Rlb gulf states_report_october_2011

CONSTRUCTION MARKET INTELLIGENCE

FEATURING

THE ECONOMIST INTELLIGENCE UNIT

WHERE TO NOW FOR THE GULF?

FOURTH QUARTER 2011

GULF STATES REPORT

Cover: City skyline, Dubai

Disclaimer: While the information in this publication is believed to be correct at the time of publishing, no responsibility is accepted for its accuracy. Persons desiring to utilise any information appearing in the publication should verify its applicability to their specific circumstances. Cost information in this publication is indicative and for general guidance only and is based on rates as at Fourth Quarter 2011.

OFFICES AROUND THE WORLD

CANADACalgary

CARIBBEANBarbados

Grand Cayman

USABoise, ID

Boston, MA

Denver, CO

Hagåtña, GU

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Kennewick, WA

Las Vegas, NV

Los Angeles, CA

Monroe, WA

New York, NY

Orlando, FL

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Portland, OR

San Francisco, CA

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Washington, DC

AMERICAS

CHINABeijing

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INDIA Mumbai

INDONESIAJakarta

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PHILIPPINESCebu

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SINGAPORESingapore

SOUTH KOREASeoul

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VIETNAM

ASIA

MIDDLE EASTAbu Dhabi

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AUSTRALIAAdelaide

Brisbane

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Gold Coast

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Northern NSW

Perth

Sunshine Coast

Sydney

Townsville

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NEW ZEALANDAuckland

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Palmerston North

Tauranga

Wellington

OCEANIA

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1

BAHRAINBahrain's economy continues to reel under socio-political unrest dating back to mid-February. Effects include a drop in economic activity, apart from a higher budget deficit.

Bahrain’s Chamber of Commerce and Industry estimates that the unrest caused economic damage of up to $2 billion (approximately 750m BHD). This is a sizable amount, by virtue of equalling 9.5 per cent of gross domestic product (GDP). Bahrain has a nominal GDP of $21 billion.

Ostensibly, the economic costs relate to damage occurring to several economic sectors, notably retail, hospitality and events. Reflecting the uncertainty, some locals have chosen to limit their spending to essentials, and where possible delay purchases of durable goods.

Also, the hospitality sector is suffering from an overall drop in the number of visitors, in particular from neighbouring Saudi Arabia, simply to avoid being caught up in street violence. Thousands of Saudi nationals tend to cross the causeway during the weekend, partly to enjoy the liberal lifestyle in Bahrain.

Additional losses concern the cancellation of events, such as the hosting of Formula One. The ruling body of F1 has dropped Bahrain from the 2011 calendar due to the political unrest. The next time Bahrain hosts F1 is in a distant November 2012. F1 is a contributor to Bahrain's economy through spending on ticket sales, TV coverage, transport, accommodation, food and beverage, merchandise and souvenirs and other leisure activities.

Another casualty relates to the widening fiscal shortfall. Recently, the authorities added $860 million to the 2011 budget to help cover a hike in salaries and pensions. This will raise total spending to a record $9.1 billion in 2011.

Nevertheless, stronger spending increases the deficit to $3.1 billion, or one third of total spending. This level of shortfall contradicts a condition of the Gulf Monetary Union project, which restricts the deficit to three

per cent of GDP.

However, the actual deficit will most likely end up being less, as authorities have prepared the budget using $80 per barrel of oil. It is widely expected that oil prices will average just above $100 per barrel this year.

One additional source of income is the promised economic assistance of $10 billion by the Gulf Cooperation Council (GCC) countries. They have promised $10 billion to Bahrain and Oman over ten years to help the countries cope with the unrest. On a positive note, stronger spending should help Bahrain maintain an economic growth rate of around four per cent. Stronger spending and hence GDP growth helped convince Standard & Poor to remove the negative outlook from Bahrain's long- and short-term sovereign ratings one notch to A-/A-2 with a negative outlook.

Another victim of the socio-political unrest relates to raising fresh doubts on the planned causeway link with Qatar. This issue came to light recently following the virtual cancellation of a joint Qatar/Bahrain insurance firm. Key investors in the firm attributed the decision to a lack of progress on the planned causeway linking Qatar and Bahrain.

The 40km causeway is to cost more than $3 billion. Yet political differences rather than funding seem to be the primary cause for the lack of real progress. Looking back, the two countries settled a decade-long oil border dispute in 2001 thanks only to a ruling by the International Court of Justice. And only recently, Qatar-based Al Jazeera added to the unease by airing a programme on the problems in Bahrain.

All told, economic costs related to political unrest stand to rise further, which is not good for Bahrain.

MARKET INTELLIGENCE

GULF STATES REPORT

2

MARKET INTELLIGENCE

GULF STATES REPORT

KUWAITThe IMF forecasts that Kuwait's

economy will grow steadily

throughout 2011 as a result of the

government implementing its

development plan and the global

recovery supporting demand for oil,

together with the higher oil prices.

Real GDP of the world's 4th largest

oil exporter is projected to grow by

5.2% this year, slightly down on the

IMF's April projection of 5.3%.

Analysts polled by Reuters earlier this

year expected economic output to

grow by up to 4% this year in Kuwait,

which has seen only limited public

protests in the political unrest that

has swept other parts of the Middle

East.

Government expenditure, excluding

energy subsidies and social security

recapitalisation, is estimated to have

increased by 21.5%. Expenditure

increased in the second half of the

fiscal year 2010/2011, with a cash-

for-food social grant accounting for

half of the increase. Moderate fiscal

stimulus is still appropriate at this

time.

