring inflation rates to normal levels, the kingdom's largest bank said yesterday.
The National Commercial Bank (NCB) estimated the investment programme being carried out in the world's oil superpower at SR2.4 trillion (Dh2.35trn), covering planned projects and those under way.
It said such projects, mostly infrastructure, are intended to expand the supply capacity in the kingdom and ease inflationary pressure in the long term.
Citing official data, NCB said inflation in Saudi Arabia, which controls a quarter of the world's recoverable oil deposits, declined to about 5.2 per cent in April from six cent in March, its lowest rate since the historic high of 11.1 per cent in July.
But the report noted that the main cause of the decline was a sharp fall in food and beverage prices, which tumbled by 10 per cent during that period. In contrast, the rental component of the cost of living index in the kingdom slipped by only about 1.2 per cent, the report said.
The report attributed the plunge in food inflation to the drop in imported inflation from major trading partners, as a result of the rapid decline in global commodity prices. In rental, the decline was minimal due to the domestic supply crunch.
"In the kingdom, the demand for residential housing is estimated at nearly 155,000 units per annum that will require a significant investment outlay of about SR68 billion during 2009-2014," NCB said in its weekly bulletin, sent to Emirates Business. "Bottom-line, priorities should be in place to direct both public and private resources towards relaxing such capacity constraints and to counterbalance the spillover effects of external shocks by capitalising on the windfall of oil resources, which will mitigate inflationary pressures in the long-run."
Saudi Arabia, which pumps nearly 10 per cent of the world's oil supply, has already announced it would invest more than $400bn (Dh1.47trn) in infrastructure development in the next five years.
The government also announced a record budget of SR475bn for 2009 in a bid to stimulate the economy that has been largely stifled by the global financial distress.
Inflation in Saudi Arabia climbed to its highest annual rate of about 10 per cent in 2008 because of a surge in food prices and rents, a weakening in the US dollar to which the Saudi rial is pegged, and strong domestic demand after oil prices soared to their highest average of nearly $95 per barrel.
The rate last year was more than double the 4.1 per cent inflation average recorded in 2007 and five times the rate of 2.1 per cent in 2006. Independent estimates expect the rate to tumble below six per cent this year.
Like in other Gulf oil producing countries, the global financial crisis has ended nearly six years of an economic boom in Saudi Arabia after sharply depressing crude prices and forcing the kingdom to trim oil output in line with an Organisation of Petroleum Exporting Countries' accord. This has led to a liquidity shortage, weakened domestic demand and slashed the kingdom's income, prompting it to use part of its massive overseas assets. (Nadim Kawach)
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