By Andrew White and James Bennett
2006 was a year when regional instability failed to dampen the business world’s positive progress. Andrew White and James Bennett discover what the New Year has in store for the Middle East.
What a year 2006 was. From unexpected mega foreign acquisitions by Arab multinationals to a spectacular 15th Asian Games, to the beginning of the end for the GCC single currency and continuing insurgency and needless bloodshed in Iraq, Afghanistan, Lebanon and Palestine. So with the New Year upon us you would think that 2007 would promise to be full of hope. Human optimism tells us it could and should be, but in harsh reality, and according to our panel of experts, rather disappointingly for many, much of it is likely to be a repeat of the last 12 months. The boom times will match the gloom times. On the plus side our five chosen major sectors will all experience positive growth, while the business world will steadily mature alongside regional stock markets correcting themselves and only taking a slightly lighter battering this time around. The gloom however, will sadly continue with politically sensitive issues intensifying and often worsening, piling more misery onto those people that deserve it the least. Read our 12-page guide on what 2007 holds for the Middle East.
War, conflict, kidnappings, terrorism and security once again dominated the headlines in 2006 and will continue to do so over the next 12 months. In July long-running tensions in South Lebanon sparked a two month-long bombing campaign that saw thousands of dead and billions of dollars worth of long-term damage to Lebanese infrastructure and to many civilian areas. The situation has now eased but is on a constant knife-edge with the bombings, the assassination of former Prime Minister Rafik Hariri two years ago and the murder of former trade minister Pierre Gemayel two months ago, still fresh in the public's minds. The Palestine situation appears endless and recent internal political struggles are not helping matters, Iraq remains a daily bloodbath with the words ‘civil' and ‘war' increasingly entering diplomatic vocabulary, while the resurgence of the Taliban in Afghanistan has tragically seen more disruption to a country once thought to be back on track. Other conflict zones, this time on a diplomatic level, will fill thousands of front pages in 2007 with Iran and North Korea the principal protagonists. In foreign politics US president George W Bush continued to cause controversy wherever he went and only has two years to prove himself before having to leave the Oval Office for the after-dinner speaking circuit. He has several major unresolved issues on his plate, namely Iraq and Iran and is the losing battle on both fronts.
The outgoing British prime minister Tony Blair visited the region at the tail end of 2006 and concluded his tour with a trip to the UAE, the first time he'd been back in 30 years. Let's hope his likely successor, Gordon Brown, will visit us more often.
The Middle East made great strides in business in 2006 and stamped its footprint on the Western world in style. DP World led the way with its multi-billion dollar purchase of UK ports and ferry operator P&O. But it faced huge amounts of pressure from several influential US senators, including Hillary Clinton, over "security issues" concerning its acquisition of six US ports (previously owned by P&O). Even President Bush stepped in to calm the storm of protest with Americans taking to the streets, apparently concerned with an Arab company owning and running its homeland ports. DP World eventually bowed to pressure selling out to American Insurance Group (AIG) for an undisclosed figure earlier this month.
Dubai also led the way in other foreign multi-million dollar acquisitions including the Tussauds Group, Doncasters, the New York branch of the Mandarin Oriental hotel and the ongoing takeover of Liverpool Football Club.
Kuwaiti companies including Mazaya made great strides in property; Qatar launched its Energy City project; Bahrain its Financial Harbour and Bahrain Bay developments; Saudi Arabia its gigantic five economic cities; Abu Dhabi took advantage of its 200 islands by announcing several developments; and of course Dubai usurped everyone with the glamorous Bawadi project which will recreate some of the world's most famous landmarks. And who can forget the UK press telling all those freezing cold Brits that Christmas was more Christmassy in Dubai than at home. Truly a boom and gloom year for all.