Kuwait’s economic outlook remains

robust, with a strong energy sector

combined with a government willing

to spend massively on infrastructure

projects, underpinning our positive

view on growth potential in 2011.

This research believes that Kuwait's

economy will be only minimally

affected by the political tensions

that erupted in the start of 2011 and

forecasts growth to remain robust

at 3.4%, averaging 4.0% through to

2015.

The outlook for Kuwait's property

sector remains reasonable, with

the strength of the wider economy

underpinning the sector. The total

volume of real estate transactions

in the country rose by 5.3% quarter-

on-quarter in Q2. This result follows

steady growth in the sector since

mid-2009, where the greatest growth

has been in residential property, due

to government housing distribution.

Overall transaction volume is forecast

to continue to rise throughout 2011.

The government is attempting

to direct investment in the non-

hydrocarbon sector, targeting a host

of new infrastructure projects, along

with investment in healthcare and

education. Plans also include the

construction of the business hub,

Silk City, at an estimated cost of

US$77bn, as well as a new railway

and metro system. In addition to

this, the government has already

begun the construction of three more

hospitals and 15 new clinics.

3

MARKET INTELLIGENCE

GULF STATES REPORT

OMANGDP growth is forecast to slow to

4.6% this year, from an estimated

5.5% in 2010, with a further slowdown

to 4.2% in 2012. Strong growth in

oil and gas production will lift oil

GDP by 4.8% this year, while non-

oil GDP is forecast to increase by a

respectable 4.5%. Despite the impact

of continued protests on business

confidence and tourism, non-oil GDP

will benefit from surging oil prices

(up 42%) and a boost from public

spending, including GCC aid. Despite

an additional spending package of

US$2.6bn, the budget is forecast

to move into a surplus of some

6.7% of GDP in 2011 from a deficit

of 2% of GDP last year. This reflects

an oil price forecast of US$113 per

barrel compared with the oil price

assumption in the budget of US$58

per barrel. Inflation is forecast at just

below 4% both this year and next.

With Brent crude prices having

hovered between $92 and $127 per

barrel since the beginning of the

year, Oman’s government spending

should rise to 9.2 billion rials ($23.9

billion) this year, slightly higher

than the expected 8.1 billion rials.

The Sultanate plans to increase

government spending by a further

9 percent in 2012 to finance

construction projects and create

more jobs for nationals.

The government’s plan to spend

a massive RO 42.71bn during the

Eighth Five-Year Plan period (2011-

2015) will see 37.7 percent of the total

budget funnelled into infrastructure

development.

The continued weakness of the US

dollar, to which the Omani Rial is

pegged, has had an inflationary

effect on materials, which are mostly

imported. This has further reduced

the margins of developers, who

continue to absorb the impacts of

wage increases and transportation

costs.

International uncertainty and

market volatility are still affecting

the property market in Oman but

growth prospects are improving for

the longer term and the sector is

expected to rebound slowly over the

coming years. Integrated Tourism

Complex projects such as The Wave

and Muscat Hills remain in demand

due to the quality of housing and

modern design.

Analysts report that there are some

signs of increasing stability in the

residential leasing market, but further

softening of rental values can be

expected in the short to medium

term, particularly as the supply of

new apartments comes into the

market. The long term outlook is

that the market should start to show

signs of recovery as the economy

continues to expand.

The population of Oman has grown,

with approximately 73 per cent of the

population now living in urban areas.

The result has been an increasing

need for housing designed for, and

affordable to, the local population in

western areas of the city, such as Al

Khoud and Seeb.

Several developers have picked up on

these trends and there is increasing

development of affordable housing in

these areas.

The pace of development in the

retail sector had slowed significantly,

and according to reports, it would

appear that the appetite for further

large-scale retail space has been

satiated to a large degree in the

short to medium term. Reasons for

this include the fact that levels of

per capita disposable income are

relatively low in comparison to other

GCC countries, and that Muscat is

not seen as a shopping destination,

unlike Dubai.

5

MARKET INTELLIGENCE

GULF STATES REPORT

QATARQatar’s economy is predicted

to continue its rapid growth

trend through the rest of 2011,

with increases in GDP per capita

expected at around 20%. The main

drivers for the recent rapid growth

come from the ongoing increase

in production and exports of LNG,

oil, petrochemicals and related

industries. LNG production targets

are on programme to be met at the

end of 2011 and the growth rate is

then expected to reduce to a more

modest, but steady, increase of 3 to

4% per annum from 2012 to 2015.

Although Qatar is currently riding on

a massive hydrocarbons expansion

boom, which is driving growth

rates, economic diversity is seen as

fundamental to securing long-term

stability in the local economy.

General market inflation peaked

in 2008 at 15.5%, subsequently

crashing to -5% in 2009 as a

result of the economic downturn.

Although returning to positive levels

in 2010 the percentage increase

remained low at around 1%. Inflation

is expected to rise and stabilise

between 3 and 4% per annum from

2011 to 2015.

Qatar benefited, in the first quarter

of 2011, from higher oil and gas prices

adding to the economy growth and

funding the diversification strategy.

Qatar allocated QAR 35.5 billion of

its 2010/2011 budget to infrastructure

projects, which constituted 30% of

the total budget expenditure. Less

than half way through the 2010/2011

financial year the Qatari budget hit

a surplus of over 19 billion Riyals,

predominantly due to increased gas

production and oil prices trading

significantly above that assumed by

the government. First quarter 2011 oil

prices broke the US$100 per barrel

mark as a result of the widespread

unrest in the Middle East.

