Interview: Vijay Malhotra

For more than three decades, Vijay Malhotra has played a pivotal role in developing the UAE’s culture of corporate governance. In a wide-ranging interview, the KPMG Lower Gulf chairman explains why he is more excited than ever about the country’s economic outlook.
By Daniel Shane
Fri 22 Nov 2013 11:13 AM

Vijay Malhotra has been in the Middle East for 35 years, although it is fair to say he had a rocky start to life in the region.

After leaving his native India to study in the UK, the young accountant secured a position with KPMG’s Iran affiliate in 1976. Not long after, though, he found himself the victim of history with the dawning of the country’s Islamic revolution, leading him to head back to London.

Determined to have another crack at the Middle East, Malhotra soon found himself back in the region, taking up a position again at KPMG in the at-the-time little-known trading hub of Dubai.

Since arriving on the UAE’s shores all those years ago, Malhotra has played nothing less than a pivotal role in developing the Gulf state’s fledgling culture of corporate governance. While at KPMG, known as one of the ‘big four’ global auditing networks, the firm’s client list has become a who’s who of the UAE’s top corporations and institutions. These include sovereign wealth funds Abu Dhabi Investment Authority and Mubadala Development, National Bank of Abu Dhabi, Etihad Airways and telecommunications giant du.

Malhotra, who in his position as chairman of KPMG Lower Gulf is in charge of one of the Dutch organisation’s most vital international markets, says he is more optimistic than ever, predicting a bright future for real estate, capital markets and financial services in the country he has come to call home.

“The market is extremely bullish and buoyant, particularly in Dubai, and there’s a great expectation on winning [the] Expo 2020, which I think would be a game changer,” Malhotra says. ”I think everyone’s attention in Dubai, and in Abu Dhabi for that matter, is focused on Expo 2020, and it will be [a] huge opportunity to showcase the region, the UAE and particularly Dubai.”

According to some analyses, property prices in Dubai have leapt by up to 20 percent in the year to date, while economic growth in the emirate has rebounded 4.9 percent in the first half of 2013, buoyed by a strong expansion in trade and tourism.

Estimates by Bank of America Merrill Lynch put the economic impact of a successful Expo bid at 0.5 percentage points per year and 2 percentage points in 2020, as well as the creation of 277,000 jobs, and Malhotra agrees that the benefits cannot be underestimated.

“We’re talking about a spend of probably $10bn, because a lot of the infrastructure is already in place, so it’s not as if the UAE is starting from scratch, and that’s a huge opportunity for the economy,” he forecasts. “Of course, the 25 million extra visitors that will come during that six-month period will also be a great opportunity.”

Understandably following Dubai’s 2008-2009 debt crisis, whose aftermath led to a slump in property prices of up to 60 percent, some industry analysts have been sceptical over the market’s recovery, with suggestions of another bubble forming. Malhotra is less concerned though and says he has faith in the fundamentals of the emirate’s economic renaissance.

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“People are still somewhat apprehensive about investing in certain parts of the world, even if prices have gone up 20, 30 or 40 percent. Even today the prices in terms of what you get [in Dubai] in terms of quality, location, is cheap,” he claims. “If you look at India, London, New York, Singapore, where would you get property at $500 per sq ft or $600 per sq ft?”

Much of his conviction in the real estate sector is driven by some of the new regulations introduced in the years since the last downturn, intended to eradicate fly-by-night developers and speculative investors. These include a doubling of land registration fees to 4 percent of the sales price and a limit on home loan lending to both UAE citizens and expatriates.

“What they seem to have initiated are some checks and balances like the mortgage law, and even enhancing regulations in the property sector,” he says. “That’s important, as otherwise there was a worry about whether this was another bubble, but there’s still a lot of money in the region.”

All of this spells good news for KPMG in the Gulf. With the country’s economy and real estate markets buoyant, investor sentiment is at a high, attracting new capital inflows and multinational companies to the UAE. KPMG, which provides services from auditing and accounting to advice on restructuring and stock market flotations, appears all set to reap the rewards.

“For KPMG, the UAE is labelled as a high-growth market. We’ve got some priority markets around the world, and some of the GCC countries, but not all are high-growth markets,” Malhotra explains. “We saw huge growth through to 2010, and then of course with the problems of debt, things slowed down quite considerably, but then there was a period of consolidation, but now I think that everyone’s very bullish about the market.”