Economist Intelligence Unit
Senior Middle East economist and chief energy analyst
My view is summed up by ‘boom and gloom'. Looking at the Gulf in financial terms, you're still going to see very strong underlying economic growth, but I think that the political issues overshadowing the region are gathering in intensity. The question is to what extent can the Gulf continue to prosper in this adverse regional condition, being insulated from it and benefiting from the flight of capital and skills into the Gulf from other parts of the region, particularly Lebanon. But I think that the political risk generally over the whole region is on the rise. It is the themes of last year in a sense. The stock market was clearly a predominant theme in the Gulf. So, is there going to be a significant bounce back? I think that the nature of boom and bust reflected the very heavy involvement of retail, local investors, in the market, and as such it's difficult to predict their behaviour in the future because their decisions are not really very well considered. That said, there are going to be more openings for international investors in the Gulf, although not that many funds look very closely at the market. Those that are identify Abu Dhabi and Qatar as perhaps the best opportunities. I still detect a certain scepticism about some of the Dubai stocks. There are not that many of them, you can't buy banks in Dubai, and Abu Dhabi is perhaps a more promising play. Perhaps that might be the theme of 2007 - rather more of a focus on what's happening in Abu Dhabi than in Dubai.
Head of Middle East company research
We will continue to see corporate level growth in '07 and '08, and we see that across the core sector constituents in most markets including banking, telecoms, building materials and real estate. For banks it's going to be two-pronged. It's going to be an issue of the government continuing to spend significant amounts of capital within the region's infrastructure projects, and capacity addition from petrochem as well as upstream oil and gas sectors. Totals vary depending on who you speak to, but there are around US$300bn to US$350bn that are expected to be spent by the respective governments in the next three to five years. That's capital that's going to be majority-funded by the regional banking system. The capital markets are still in a period of development and are not going to be able to play their rightful part in funding this growth so I think a large part of the capital requirement will still fall squarely in front of the region's banking sector. In our view this provides a bedrock of growth as far as the balance sheet is concerned, for all of the banks in the region.
The other core driver going forward is that of retail growth. I think that banks started discovering properly the retail market only properly about three years ago, and there's a lot more to be had both in terms of penetration and services within that segment, as well as funnelling a broader base of services and products into that base. Whether you're talking about home mortgages, Islamic products or savings and investment products, there's still a good amount of room left for the more inventive banks in the region.
We see growth continuing. What's happened as a result of the price corrections over the last 12 months, is that valuations have become a lot more attractive. The per-share growth forecast for '07 for emerging markets is 14%, whereas for the Arab markets it is around 21%, so investors are getting an asset for roughly the same value, but that is expected to produce a much higher rate of return.
A third aspect we need to look at is where we are in terms of correction mechanisms. It is not a watertight exercise, but we have looked at crashes in Mexico in 1994 and Asia in the late 1990s and then Russia in 2000, and on each occasion more or less what you get is a market correcting by between 50% to 70% over a period of a year to 18 months.
That's what we've got within the two bubble-centric markets in the region - Saudi Arabia and the UAE. Over the same time period, both of them have corrected by between 50% and 70%, so at least our margin of safety is far healthier than if we were down, say, 30%. The bubble's deflation patterns are quite closely resembling ones that we have seen in other financial markets, and that leads us to believe that the worst is, in fact, hopefully over.
Signature Global Investment Group
Where will the most attractive investment opportunities lie in 2007 within the region's real estate, media, energy, and infrastructure sectors?
We have has selected those four areas of investment in the Gulf region, and in the Middle East for several important reasons.
Infrastructure is crucial to answering the requirements of the developing local population, expanding businesses and of the travel and tourism industry, from air and road linkage to water distribution. Energy, due to an ever growing demand for fuel and electricity to feed the overall development of the region. Real estate, due to an ongoing need for commercial, retail and hospitality properties, linked to the development of the UAE and of the whole area. And media, a fascinating sector that is starting a large phase of much needed consolidation and integration in the region and globally.
In general, the countries and regions chosen by Signature Group should see a very significant rise in foreign direct investment flows during the period as compared to recent years.