Qatar’s construction market

continues to show favourable signs,

with clear evidence of new projects

underway in Doha. Below are some

of the major government funded

projects currently under design/

construction in Qatar:

• Qatar’s US$14 billion international

airport due to open in 2011 with

capacity for 24 million passengers.

• New city areas (Lusail), port and

road infrastructure with associated

utility services.

• Major urban regeneration projects,

such as the Musheireb project.

• Rail transport systems, linking

Qatar to neighbouring countries.

• Doha Metro system, a US$ 3

billion scheme with 85km of track

connecting Musheireb, West Bay

and Lusail.

• US$ 20 billion on road networks

including the new Qatar / Bahrain

causeway and multi lane road

tunnels linking existing areas of

Doha.

In addition to the government

funded projects, new retail centres,

healthcare facilities and residential

communities have also been released

to the market.

With the announcement of Qatar as

the host nation for the 2022 World

Cup, it is no surprise that there is a

certain optimism being felt within

the Qatar construction market. With

the associated spend in the sector

expected to be in the region of US$

50 billion there is a lot to be done in

a relatively short period of time.

In addition to the 12 stadia,

additional hotels and other World

Cup specific requirements, some

previously planned projects will

be accelerated to be ready for the

Event, including the new Doha port;

a US$7 billion project previously due

for completion in 2023. The new port

will allow cruise ships to be used to

accommodate fans during the games.

6

MARKET INTELLIGENCE

GULF STATES REPORT

UAEThe UAE's economy, which is the

second largest in the Middle East,

is in recovery mode, despite the

increasingly uncertain regional

environment. This is primarily due

to the high oil prices and strong

demand from traditional trading

partners, which is boosting growth

in non-hydrocarbon GDP from 2.1%

in 2010 to 3.3% in 2011. The UAE

economy is projected to pick up

sharply by around 5% over the next

five years, with real GDP rebounding

to almost 3.6% in 2011, from 2.1% in

2010 and 1.6% in 2009.

In March 2011, the International

Monetary Fund, projected UAE

growth for 2011 at around 3.3%, but

has revised this upwards to to 3.5%

citing Dubai's recovery, massive

spending by Abu Dhabi and high oil

prices.

New figures for the key UAE sectors

of transport, tourism and trade are

encouraging.

In May 2011, Emirates Airline, Dubai's

best known brand, announced a 52%

increase in profits to US$1.5 billion for

the year to 31 March 2011, compared

to US$964 million in 2010. It also

recently successfully marketed a

US$1 billion bond.

Tourism, which is one of the UAE's

prime economic sectors, is also

increasing strongly. The Emirate's

biggest hotel group, Jumeirah, states

that occupancy and room rates are

back to 2007 levels as a result of

a 9% growth in tourist numbers in

2011. This is mainly due to the unrest

in other part of the Middle East and

Northern Africa where tourists are

regarding the UAE as a safe haven,

free from any uprisings.

The Arab unrest has also boosted

the financial services sector, which

suffered badly in the credit crunch.

Many banking services have

relocated from Manama in Bahrain to

Dubai. Bahrain was Dubai's closest

rival in this sector. In addition, new

banks from the BRICSA countries

(Brazil, Russia, India, China and South

Africa) have begun to set up facilities

in UAE. Bank deposits have climbed

to their highest level in more than

two years.

7

MARKET INTELLIGENCE

GULF STATES REPORT

Economic growth has been so strong

recently that MSCI, the economic

index provider, is now examining

whether to re classify the UAE from

"frontier" to "emerging market" by

the end of 2011. An upgrade would

attract new liquidity to the UAE's

bourses and encourage investment.

Interestingly, Dubai has been named

"Middle East City of the Future

2010-2011" by fD Magazine, based

on its popularity as a foreign direct

investment destination. This is a

strong testament to its economic

fundamentals and growth potential.

The study looked at 46 cities under

six categories - economic potential,

human resources, cost effectiveness,

quality of life, infrastructure and

business friendliness.

The property real estate sector

remains under pressure in Dubai, with

the over supply situation continuing

in certain asset classes, especially

residential apartments and offices.

The prices have stabilised in certain

residential sectors and banks are now

starting to ease lending conditions,

which is contributing to an increase

in sales activities. Rentals continue to

fall in the lower to medium classes. In

Abu Dhabi, there is still a shortage of

residential and office space, but there

is a large amount of supply coming

onto the market over the next few

years.

Retail malls are still experiencing

some vacancies, but these are quickly

snapped up by other retailers.

Abu Dhabi has been set to

outperform Dubai over the coming

years, given the former's large

scale investment plans targeting

the infrastructure sector, as well as

the ongoing concerns surrounding

Dubai's lingering debt repayment

schedule. However, a number of

Dubai's debts are being resolved

at this time and Abu Dhabi has

shown signs of slowing down its

development so that it maintains

sustainable levels.

9

MARKET INTELLIGENCE

GULF STATES REPORT

SAUDI ARABIAThe construction sector in Saudi

Arabia is projected to achieve a 4%

growth by the end of the year and

the sector’s annual development

is expected to be maintained at a

similar rate until 2015. Presently,

Saudi’s investment in construction

accounts for 31 per cent of the MENA

region’s total. The top three sectors

receiving the most investment are

construction, infrastructure and

power.

Saudi Arabia’s construction sector

recorded a significant leap in

the first quarter of 2011, with the

value of contracts awarded by the

government increasing by more than

five times that of the same period of

last year. In recent years, record high

oil prices and large oil revenue have

made it possible for the construction

industry to employ extra liquidity for

its development.