Across the Middle East and South Asia, KMPG has about 150 partners and around 6,000 employees, with the entire region generating between $300m and $350m in fee income annually, Malhotra says. In the Gulf, the UAE is the firm’s largest practice with about 800 staff, followed by Saudi Arabia, where approximately half that figure is based. KPMG also has a significant presence in Qatar, Kuwait, Oman and Bahrain.

Malhotra says that the ‘big four’ international accountancy networks, which also includes Deloitte, PwC and Ernst & Young, saw their business take a hit in the aftermath of Dubai’s debt crisis, but that they are now on an upward curve. “We’re all sort of on the uptick, but it’s all single-digit growth, which I think will move to double-digit growth in certain parts of the GCC, like Saudi and in Qatar we’re well into the double digits,” he explains. Some areas of strength for the group include the UAE’s lucrative oil and gas sector, financial services firms, and large, family-owned conglomerates.

A major focus for KPMG regionally in the past has been advising companies looking to launch a stock market initial public offering (IPO). Since the crash, the pipeline for these deals has been thin, with little in the way of share offerings on local bourses since building contractor Drake & Scull International went public in 2008.

Earlier this year, KPMG advised on UAE healthcare firm Al Noor Hospitals’ successful flotation on the London Stock Exchange, which raised $342m.

Others have foundered, however, with local conglomerate Al Habtoor Group late last year shelving a proposed $1.6bn IPO on NASDAQ Dubai. KPMG was not one of the advisors on that deal. Malhotra says that other local firms, particularly family-owned ones, continue to examine the prospects of a public share offering.

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“Family groups have always been looking at IPOs, and it’s all part of the market sentiment. If anyone wants to do an IPO, they do it in a bullish market, not in a bearish market,” he says. “As businesses mature and they grow, that’s one way to go. Talking to some [of] our long-term clients... the patriarchs who set up the business, they’re in no mood to do an IPO, but the younger generation would like to.”

Malhotra says he does not anticipate a strong pipeline of IPOs over the next 12 months. After this point, more deals may begin to trickle through if the regional market continues on its current upward trajectory, he adds.

One trend he does see continuing is local companies seeking public listings on foreign bourses. In addition to Al Noor Hospitals, Abu Dhabi healthcare firm NMC Health listed on the London exchange in 2012, while Dubai developer Damac Properties has also begun the IPO process on the same market.

“You appreciate that the Abu Dhabi and Dubai markets are small, and if I may use the expression, shallow compared to the UK. London is global,” Malhotra says. “The liquidity is one thing, but for a successful stock market you need a throughput of buyers and sellers. Most people [on the UAE bourses] buy and hold. That itself means you have an issue in terms of how successful you can be.”

Financial regulators in the UAE have already signalled their intention to merge the primary Dubai and Abu Dhabi financial markets, although there is currently no timeframe for this, and the KPMG veteran believes that pooling liquidity into a single bourse would be beneficial for all involved.

“It’s been talked about for years and it’s now happening, and I think this consolidation is great. The market’s too small for two players,” he says. “You’ve got another scenario where you look at the Dubai Financial Market, where you’ve got [property developer] Emaar which is probably half the market’s capitalisation. You wouldn’t see that in London or New York, to have such a dominant power in a stock market.”

Arguably KPMG’s most prestigious clients in the region are its sovereign wealth funds, those government organisations that are tasked with investing the Gulf’s fabulous oil wealth for the benefit of future generations. Since their inception, both the UAE’s Abu Dhabi Investment Authority and Mubadala Development, which between them have around $700bn of assets under management, have sought professional advice from Malhotra and KPMG. As one of the closest observers of their movements, Malhotra is best placed to notice a marked change in the investment strategy of these funds.

According to KPMG data, many of these wealth funds have begun shying away from trophy assets in Europe and the US, and instead have begun funnelling money back into the Middle East. Across all GCC sovereign wealth funds, the proportion of local investment has risen from 33 percent in 2011 to 56 percent last year due to the combined effects of the euro zone crisis and increasing appetite for regional infrastructure projects.

“There was a time when these funds’ investment strategy was pretty global, but then some of them overpaid — some of the Dubai funds overpaid — and had their fingers burned,” Malhotra explains. “Quite frankly, now, when you look at the growth opportunities in many of the developed countries, they’re still not out of the woods. The opportunities for returns are greater nearer to home, meaning the region. They’ve sort of retreated.”

All of this feeds into Malhotra’s glowing outlook for future growth in the UAE, and for someone who has been in the country as long as he has, he ought to know.“I’ve been here 35 years and I’m clearly extremely bullish,” Malhotra says.

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