The UAE, due to its more liberalised lifestyle attraction, and generation of wealth surpluses in the Middle East; the Indian subcontinent due to its long-term and fast-paced economic and business growth; certain emerging parts of the Middle East due to favourable political and financial outlook; Central Europe due to the expected dividends of an expanding EU; and some parts of Central Asia, due to a mixture of factors ranging from improved relations with other Western and Middle Eastern countries as well as better resource generation and exploitation in some of the energy rich countries within the region.
So what are the sectors in the GCC that investors should avoid in 2007?
Within our selected regions at large, I expect the Gulf to continue to be an attractive place for our types of investments in the coming year. Naturally, the selection of projects and local access to the best private projects and developments will be the key to performance and differentiation.
This is the reason why the management of the Signature Group is constantly developing privileged relationships and joint ventures with the best recognised international and local specialist in their respective fields, for an even better selection and management of investments.
Signature is an asset-management company whose business model and added-value is to work closely with the other sector specific fund managers of its target regions, select special investment opportunities for its investors in high-potential regions like the Gulf, the Middle-East, the Indian subcontinent, Central Europe and perhaps very selectively, Central Asia also, and include those assets in high-return fund structures. Signature has launched the two first funds - the Emirates Realty Fund, and the Taj India Rental Fund.
Standard Chartered Bank
Regional head of research MEPA and South Asia
Stocks have clearly taken a beating in 2006 and the question is will this continue in 2007 or will they rebound strongly? We believe the answer is somewhere between the two. Indeed, the bank believes stock markets are unlikely to be a significant positive for economic sentiment, but they will also not be the negative that they were in 2006. Clearly, sentiment remains extremely weak and the risks in the first quarter of 2007 appear to be skewed to the downside.
However, in some markets, price/earnings (P/E) ratios are coming down to much more reasonable levels. We estimate that the UAE, for instance, is trading at around a 13-14 ratio on a trailing basis, which we believe is good value. At some point, true investors, not speculators are likely to re-enter the market. However, moves to the upside are likely to be relatively muted in 2007.
Normally, when stock markets sell off dramatically, they need to form a base for an extended period (12 to 18 months). The main reason for this is that a large number of market participants bought shares at much higher levels and failed to sell on the way down. This generally means that rallies are used as an opportunity to exit, suppressing any rally.
The one country that appears to have broken this trend is Egypt, which has rallied strongly this year. This has happened on the back of strong domestic reform with the government stepping up its privatisation drive. While the market, against the backdrop of a very liquid region, can make further gains, investors should be aware that valuations are no longer cheap, with Bloomberg estimating the P/E ratio at just under 19.
No discussion of the region's markets would be complete without mentioning the Kingdom of Saudi Arabia. Here, we remain extremely cautious. While valuations are less expensive than they were, they are by no means cheap with the P/E ratio standing at just under 20 by our estimates. This means that this market remains more vulnerable than most in the region.
Kamal Al Harmi
Former member of the OPEC delegation
In 2007 oil prices will stay at the US$60 per barrel level, provided that all OPEC members stick to the new quota (the energy body decided on a 500,000 bpd cut effective from January 2007). If it doesn't stick to it the cut prices might drop to US$50 per barrel.
If there is more oil in the market and prices weaken there might be another OPEC cut in Q2 next year.
In general prices will stay about US$60 per barrel, unless there is another war, a huge protest or some other form of major political instability, and of course natural catastrophes that could push up prices.
The situation in Iraq won't change much, they will probably produce less than this year but this is hardly affecting the global oil market.
Omran Al Sabbrie
After the last OPEC cut prices might tighten at US$65 per barrel. Prices should remain at this level until May, but in the summer they might decline to around US$60 per barrel.
Angola is becoming an OPEC member next year, which means another half a million barrels per day will be under OPEC control. I don't think there will be another production cut next year.
China and India will have a steady but stagnant economic growth, the US will slow down to maybe around 1% (economic growth).