The impact of the recent Arab

Spring has been varied throughout

the gulf region. In the Kingdom this

has led the government to pledge

investment in infrastructure and

affordable housing, to which 50

per cent of Saudi Arabia’s stimulus

package of SAR 500billion will be

allocated, providing 500,000 new

homes. Saudi Arabia is likely to see

inflation slow in the medium – to

long term as government spending

provides more homes and increases

the limit on loans at the Mortgage

Development Fund.

The country has maintained a strong

sustainable demand for infrastructure

projects, as a direct result of the

growing Saudi national population's

demographics, 66 per cent of the

population being under 25 years old.

Hospitals and healthcare facilities

have received SR68.7 billion funding

from the Health Ministry to enhance

medical health facilities throughout

the Kingdom equating to a 12.3 per

cent increase over the previous

year. Infrastructure pertaining to

transportation and municipal services

for the provision of 23,000 miles

of additional roads, traffic easing

projects and expansion of aviation

networks, have received circa SAR 50

billion.

Private sector credit has continued

to track higher, albeit gradually, as

the Kingdom’s well-capitalised and

liquid banks respond to increasing

demand from an expanding private

sector. Official data shows that

bank lending to the private sector

grew by 6.9 per cent in the twelve

months to April leading a multitude

of private construction investment

opportunities.

The Construction Contracts Index

(CCI) reached 225.5 points, an

increase of 79.02 base points in the

first quarter, reflecting the high value

of awarded contracts resulting in a

strong start to the year.

Following on from strong

construction growth, consumption

of iron and steel in the Kingdom

reached 16 million tonnes in 2010. The

Saudi Arabian Steel Industry forecast

that, by 2013, steel consumption

will have significantly increased and

prices will soar. Presently, the steel

industry of Saudi Arabia is highly

import-oriented and steel imports

were estimated at 4 million metric

tons in 2010. Further, it is anticipated

that the share of imported steel

will witness an upward trend in the

coming years.

11

LOCATION HOUSES APARTMENTS OFFICES INDUSTRIAL RETAIL HOTEL CIVIL

ABU DHABI

BAHRAIN

DOHA

DUBAI

KUWAIT

OMAN

RIyADH

PEAK GROWTH ZONE

PEAK DECLINE ZONEPEAK ZONE

MID GROWTH ZONE

MID DECLINE ZONE

MID ZONE

TROUGH GROWTH ZONE

TROUGH DECLINE ZONETROUGH ZONE

CONSTRUCTION MARKET ACTIVITy

CyCLE MODEL

GULF STATES REPORT

0%

10%

50%

80%

100%

HOUSES APARTMENTS OFFICES INDUSTRIAL RETAIL HOTEL CIVIL

PEAK ZONE MID ZONE TROUGH ZONE

20%

30%

60%

40%

90%

70%

MARKET SECTOR MOVEMENT - GULF BAROMETER

0

20

25

5

15

10

NU

MB

ER

OF

IN

ST

AN

CE

S

PEAK ZONE MID ZONE TROUGH ZONE

NUMBER OF INSTANCES – GULF TALLy

12

LOCATION

OFFICES BUILDINGS (INCL FITOUT) RETAIL INDUSTRIAL

PREMIUM A GRADE MALL STRIP SHOPS WAREHOUSE

LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH

ABU DHABI AED 6,700 8,000 5,700 6,900 4,800 6,500 3,500 4,500 1,800 2,700

BAHRAIN BHD 525 650 425 550 375 475 225 300 125 200

DOHA QAR 7,000 8,500 6,000 7,200 5,000 6,000 3,500 4,500 2,000 3,200

DUBAI AED 6,500 7,800 5,500 6,700 4,600 6,300 3,500 4,500 1,800 2,600

JEDDAH SAR 4,650 6,550 3,550 5,375 2,800 4,650 2,650 4,850 1,750 2,400

KUWAIT KWD 375 475 325 425 275 375 175 225 100 150

OMAN OMR 605 725 510 625 430 585 325 420 165 240

RIyADH SAR 4,500 6,400 3,450 5,200 2,670 4,500 2,500 3,750 1,650 2,300

LOCATION

CAR PARKING HOTELS (INCL FITOUT) HOSPITAL RESIDENTIAL

MULTI-STOREy BASEMENT 5 STAR 3 STAR GENERAL MULTI-STOREy

LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH

ABU DHABI AED 1,500 3,500 2,750 4,500 9,000 12,000 7,500 9,000 7,500 10,100 4,700 6,500

BAHRAIN BHD 125 300 250 450 675 850 775 925 775 1,050 350 450

DOHA QAR 2,000 4,000 3,000 5,000 9,500 11,000 7,500 9,000 8,000 10,500 5,500 7,000

DUBAI AED 1,500 3,500 2,750 4,500 9,000 12,000 7,300 8,900 7,400 9,800 4,500 6,300

JEDDAH SAR 1,475 1,900 1,950 2,900 5,800 6,800 3,950 4,900 5,800 6,800 3,400 4,700

KUWAIT KWD 100 250 200 350 500 700 550 675 550 750 300 400

OMAN OMR 140 325 255 420 835 1,115 680 830 690 910 420 585

RIyADH SAR 1,350 1,750 1,875 2,800 5,625 6,750 3,950 4,800 5,625 6,750 3,200 4,500

CONSTRUCTION RATES The following data represents estimates of current building costs in the

respective market. Costs may vary as a consequence of factors such as site

conditions, climatic conditions, standards of specification, market conditions

etc. Costs are per square metre of gross floor area.

