By Ed Attwood
All the Gulf economies are now back on a strong growth curve. At the 8th Arabian Business Forum, a 200-strong audience heard from the top names in local business as to the real state of the market
Booms, busts, subsidies and the ‘youth bulge’; the 8th Arabian Business Forum, held last week in Dubai, discussed some of the major issues currently facing the Gulf economies. Chaired by ITP chairman and BBC television presenter Andrew Neil, the forum invited a series of keynote speakers and panelists to give their opinions on the most pressing concerns of the day.
And when it comes to the Gulf economies, there aren't many more prominent experts than Dr Nasser Saidi. He is the founder and president of Nasser Saidi & Associates, and is the vice-chairman of crowdfunding start-up Eureeca. In a long and varied career, he has also served as chief economist of the DIFC, and as a minister covering both the economy and trade and finance portfolios in his native Lebanon. Saidi is also a member of the IMF's Regional Advisory Group for MENA, among several other positions.
Saidi began his speech with a wide appreciation of the regional economy, pointing out that receipts from oil exports won't help the region in 2013 as much as they did last year, as prices plateau and even dip, and as non-Gulf exporters build up production. But the non-oil sector - a major policy platform for GCC governments - are doing much better.
"Overall, you can expect growth in the GCC to be 3.6-3.8 percent in 2013," he said, pointing out that this is significantly better than the more established economies. That growth will be even higher in the UAE, and especially in Dubai. Saidi added that key sectors such as hospitality, tourism and trade make up more than 40 percent of the Dubai economy, and that will grow further as Dubai continues to turn itself into an aerotropolis.
Saidi, who coined the phrase 'Arab firestorm countries’ - rather than the Arab Spring or 'transition' countries - said that the states most affected by revolutions would take years to recover. "When the forest is very dry and the leaves have fallen, the fire can transmit itself anywhere," he said. "You can expect four to five years before foreign direct investment coming back to any of those countries."
Given the huge unemployment figures in the MENA region, and the growing number of young people out of work, this was a fairly grim assessment. In Saudi Arabia, 40 percent of male graduates are out of work; this figure rises to 60 percent for female graduates.
The economist argued that high unemployment puts more of a focus on the SME sector, a key part of any country's economy. It also means that states will have to stop focusing on employing nationals in the public sector. Saidi explained that some steps are being taken, especially in the UAE and Saudi Arabia, to eliminate capital barriers that obstruct the process of setting up companies. In addition, governments are also playing their part by encouraging banks to give out more loans.
However, Saidi argued that this policy gives banks mixed messages; lenders have to conform to Basel III, which tends to restrict lending to small companies. In addition, banks pay the same in terms of risk analysis to approve small loans as they do for loans for much larger companies, making smaller loans uneconomic. In addition, credit bureaus are not fully in place yet. "Loan guarantees play an important role, and you need a law that provides incentives for SMEs," Saidi said.
Only 20 percent of SMEs in the region actually have a credit line from the bank, while in the UAE only 4 percent of loans go to SMEs. That figure drops to 2 percent in Saudi Arabia, Saidi revealed. However, government-assisted loan guarantee programmes in Lebanon and Morocco have raised that figure to 25 percent. Saidi himself is working on two ventures in the SME field. Launched earlier this month, Eureeca is a crowdfunding start-up based in the UAE. A second initiative is focused on building a platform to allow SMEs to list on regional bourses. Saidi said that the costs associated with listing in the Middle East are astronomical, with compliance and regulation fees coming in at around $4.5m.
The second speaker on the day was Ryan Mahoney, the CEO of the biggest real estate agent in the region, Better Homes. He argued that buyers in Dubai need to focus more on the potential rental yield income than the capital gains sales price when making a purchase decision. A survey by Better Homes has found 88 percent of 1,400 residents surveyed rent their accommodation, leaving just 12 percent opting to own their own home.
Mahoney said that purchasers needed to focus on this factor when making their purchase decisions.
When determining where to achieve the best yields, Mahoney pointed to less glamorous areas such as Discovery Gardens, Jumeirah Lake Towers (JLT) and International City.
In International City some smaller units rental levels grew by 70 percent over tha last two years, Better Homes found. In JLT, Better Homes reported it had twice as many tenants looking for homes to rent, compared to landlords offering their properties for rental. Additionally in Discovery Gardens, Mahoney said there were now more tenants chasing homes than there were units becoming available.“This is due to an oversupply of tenants and high demand,” Mahoney said.
As a result, yields in Discovery Gardens are higher, at around 8 percent, compared to 6.5 percent on average across Dubai. When comparing sale prices, Mahoney said the average sales prices were AED15,000 per sqm in Dubai, compared to four times that in London. However, average rents were AED80 per sqm, only half that in London. Therefore, Mahoney said the yields in Dubai were a lot higher than comparable western and emerging market cities like London or Singapore. Looking at the market as a whole, Mahoney said high end villas in luxury developments achieved the lowest overall yields. "Let's use [rental yields] as a benchmark," he advised when making purchasing decisions.
"Dubai is not London, it doesn't have the same track record - but all things considered, it is relatively cheap. When that changes, then we can start to worry about a bubble."