Budget deficit, Iraq and potential natural disasters such as a hurricane would be responsible for a US economy slowdown. The dollar will decline more, and with it the oil exports (which are in dollars), OPEC is pushing for higher prices to compensate for this.
Within the oil producing nations there is more and more talk of selling oil in euros, which Iran has done.
The euro is now almost twice the value of the dollar, so countries like Algeria and Nigeria might follow Iran.
But for the Gulf it will take at least another five years for this step, since most foreign investments in the GCC are in dollars, so if the dollar weakens more it will hurt them a lot. It's in the interest of the Gulf countries to keep the dollar stable, and once they sell their oil in euros the dollar will crash more.
Now we have a booming period for the oil market, so it does not make sense to make major changes now.
Oil companies are exploring new technology for major projects and Old Economy companies are increasingly going high-tech.
Billion dollar oil giants are using software to make production and maintenance of complicated oil rigs more efficient. By commissioning web-based software, oil companies hope that construction of massive oil rigs, pipelines and power plants will go more smoothly and cost less. The project management software promises to keep everyone in the project working on the same set of designs, including the latest changes.
Traditionally, old economy oil and gas companies have been among the slower industries to adopt new software technologies and practices.
But increasingly to stay ahead of the curve, companies are modernising their infrastructure and investing in technology to increase their return on investments. We expect this trend to continue in 2007.
Rashid AW Galadari
Galadari Investment Office
Political stability continues to be a key factor in this market. Given the current situation in Iraq showing little sign of repair, and an ever-influential Iranian regime holding on, prices are unlikely to drop drastically throughout 2007.
As has been the case recently, all the metrics and analysis in the world cannot prevent regional markets turning more to sentiment as opposed to financial reporting. Increasing awareness for the need for good corporate governance should have a positive effect. Institutions from abroad are certain to take a keener interest in 2007.
This is a sector experiencing strong growth, and I anticipate that this will continue throughout next year. A recent AT Kearney report suggested that the biggest challenge for 2007 will be staffing to cope with the increase in business, and I can certainly see this happening.
Aviation & tourism
Abroad, M&A activity is on the rampage in aviation, while environmental taxes will strongly affect short-haul budget carriers in Europe. In the GCC, however, there is still market share to be had for the no-frills carriers, and well-managed companies can expect another good year. Tourism remains a key industry for Dubai and a growing section of the region and the only way is up for 2007.
Property & construction
As the market begins to mature, the bigger players will take an even larger slice of the market in 2007. The progress of some new entrants from across the GCC will be interesting to follow. Profitability is likely to drop for developers as escalation in construction prices continues. However supply side delays will result in a continued excess of demand, meaning rental yields remain strong, and house prices stabilise, but don't crash.
The Islamic finance market will continue to see double-digit growth next year and rapidly rise up the priority ladder for major international banks.
There will be continued convergence from conventional banking products to Islamic instruments and a lot more capital market products as well.
With more conventional products adopting Islamic structures and becoming Sharia-compliant the market will inevitably grow. Three to four years ago all the Islamic market had were short-dated products.
Increased convergence will continue to spur growth in the market. More depth in the product range will increase the number and range of investors.
Sukuks and convertible bonds continue to grow in number and importance, while hybrid capital products will certainly emerge.
The large sophisticated Islamic banks such as Kuwait Finance House, Dubai Islamic Bank and Abu Dhabi Islamic Bank will all play significant roles in 2007 in driving the market forwards, while the international banks will further integrate Islamic products into their product portfolios.
International investors will increasingly look at Islamic finance products as a means to a positive end result. For example, the majority of interest we placed for the pre-IPO Sukuk we carried out for Nakheel at the end of this year was placed internationally. More and more international investors are buying into Sharia-compliant funds and seeing it as a fantastic way of making significant financial returns.
Industry consolidation will be limited but over time, once the GCC is spurred on by the introduction of a single currency (which is some way down the road), consolidation could well take place. As long as national governments play an important role in the large regional banks we won't see any cross-border mergers anytime soon.