MARKET DATA

GULF STATES REPORT

13

GULF STATES REPORT

MARKET DATA CONSTRUCTION COST RELATIVITIES

ABU DHABI 110

DOHA 110

DUBAI 107

JEDDAH 106

RIyADH 100

BAHRAIN 97

OMAN 93

KUWAIT 82

CONSTRUCTION COST MOVEMENTS

NOTES

1. Indexation in this edition of the Gulf Report provides a direct relativity

comparison between Locations.

2. Index numbers have been re-based to align the Gulf Report with the index

base of the suite of Rider Levett Bucknall Reports. This process of re-basing

has not altered or affected the relativities shown in the current Report.

INDICES 2006 2007 2008 2009 2010 2011 (F) 2012 (F) 2013 (F)

BAHRAIN 86.7 97.9 104.8 106.9 109.0 113.8 119.4 125.2

KUWAIT 75.0 81.9 88.0 90.2 92.0 96.1 101.4 106.3

OMAN 77.0 87.9 97.6 101.0 105.0 108.2 111.4 117.0

DOHA 73.2 96.6 115.9 121.1 122.4 128.9 138.8 147.3

RIyADH 93.0 101.1 108.6 111.3 113.6 116.4 119.9 125.9

UAE 84.9 101.8 117.1 119.5 120.6 126.1 132.8 139.7

% MOVEMENT 2006 2007 2008 2009 2010 2011 (F) 2012 (F) 2013 (F)

BAHRAIN 7.0% 13.0% 7.0% 2.0% 2.0% 4.4% 4.9% 4.9%

KUWAIT 6.5% 9.2% 7.5% 2.5% 2.0% 4.4% 5.5% 4.9%

OMAN 8.2% 14.1% 11.0% 3.5% 4.0% 3.0% 3.0% 5.0%

DOHA 21.4% 32.0% 20.0% 4.5% 1.0% 5.3% 7.7% 6.1%

RIyADH 4.2% 8.7% 7.5% 2.5% 2.0% 2.5% 3.0% 5.0%

UAE 15.0% 20.0% 15.0% 2.0% 1.0% 4.5% 5.3% 5.2%

(F) FORECAST

14

GULF OF ADEN

RED SEA

GULF OF OMAN

PERSIANGULF

ARABIAN SEA

YEMEN

SAUDI ARABIA

UNITED ARAB EMIRATES

QATAR

BAHRAIN

KUWAIT

IRAQ

IRAN

OMAN

GULF STATES REPORT

15

BAHRAIN

GDP (2010) : US$ 22.7 billion

GDP Growth (Year on Year) : +4.1%

Inflation (2010) : +2.0%

Oil Production (2011 Feb, NOGA) : 40,000 bpd

Population (2010) : 1.1 million

Population Growth (Year on Year) : +6.5%

IRAN



Inflation (2010) : +12.5%

Oil Production (2011 2Q, IEA Oil Report) : 3.7 million bpd



SAUDI ARABIA



Inflation (2010) : +5.4%




IRAQ



Inflation (2010) : +5.1%




UNITED ARAB EMIRATES



Inflation (2010) : +0.9%




OMAN



Inflation (2010) : +3.3%




KUWAIT



Inflation (2010) : +4.1%




QATAR



Inflation (2010) : -2.4%




yEMEN



Inflation (2010) : +12.1%




GULF STATES REPORT

Sources: International Monetary Fund (IMF)

National Oil and Gas Authority (NOGA)

International Energy Agency (IEA)

- Oil Market Report

17


The political turmoil across the Middle East has had a limited direct impact

on the Gulf Arab states, with the important exception of Bahrain. Overall,

the combination of a continuous political premium on crude oil prices and

business perceptions of the Gulf as a relatively safe haven has been beneficial

for the region's economic prospects. However, there has been no return to

the boom times of the 2005-08 period, as both business and government are

exercising a degree of caution.

ABU DHABI'S "HIBERNATION"In the wake of the Dubai debt crisis at the end of 2009 it was commonly assumed that Abu Dhabi would take advantage of the situation to press ahead with its own development plans, which had hitherto been overshadowed by the headline-grabbing exploits of its neighbouring emirate. In 2007 Abu Dhabi released its “Vision 2030” document, which envisaged rapid growth of the non-oil economy based on the promotion of manufacturing alongside high-end tourism and real estate and initiatives such as the carbon-free Masdar City.

Unlike Dubai, Abu Dhabi apparently faced no financial constraints in pursuing this vision, based on its abundant oil export revenue and hundreds of billions of dollars of external assets. However, over the past 18 months it has become clear that Abu Dhabi has been affected by several of the symptoms that caused the Dubai crisis, in particular the collapse in property prices and the excessive borrowing of government-related entities (GREs). Having bailed out Dubai to the tune of US$20bn, the Abu Dhabi government faced the prospect of having to perform a similar rescue mission for its own corporations.

Other worries for the Abu Dhabi government include the stalling of the recovery of the global economy, which will hit its worldwide investments, and the burden of supporting the UAE's poorer northern emirates, which have a relatively high proportion of nationals among their population.

Such is the opacity of government operations in Abu Dhabi (as in most countries in the Gulf) that it has been hard to detect any explicit change in policy in response to these pressures. However, there have been several signs pointing to a shift to a more conservative approach.

One of the more striking was a comment in the prospectus issued by the Tourism Development & Investment Company (TDIC), a 100% government-owned venture whose projects include the Louvre and Guggenheim museums on Saadiyat Island. The prospectus was part of its initial approach to the market in June for a US$3bn medium-term note borrowing.

