UAE Upgraded to MSCI Emerging Market Index

UAE upgraded to “emerging market” by MSCI upgrade

Dubai’s stock market has outperformed all of the world’s primary bourses so far this year as it has in 2013. Dubai Financial Market Index is up 44% year-to-date, beating Qatar’s 22% and Saudi Arabia’s 15%. This compares to -2%, -1% and +1% for the Dow Jones Industrials Index, the Dax and the FTSE-100 respectively. A major reason to Dubai’s stellar stock market performance has been Morgan Stanley Capital International’s upgrade of the UAE to its flagship emerging markets benchmark index, prompting EM fund managers around the globe to rush into UAE shares.

There is also chatter about UAE stocks finding more demand from global fund managers in the event that MSCI upgrades Korea or Taiwan (or both) from its EM classification to that of developed market. The announcement is due on June 10.

The UAE is expected to grow at a healthy rate of 3.5%-3.8% in 2014 and 2015, benefiting from low interest rates, stable inflation, productive capital, increased investment and continued security from the volatility and unrest in the neighbouring nations.

Selling assets to pay Dubai World debts

The recovery in the UAE in general and Dubai in particular has helped the United Arab Emirates repay the debts owed by Dubai World, after the conglomerate’s $25 bn debt restructuring took part in 2011.

-           Istithmar, Dubai World’s investment arm plans to sell Atlantis hotel and major utility provider to state-holding firm in order to raise cash ahead of a $5.5 bn debt repayment due in September 2015.

-          Palm Utilities, the cooling provider for Palm Island and other developments owned by Dubai World, will be sold to the Dubai Water & Electric Authority for $500 mln, including its debts.

-          Nakheel, the Dubai World-owned developer of manmade Palm islands fell under state control in 2011 after Dubai World’s restructuring.

Possible limitations to the current model of asset sales may be the following: There are about 90 lenders waiting to be repaid by Dubai World as it continues with the sales of its strategic assets. But since these assets are sold to other entities inside the Emirate, questions arise on whether the “best” optimum value is obtained by creditors to repay debt, or is it simply a shift of assets among friends. Such a model may have its risks, but as long as foreign and domestic capital formation is mobilized

The latest real estate boom

Dubai’s growing population and improving economy have been instrumental in the housing market’s impressive recovery, which is unlike the housing rally of the 2006-08, largely driven by speculators and foreigners.  Off-plan sales are also making a comeback. These sales, whereby investors buy directly from developers before construction begins, starting with a deposit of around 10%, followed by instalments during the construction process.  Off-plan projects have helped bring the property market to halt in 2009-10 partly due to high loan-value ratios. Today, major developers such as Emaar are growing to new strengths thanks to off-plan purchases, with banks providing 50% mortgages.

Dubai’s residential property market remains dominant by cash-based buyers, but as housing recovery continues to gradually spread into secondary neighbourhoods, mortgage buyers will follow suit.

Standard & Poor’s sees no major big drop in real estate prices, especially as banks benefit from a feedback loop with large loan provisions to real estate. Residential property prices are nearing their 2008 peak, but with fewer empty units in the market than 6 years ago. The accelerating pace of new supply has also helped to mitigate the potential risk emerging from solely tight supplies.

Real estate volumes rose nearly 50% over the past year in Dubai. In a healthy sign of potential durability and stability, the Dubai Real Estate Regulatory Agency cited deals for commercial and residential real estate to have reached AED 236 billion in 2013 from AED 154 billion in 2012, with demand evenly shared between local investors (AED 122 billion) and foreign investors (AED 114 billion).

From capital flow to human flow

Dubai’s exceptional record in averting terrorism and unrest — creeping in from abroad or growing from within– while simultaneously improving the social-safety net and human rights aspects of its low-level labour will not only increase the Emirate’s continuity in drawing human and financial capital from abroad, but also impose its standing as a safe-haven from the worlds’ financial and political ills. In 2013, Dubai International Airport’s passenger traffic rose 15%, beating London Heathrow’s 3.7%, with total passengers surpassing 66 million and expected to reach 100 million by 2020. The steady growth in new hotels and the recovery in hotel occupancy following the 2009 decline is expected to be further bolstered into the World Expo 2020

Is it sustainable?

As in the case of China, Dubai has monetized its natural wealth and deployed its massive foreign exchange armoury to infrastructure, technology and even social mobility. Unlike China, Dubai is not burdened by the vast influx of low-skilled workers from villages, which end up draining resources and leading to overcapacity. Like Switzerland, the high concentration of wealth is a function of careful capital and excellence of execution and service, while respecting and promoting diversity. No nation is immune to bursting financial bubbles and uncertainty. Yet, as long as the UAE keeps the upper hand on national security and combines economic risk-taking with solid legal framework, Dubai will make it into the World Expo 2020 and beyond.