The GCC single currency will be delayed until after 2010, but when it is implemented it will simplify things a lot more, such as accounting issues, for example. The fact is that most countries in the region already operate with a single currency as they are all pegged to the US dollar.
The GCC is ahead of the pack, with Saudi Arabia making major inroads and Qatar and Kuwait beginning to move.
Senior research analyst
Despite a fall in earnings this year, a promising forecast and the onset of true competition is predicted for the UAE banking and finance sector in 2007. The environment for core banking operations remains extremely strong, based on solid economic growth, increasing financial penetration and sustainable debt levels. 2007 is looking set to be a year of growth for the sector.
By the middle of 2006 the industry witnessed the fall of IPO gains, asset management fees and income available for sale securities. This in turn led to the depression of 2006/07 earnings growth and rapidly falling valuations. However, the operating environment for UAE banks is far more positive for 2007.
In a move that highlights the industry's ability to adapt to demand, banks in the UAE throughout 2006 focused on growing their core earnings, resulting in lending being a strong growth driver. To ensure that slower deposit growth did not become a constraining factor, most banks then launched multi-billion dollar medium term notes (MTN) programmes. Many banks however are now beginning to focus on diversifying their revenue streams, and taking advantage of cross-selling opportunities.
This is not to suggest that banks are operating in a fiercely competitive environment. Evidence from the liquidity boom of the past few years' shows banks compete aggressively on volumes and incentives, but not on price, hence competition is not true compared to Western counterparts.
While the banks themselves seem to think that they currently operate in one of the most competitive markets in the world, we believe there are significant institutional reasons why this is not the case. The evidence from the liquidity boom of the past few years has been that the banks will compete aggressively on volumes and incentives but not on price.
The only reason why returns on equity are good, but not conspicuously so, is that the banks are generally overcapitalised, make insufficient use of innovative financing solutions and have little service-related non-interest income. Indeed so far they have not needed to pursue these revenue streams.
EFG-Hermes expects a slowdown in the loan market in the UAE, and banks need to seriously consider how they will respond to this.
The risk is that overcapitalisation combined with weak growth, increased account portability and a plausible impact from adjustments to market regulation possibly driven by the Free Trade Agreement, will result in the onset of true competition.
Director, Debt capital markets
The GCC bond market is set to grow by 60% next year, with both conventional and Islamic bonds performing strongly. With conservative estimation, we expect the bond market to rise from US$25bn this year to US$30bn to US$40bn in 2007. In 2004 the market was worth US$5bn, and doubled to US$10bn in 2005. Bonds offer an attractive funding alternative for banks as opposed to traditional lending. They also offer attractive prices, good maturity, diversified risk and greater flexibility, besides the fact that organisations can build up a solid investor base. There is also a strong appetite for GCC bonds from overseas investors. Three quarters of bonds are held by investors outside the Middle East, mainly in Europe and Asia, with a few in the US. The GCC has great economic growth, and Gulf bonds have very competitive margins. It is also a rather stable market, since it has so far not been affected by the political insecurity of this area. As the credit environment in the Gulf is improving and the market is maturing, the demand for bonds is increasing.
The majority of issuers are banks that also tend to borrow for capital purposes, as opposed to liquidity insurance, whereas corporates issue bonds for general purposes. The UAE makes up at least 50% of the total Gulf market. Dubai is ahead of the curve in the GCC, but we expect the other markets such as Saudi Arabia, Kuwait and Qatar to follow.
The biggest risks for GCC bonds in 2007 will be an increase in regional political instabilities, or a general liquidity squeeze. If other asset classes in different markets start to outperform GCC bonds, many investors would shift. Declining oil prices do not pose a severe threat to a bond's value. A change in oil prices needs to be quite radical to really affect financial markets.