In an apparent effort to reassure prospective investors in these notes, TDIC said that it had decided to rein in its capital spending plans through "selectively hibernating, delaying or scaling-back certain projects". This would have the effect of reducing its capital expenditure in 2011 by almost one-third to Dh13.4bn (US$3.65bn) from Dh18.6bn. TDIC emphasised that this "hibernation" would not affect projects that had already started.

TDIC's debt stood at just below US$3bn at end-2010, and the company has run up increasing net losses in the past three years, with the shortfall in 2010 doubling year on year to Dh1.15bn. The prospectus stated clearly that the new notes would not be guaranteed by the Abu Dhabi government, but at the same time it made clear that it would continue to receive substantial financial support from the government. As of September 1st, TDIC had not yet issued any of the new debt instruments.

CAUTION REIGNS IN THE

GULF'S FORMER HOTSPOTS

18


The travails of TDIC pale into

insignificance compared with those

of Abu Dhabi's highest-profile real

estate developer, Aldar Properties,

which racked up losses of Dh12.5bn

in 2010, and has been kept afloat

thanks to a massive bailout package

from the Abu Dhabi government.

This included Dh19.4bn in cash

inflows through asset sales to

and reimbursements from the

government for infrastructure

spending on Yas Island (site of the

recently opened Ferrari World theme

park). The government has also

bought Dh5.5bn worth of houses and

land from Aldar, and put in a further

Dh2.8bn through a bond placement

with the 100% government-

owned Mubadala Development

Company, which is the largest single

shareholder in Aldar.

An IMF study found that Aldar's

financial performance in terms of

return on equity in 2010 was the

second-worst among regional real

estates companies (bottom of the

pile was another UAE developer,

Union Properties), and that the

aggregate performance of UAE real

estate GREs, excluding Dubai-based

Emaar Properties, showed a return

on equity of -5.9% compared with a

positive return of 3.3% on average

for regional peers from Saudi Arabia,

Qatar and Egypt.

Other straws in the wind suggesting

a more restrained approach to

development projects include

changes in the boards of these GREs.

Ahmed Ali al-Sayegh was replaced in

April as chairman of Aldar by Ali Eid

al-Muhairi; Sayegh also subsequently

lost his place on the Mubadala board.

Among the new appointments to

Mubadala's top table was Abdul-

Hamid Mohammed Saeed, the chief

executive of First Gulf Bank. Some

commentators have noted that the

bank is chaired by Sheikh Hazza

bin Zayed al-Nahyan, a member of

the ruling family whose influence

appears to be in the ascendant. It is

not clear whether this is in any way

to the detriment of the Crown Prince,

Mohammed bin Zayed al-Nahyan,

who has been the main driver of Abu

Dhabi's ambitious development plans

over the past few years, or whether

it is a matter of the ruling family

deciding collectively on a more

prudent approach.

At the other end of the food chain,

the tighter management of Abu

Dhabi's finances has been felt by

suppliers and contractors, who

have seen a marked slowdown in

new orders and a deterioration in

payment conditions. Abu Dhabi

clients—both governmental and

quasi-governmental—have a

reputation for being slow to honour

payments, but the situation is

said to have got worse in recent

months. The most common form

of payment guarantee in UAE

business is a post-dated cheque.

This is regarded as more secure

than a letter of guarantee because

of the stiff legal penalties imposed

for failing to honour a cheque.

However, contractors are becoming

increasingly reluctant to issue post-

dated cheques to their own sub-

contractors and suppliers because

of their concerns about the risk of

prolonged delays in getting paid by

their own clients.

19


DEBTS IN PERSPECTIVEThe scale of Abu Dhabi's debt problems—and indeed of the slowdown in project and development work—should not be overstated. The nominal value of the debt of Abu Dhabi's GREs is US$92.4bn, according to the tally included by the IMF in its Article IV consultation report issued in May this year. This is bigger than the US$76.9bn owed by Dubai's GREs. However, Dubai's total debt of US$113bn is higher than the US$104bn owed by Abu Dhabi (and includes more than US$20bn owed by the government of Dubai to Abu Dhabi), and Abu Dhabi's debt as a proportion of 2010 GDP is 55%, compared with 103% for Dubai.

Abu Dhabi's fiscal position is also much more secure than that of its neighbour. Its total government revenue is expected to be about US$77bn in 2011, thanks to an oil price likely to average about US$110 per barrel of Brent, and the budget will be more or less balanced. The Dubai government, by contrast, is expected to get revenue of only US$12.3bn in 2011 and will run a deficit of 1.4% of GDP (effectively subsidised by Abu Dhabi's refinancing of a significant portion of its debt).

The change of pace in Abu Dhabi does not mean that development has ground to a halt. In a sign of the enduring commitment to the broad goals of "Vision 2030", the Abu Dhabi government is preparing for the official opening of the Sowwah Island scheme. Sowwah Island had been designed to provide a hub for financial-sector companies and other big businesses servicing them on a scale to match some of the world’s top financial centres.

The migration of companies to Sowwah from other premises started as soon as the first two buildings in Sowwah Square opened earlier this year. One of the downsides of the scheme is that the migration to the new office space on Sowwah will put more pressure on already subdued commercial rents in central Abu Dhabi City as well as on rival new locations such as Reem Island and Saadiyat Island.