The third speaker was Kate Hardcastle, a UK-based TV business and retail commentator and the co-founder of 'business transformation organisation' Insight with Passion. She's worked with more than 80 companies, advising them on issues as diverse as branding to how to run a family business.
"We need to start thinking about how we engage our customers. So many times I look at P&L and see the huge amounts spent on marketing and advertising - if we engage our customers to be advocates for our business, we can do all that for the princely sum of zero," Hardcastle said.
Emotional intelligence and engagement are key for the next ten years, she added, citing the case of a prominent airline, which, despite trumpeting its customer service techniques via a book written by its founder, still has a complaints process that takes six to eight weeks to get any results. Around 24 percent of customers have stopped doing business with an organisation because of a bad experience, and the internet has provided a forum for airing negative experiences.
“You need to have someone monitoring social media almost constantly - most importantly, don't promise what you can't deliver,” she said. “And training is important - it's admin-led, and it needs to be led personally, and it needs to be consistent."
Hardcastle also discussed the issue of service recovery; how to get that customer back after they have had a negative experience. "You've got to be flexible, and you've got to have a policy in place so the customer knows exactly what path they're going to travel down,” she said.
Yousif Abdulghani, the managing director of McDonald's in the Middle East was the last speaker in the morning session. "Today we have 375 restaurants, providing 10,000 jobs," he said. "We adopt a unique model to fit every different region."
The McDonald’s boss claimed that the key to success is leveraging the best of the firm's local and global know-how. At the global level, McDonald's can bring six decades of experience serving 69m people every day to best practice areas like food hygiene and HR in the Gulf. "It is clear that global brands continue to elevate quality and consistency, which is why local people look favourably on them. They know they will get the same quality in Makkah that they will get in Manhattan," he said.
On the local side, Abdulghani stated that every global brand needs to understand the dynamics of a local market to succeed - and that only occurs through experience with local stakeholders. That experience has come through McDonald's partnerships with a series of big-name business leaders in the GCC. "And it is critical that we create not just jobs but careers," he added. "Rising unemployment is a key concern, but the fast dining sector has been a great employer. We have 1,000 Saudi nationals working for us."
Questions from the floor to the McDonald’s chief included whether geopolitical concerns affect the firm's decision to enter new markets. Abdulghani said that while the company is based in the US, it is listed and has shareholders all over the world, and is now seen as a global, rather than an American brand. He also pointed it hasn't been hit by recent unrest, unlike - for example - in France. "In Egypt in 2011, we had three or four restaurants ransacked, but not because they were targeted, but because they were in the vicinity of troubled areas," he said.
In terms of further expansion, he added that McDonald's is expanding within existing markets, but currently isn't looking at new markets. The firm has seen annual revenues grow by 15 percent in the last three to four years, and Abdulghani is planning to increase restaurants in the Middle East region to 1,400 (up by 500 now) by 2015.
One final panel session followed, featuring Nick Maclean, managing director of CBRE Middle East, Andrew Tarbuck, a partner at Latham & Watkins, Craig Plumb, head of MENA research at Jones Lang LaSalle (JLL) and Sam Wani, the general manager of Independent Finance.
CBRE’s Maclean kicked off the discussion by saying that demand for commercial property last year had actually exceeded that of 2007. It's primarily from organisations that are already in the Dubai market, but have been given the go-ahead to expand from their global headquarters. JLL’s Plumb added that the first quarter was the first time that all sectors of the Dubai market - so residential, commercial, retail and hotels - have all risen at the same time since 2008. "We've turned the corner, we've passed the bottom, but we're still seeing patchy recovery," he said.
Wani, who runs the biggest mortgage broker in the UAE, said that banks have significant liquidity, and are therefore lending. There are 29 banks offering mortgages, and two more are introducing mortgages in the course of the next week or so. "It's more about end-users than investors now, which is a fundamental shift from 2008," he said. Tarbuck stated that he had seen a huge uptick in banks willing to finance real estate projects across the GCC - especially in areas like education (building schools).
There is still some debris from the bubble, Plumb said, adding that 37 percent of all commercial space in Abu Dhabi is unoccupied, while the figure has dropped to 31 percent for Dubai. "So clearly the markets here are very oversupplied - in the residential sector we estimate that 15 percent of the residential units built in the last five years are unoccupied," he said.
"Before the end of this year, we'll see quite a lot of spec commercial property coming back onto the market," said Maclean. The market is also being hit by the strata law - which is seeing companies move out of near empty buildings (where they have to pay a higher proportion of the service charge) and move to more established locations.
The panellists agreed that if Dubai is to win the Expo 2020 bid, that would have a huge impact on the Dubai market, particularly with regard to areas near to the Dubai World Central site, like Dubai Investments Park and the Green Community.
The forum concluded with a presentation from Fredrick Schauman, managing director MENA for iProspect, who revealed the results of a specially commissioned banking survey. The research revealed that more than half of the UAE population want to switch to a better bank, with poor customer service and high transaction fees as key reasons for consumers wanting to make the switch. However the study also showed that complicated administration prevented many customers from making any change. Fully 24 percent of those interviewed said they believed there is no better option among UAE banks.