Islamic finance bonds, or Sukuks, that are Sharia-compliant, make up some 40% of all Gulf bonds. This sector is evolving fast, and is gaining popularity also in Europe. Sukuks have been around for many years, but they are now gaining momentum also with conventional investors. It's really more or less the same investor base that is interested in these bonds, since the margins are the same. Saudi Arabia is a sleeping giant. It has strong infrastructure growth, and the telecom and oil and gas sectors are growing fast.
Global head of Sharia structuring, and regional head of ME structuring
Islamic finance has evolved from an exotic into a niche market, and is now starting to become mainstream. One of the themes of 2007 will be its further development.
There are a couple of aspects that are typical for a market at this stage. First of all, globalisation. Islamic finance started as a Far East and Middle East adventure, and the question for 2007 will be how adaptive or how open the global financial world will be to Islamic finance. I predict that either a European or the Japanese government will come out with an Islamic Sukuk, to signal that they are open for business.
We saw the seeds of serious globalisation this year, with even the American investment banks moving in - not only into Dubai, but also into Qatar and Bahrain. The banks are moving fast, and this goes for the whole financial market in the Middle East, not just the Islamic market. Infrastructure is also key. At this stage there is no dominant stock or exchange market. You could say that Riyadh is dominant, but that's because of its domestic importance - it's not ‘the market' in the region that attracts, for example, Kuwaiti or Bahraini stock. To a certain extent it's perhaps only the DIFC that has that potential, but it has not yet lived up to that potential. One of the key things for 2007 is whether the potential of the DIFC will materialise. It has changed its structure quite dramatically, with more focus on niche markets and retail. This has a direct implication for the Islamic markets, as it could make them more liquid. They currently lack liquidity across the Middle East.
From an equity point of view, we're quite confident in the Middle East. Economically, the fundamentals are looking very good. Oil prices are always difficult to predict, but I think there is a consensus in the market that they will stay reasonably high. It should be a very good year for all.
Senior vice president for sales in the MENA region
"With regards to investing in the region, we are in close discussions with the Dubai Aerospace Enterprise to do some work in the region. My goal is that between now and the end of 2007, we will have a Gulf customer for the Dreamliner 787 that we can announce. 2007 will be a very busy year especially with the Dubai Air Show, where we hope to build on the successes of previous shows."
Royal Jordanian Airlines could become the first carrier to take on the 787, replacing its ageing Airbus 340 fleet of aircraft due to be phased out in 2010, with negotiations ongoing the the time of going to press.
Its CEO Samer Majali said in a statement that its was conducting negotiations with Boeing and "other international firms" to purchase five 787-8 Dreamliner planes. The Dreamliner is 20% more fuel-efficient thanks to work with GE over its engine and is made of composite materials. A Boeing spokesman told Arabian Business that the first customer deliveries are scheduled for August 2008.
The spokesman said 2007 could also bring the liberalisation of Saudi market with new licences being announced. "Sama is the first carrier to have been granted a licence. This is of particular significance because of the Kingdom's lack of infrastructure with no rail and no major road network.
"Continued growth of low cost airlines driving a greater section of the industry with Air Arabia leading the way out of Sharjah. Fuel cost is increasingly becoming part of a company's balance sheet and companies are taking the issue more seriously than ever before.
"Shortage of skilled employees continues to dog the industry, especially with the rise of Jebel Ali airport and the expansion of many regional airports."
2006 saw a fleet of new aircraft, 16 new routes and the accolade of world's leading new airline for the third year running, however, the Abu Dhabi-based national airline for the UAE is planning bigger and better things for 2007. A spokesman for the carrier spoke to Arabian Business.
"We are anticipating a record four million guests for 2007, with tickets for 37 new routes in just 37 months now available including the highly prestigious service to New York which opened in October last year. The Kuala Lumpur route is also on set for launch on 16 January 2007.
"Currently, 80% of Etihad's fleet is brand new which is unprecedented in the world of air travel. The fleet has become one of the youngest in the world with the twenty third aircraft, a three-zone A340-500, arriving in Abu Dhabi in December."