MATURING IN

2011 2012 BEYOND TOTAL

ABU DHABI GOVERNMENT 0.4 1.3 9.9 11.6

ABU DHABI GREs 16.6 9.3 66.4 92.4

TOTAL ABU DHABI 17.1 10.6 76.4 104.0

% of Abu DhAbi 2010 GDP 8.9 5.5 54.8

DUBAI GOVERNMENT (A) 5.6 1.6 28.9 36.0

DUBAI GREs 10.4 13.6 52.9 76.9

TOTAL DUBAI 16.0 15.2 81.7 113.0

% of DubAi AnD n. EmirAtEs 2010 GDP 14.5 13.8 102.6

OTHER EMIRATES 0.9 0.3 4.0 5.2

FEDERAL GOVERNMENT 19.1

TOTAL UAE 33.1 25.8 158.1 236.0

% of uAE 2010 GDP 11.0 8.5 78.2

(A) INCLUDING GRE DEBT GUARANTEED BY DUBAI GOVERNMENT.

Source: IMF Article IV report, May 2011

UAE: GROSS PUBLIC AND PUBLICLY HELD DEBT (US$BN)


20

Whether Sowwah Island can

realise its ambition to become

a new financial centre servicing

the region is also in question. The

Abu Dhabi Securities Exchange

(ADX) is the anchor tenant for the

development and will be housed

in a landmark building in Sowwah

Square. The construction of the

new ADX building has already

enticed several banks, including the

National Bank of Abu Dhabi and Al

Hilal Bank, into buying land on the

island and building offices there.

Several other investment banks, law

firms, private equity groups and

brokerage companies are also said

to be considering setting up their

headquarters on the island.

Apart from the new impressive

headquarters, ADX will also have

advanced information-transfer

technology in the new location,

offering greater speed and security

for investors. Servers transferring

data will be placed as close as

possible to the exchange to minimize

the time lag and allow almost

instantaneous trades. The new data

protection and transfer systems are

believed to provide an additional pull

for trading companies choosing to

settle on Sowwah.

The chief shortcoming of the new

business and financial district is

the lack of transparent rules on

jurisdiction and its own courts. It

is often pointed out that Sowwah

Island should model its legal set up

on imperfect, but working solutions

adopted by the Dubai International

Financial Centre (DIFC). While

the DIFC’s legal system had to be

adjusted since the centre opened in

2005, especially as the system came

under stress with debt-restructuring

procedures and the property crash, it

has provided an effective framework

within which to handle complex

issues.

21


NO CLEAR WINNERS FROM THE ARAB SPRING FALL-OUT

The plans drawn up by Abu Dhabi

and Dubai prior to the global

financial crisis were based on

optimistic assumptions for the

growth in trade and investment flows

in the Middle East and in the wider

world economy. The trimming of

the two emirates' plans since then

has been an inevitable consequence

of the sharp change in sentiment

and the growing realisation that the

effects of the credit crunch and the

subsequent recession will be long-

lasting. The upheavals around the

Arab world have added a further

cause for concern.

The popular movements against Arab

dictators have struck a chord with

the younger generation in the Gulf,

although only in Bahrain and, to a

much lesser extent, Oman, have there

been any real efforts to emulate the

Tahrir Square protesters. Political

leaders in the Gulf have shown

ambivalence in their responses,

seemingly unsure whether to

welcome change and line up with

the winning side, or whether to try

to turn back a destructive tide that

could overwhelm the entire political

establishment across the Arab world.

The Qatari royal family has adapted

better than most to the new realities,

in particular through its decision to

become heavily involved in the NATO

operation against the Qadhafi regime

in Libya. The UAE also committed

forces to the Libya operation, but,

diplomatically, it was overshadowed

by its Gulf neighbour. This partly

reflects the strong emphasis that

Qatar had placed on being heavily

engaged in regional political issues

as part of its drive to outdo Dubai in

projecting its influence and turning

the name of the state into a global

brand.

In this respect, Qatar can be seen as

a net gainer from the Arab Spring.

However, with a national population

of only 240,000 and the highest

per-capita income in the world,

Qatar has the least cause among

its Gulf peers to worry about the

risk of revolutionary contagion.

The UAE has a more complicated

domestic political scene, with family

and tribal rivalries needing to be

kept under control in seven emirates

and solidarity between the emirates

having to be preserved.

The UAE’s rulers also have to take

into account the grievances of less

privileged Emiratis and resentment

among sections of the population at

the predominance of expatriates in

the population mix (only about one

in seven residents is a national). In

addition, there is a risk that searching

questions might be put by young

radicals about the management

of the UAE's resources and the

reasons for its accumulation of such

high amounts of debt. This array

of concerns provides part of the

explanation for Abu Dhabi's decision

to take the pedal off its development

accelerator, and for the efforts being

made to widen political debate

through expanding the electoral

college for the Federal National

Council.

Saudi Arabia's response to the

Arab revolutionary movements has

been primarily economic, with the

king approving two development

spending packages worth US$130bn

in total. A significant portion of this

has been allocated to beefing up

the internal security forces; much

of the remainder has been directed

towards addressing socio-economic

problems, in particular youth

unemployment among Saudis and

the chronic shortage of affordable

housing.

22


This article was contributed by David Butter, Regional Director,

Middle East & North Africa and ViewsWire Editor, Middle East,

with the Economist Intelligence Unit

NATIONALS-VS-ExPATS IN GULF DEMOGRAPHICS 2010

SAUDI ARABIA UAE QATAR

M % M % M %

TOTAL POPULATION 27.1 100% 6.7 100% 1.7 100%

NATIONALS 18.7 69% 1.0 15% 0.24 14%

ExPATRIATES 8.4 31% 5.7 85% 1.46 86%

NOTE: THE UAE'S NATIONAL BUREAU OF STATISTICS HAS ESTIMATED THE TOTAL POPULATION TO HAVE BEEN 8.26M IN MID-2010, OF WHICH 11.4% WERE NATIONALS; THE EIU HAS A LOWER TOTAL, REFLECTING DOUBTS ABOUT THE ASSUMPTIONS UNDERLYING THE OFFICIAL ESTIMATES.