The new A340-500 forms part of the airline's record US$8bn order, made in 2004 for 29 new Airbus and Boeing aircraft. The latest addition to Etihad will now join a fleet that includes nine A330-200s and five Boeing 777-300 ERs.
July 2006 saw the visit of the largest passenger plane in the world - the new Airbus A380-800 with a capacity for 555 passengers. Etihad has ordered four aircraft, but with delays on the aircraft the Abu Dhabi airline could only say that it would be delivered sometime "in the near future".
We have taken delivery of our 757, the pilots are undertaking their final training schedules, the reservation system is almost complete, our air operating certificate will be ready in the first week of January and we are hoping to launch at the end of March.
Regionally, we will see a significant increase in demand for additional capacity as incumbent carriers such as Emirates and Etihad expand their range of services. There will be more and more demand for travel to the region and both regional and international carriers and incumbents will add capacity and increase the number of passengers and tourists to the Middle East. Current flights to the US and the Indian sub-continent will create a new market back towards the region, and increased traffic.
RAK will take advantage of the rising demand and examine whether it is feasible to operate out of other airports in the UAE or other parts of the region. We are currently looking at Kuwait and Oman as serious possibilities.
The robustness and strength that most regional carriers have will be enough to answer market needs and any pressures faced such as the threat of terrorism, fuel prices and competition. Regional carriers will cope and increase their global market share. Fuel prices will rise and continue to pressure airlines, and environmental concerns will continue to press governments to tax airlines at some stage.
Economist Intelligence Unit
Chief tourism & travel analyst
We're expecting quite a healthy increase purely in terms of tourist numbers in the region over the next five years. We see it as one of the major growing regions for tourism and of course that filters through into the airline industry. Obviously there's been a lot of investment in Middle East carriers, but the market in the region is still a relatively small one in international terms. One of the big challenges for the airlines is to break into more international routes, such as London to Sydney. It's going to be the big one - how far can Middle East airlines penetrate? However much they're growing now, Middle East airlines need to look outside the region if they really want to make the difference.
They're all constrained by international agreements on travel, so while they might be able to run limited services which run through this region, what would really make a difference would be the liberalisation of the international aviation regulations. The big stumbling block on that are the EU-US talks, which have more or less stalled. Everyone was really hopeful about them, but although they're not yet dead in the water, it's looking a lot more pessimistic now.
Everybody's been saying ‘it's about to happen' for years, but it's just not got close to happening, and now there's a lot of pressure from the US in particular just to block that.
Once that huge market is liberalised, there'll be a lot more pressure on Asian and Middle Eastern markets to open up as well.
Obviously, the biggest cost for airlines at the moment is oil, which accounts for something like a quarter of costs. If the airlines can shield themselves from that pressure, they should be looking ahead quite happily at 2007.
2007 will continue to see high demand and high pricing in both the core regional sectors of oil and gas with the region well placed to sustain its increasingly dominant position within the global economy. Strategic partnerships with Russia, and strong economic relationships with neighbouring markets such as Eastern Europe, Central Asia and North Africa are essential to develop long-term sustainable global positions in these sectors.
Middle Eastern markets have experienced a correction during 2006, reflecting the over-enthusiasm of speculators and the early stages of maturity. This climb along the experience curve should see stronger accountability for listed companies, with investors demanding greater depth of analysis and detail on strategy and medium to long-term performance indicators prior to making investment decisions. Furthermore, the market also needs more ‘power' listings to complement Emaar, as well as more of the low-to-medium risk listings with companies from the FMCG sector.
Aviation & tourism
With some of the very best airlines in the world, great tourism infrastructure in leisure, business and entertainment coupled with the temperate climate, the Middle East should continue to see strong tourism growth in 2007. Relative pricing remains a key driver to the success of the tourism sector in the Middle East, and an obsession with ensuring value for money is key for repeat business.