Source: Economist Intelligence Unit estimates derived from national census data.

The reaction of the Saudi royal family

clearly betrays their recognition

of the potential for popular unrest

in the kingdom. However, at the

same time, Saudi Arabia's relatively

large national population by Gulf

standards—about 19m out of a

total regional population of 27m in

2010—offers it a better opportunity

for nationally focused economic

diversification than in the other

Gulf Arab states. The ambitious

development plans of Qatar and

Abu Dhabi, for example, are aimed

ultimately at creating high-value

jobs for locals, but would inevitably

suck in more expatriate labour and

further distort the demographic

balance towards expatriates.

Similar considerations are bound

to apply in Saudi Arabia, but to

a less pronounced extent as the

kinds of jobs that Saudis are already

prepared to accept are much more

diversified—even menial—than is the

case for Qataris and Emiratis.

The Saudi government faces long-

term issues of fiscal sustainability,

with one recent projection by a Saudi

bank's research team showing that

on current trends Saudi Arabia would

need an oil price of over US$300/

barrel (in today's dollars) in 2030 to

balance its budget. In reality, Saudi

Arabia is likely to have developed

sufficient alternative revenue

streams by that time to make such

projections meaningless.

One of these will be the chemicals

and plastics industry. This will be built

on the platform of petrochemicals,

a sector in which Saudi Arabia

already has a commanding global

presence through Saudi Basic

Industries Corporation (Sabic),

newly established affiliates of Saudi

Aramco, the national oil company,

and a number of smaller, private,

ventures.

In July the industry took a major step

forward with the announcement by

Dow Chemical and Saudi Aramco

that they had taken their final

investment decision for a US$20bn

venture to produce petrochemicals

and a large range of chemicals and

plastics at a new plant in Jubail.

This venture, named Sadara, has

been under discussion for four years

and has gone through a number of

permutations. Its launch means that

Saudi Arabia now has the chance to

make a major shift to higher value-

added products and more labour-

intensive activities fed ultimately by

its huge resources of oil and gas.

Saudi Arabia is vulnerable to similar

political upheavals as those that

have occurred elsewhere in the

Arab world. However, its economic

position, bolstered by a large

windfall from higher oil prices and

production (as it has boosted output

to compensate for the loss of Libyan

crude) provides it with a solid buffer

to protect it from these political risks.

RIDER LEVETT BUCKNALL OFFICES

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BRISBANETelephone: + 61 7 3009 6933Email: [email protected]: Mark Burow

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CANBERRATelephone: + 61 2 6281 5446Email: [email protected]: Mark Chappè

DARWINTelephone: + 61 8 8941 2262Email: [email protected]: Paul Lassemillante

GOLD COASTTelephone: + 61 7 5595 6900Email: [email protected]: Michael Gilligan

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EMEA

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DOHATelephone: + 974 3 361 4958Email: [email protected]: Sam Graham

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CHINABEIJINGTelephone: + 86 10 6515 5818Email: [email protected]: SW Lo

CHENGDUTelephone: + 86 28 8670 3382Email: [email protected]: Stephen Liu

CHONGQINGTelephone: + 86 23 6380 6628Email: [email protected]: Danny Chow

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HONG KONGTelephone: + 852 2823 1823Email: [email protected]: Philip Lo

MACAUTelephone: + 853 2875 3088Email: [email protected]: Kenneth Kwan

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SHANGHAITelephone: + 86 21 6330 1999Email: [email protected]: Stephen Lai

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WUxITelephone: + 86 510 8274 0266Email: [email protected]: Stephen Lai

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AMERICAS

CANADACALGARYTelephone: + 1 403 571 0505Email: [email protected]: Roy Baxter

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GRAND CAYMANTelephone: + 1 345 946 6063Email: [email protected]: Martyn Bould

USABOISETelephone: +1 208 947 0807E-mail: [email protected]: Craig Roth

BOSTONTelephone: + 1 617 737 9339Email: [email protected]: Grant Owen

DENVERTelephone: + 1 720 904 1480Email: [email protected]: Peter Knowles

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HILOTelephone: + 1 808 883 3379Email: [email protected]: Kevin Mitchell

HONOLULUTelephone: + 1 808 521 2641Email: [email protected]: Tony Smith / Paul Brussow / Maelyn Uyehara

KENNEWICKTelephone: +1 509 735 3056E-mail: [email protected]: Nick Castorina

LAS VEGASTelephone: + 1 702 227 8818Email: [email protected]: Martin Grace

LOS ANGELESTelephone: + 1 213 689 1103Email: [email protected]: Graham Roy

MONROETelephone: +1 360 805 0413E-mail: [email protected]: Justin Dinius

NEW YORKTelephone: + 1 212 952 1300Email: [email protected]: Grant Owen

ORLANDOTelephone: + 1 407 905 0002Email: [email protected]: David O’Neal / Rick Schmidt

PHOENIxTelephone: + 1 602 443 4848Email: [email protected]: Julian Anderson / Scott Macpherson / John Jozwick

PORTLANDTelephone: + 1 503 226 2730Email: [email protected]: Graham Roy

SAN FRANCISCOTelephone: + 1 415 362 2613Email: [email protected]: Graham Roy

SEATTLETelephone: + 1 206 223 2055Email: [email protected]: Chris Burris

TUCSONTelephone: + 1 520 202 7378Email: [email protected]: Joel Brown

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WASHINGTON DCTelephone: + 1 202 434 8350Email: [email protected]: Grant Owen

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