Property & construction
Many of us who have experienced the evolution of the region and the phenomena of the property and construction boom continue to be amazed by its resilience and strength. 2006 was a year flooded by development announcements, which should all start coming to fruition through 2007 and 2008. The market will remain strong, with more pressure on developers and agents to deliver quality as well as quantity.
Rents in the Dubai property market are set for a moderate rise in 2007 with the likelihood that they will fall in 2008, according to research from regional investment bank EFG-Hermes.
"This anticipated fall will be the result of as many as 530,000 units coming on stream in 2010 with the bulk of delivery taking place in 2008. In 2006, rents for residential units increased by an average of 30% making the increase in rates the main concern of the year. The rise was driven by demand for freehold housing which has far outpaced the speed at which new residential properties are being delivered.
"The major driver of demand is population growth that, in a city like Dubai, depends on the natural increase in population and an influx of expatriates. Strong population growth indicates that the current strong demand for residential units is sustainable.
"Assuming the population of Dubai rises at a compound annual growth rate of 7.9% to almost 1.9 million by 2010, the bank expects additional demand for residential units in the range of 40,000 to 50,000 units a year.
"Overall the market has become more mature with buyers becoming more selective, developers building less on a speculative basis, property prices becoming relatively stable and sales in the secondary market increasing steadily.
"Given our industry supply-demand forecasts, we expect an oversupply in housing units starting in 2008. As a result prices will also probably begin to fall in 2008, with the magnitude of the drop depending on how much additional supply actually hits the market.
"Meanwhile, demand for commercial property has also been outpacing supply to send rents soaring.
"This is currently reflected in abnormally high rental yields that now average 27%, representing a huge premium to the global average. However, with supply forecast to triple and demand set to remain strong in the short and medium terms, rental yields will revert to par with the global average or carry only a slight premium."
According to the bank this is expected to take place in 2009.
CB Richard Ellis
Managing director, Middle East
I have no doubt that the current level of inflationary pressure applied to residential and commercial real estate will slow down with the delivery of new upcoming supply.
I expect growth in rental values within the majority of sectors to stop completely by the end of next year.
Whether or not this will lead to rental values plateauing or declining is still subject to interpretation but, in my opinion, rents will decline from their current highs.
This is already being reflected in the marketplace with the more astute landlords offering pre-let terms in respect of commercial properties at substantial discounts from the current headline costly rental prices.
This makes new schemes very attractive and maintains their long-term growth prospects.
For one or two of our global corporate clients we know that the advantages that they foresaw when coming to Dubai during the course of 2007 have been negated by the level of rents that they would have to pay and for those institutions which are mobile, has meant that they have looked at alternative markets.
Aspire Real Estate
As always I feel Dubai will lead the bunch in 2007. However, you will see the sleeping giant, Abu Dhabi, awakening and some major prospects in Saudi Arabia and Qatar. Dubai, in spite of growth, will see some qualitative correction in a few projects. Steep competition and rising costs will stunt developers' profit margins. The biggest challenges for most developers will be constant innovation, cost control, quality check and above all ensuring timely delivery of the project. The Middle East is a highly speculative market so developers will continue the fight for payment collection from speculators who are not prepared to go long-term on a development. Due to an increasing demand and creation of superior infrastructure, land prices will continue to rise. I estimate a price hike of around 20% as an average on most locations. Materials are expected to remain more or less constant over a period of the next two years, however, a major upward change could be seen in labour and ancillary costs.
Jones Laing LaSalle
Managing director, MENA
What we're looking at for the next 12 months is really the trillion-dollar question. There's about a trillion dollars' worth of projects either underway or planned for the next five years in the Gulf. On that basis, and looking at a population probably about similar to the state of California, it's probably the highest per capita in terms of real estate investment in the world. The GCC is no longer undiscovered, and 2006 was a bit of a coming out party on a global basis. In terms of major trends, we see an increased focus on delivery versus marketing. Whereas in the last five years marketing has been king, delivery is now king.
We also see a growing trend, which we call ‘real homes for real people', and that means creating residential projects that are appropriate to the market. The market is becoming increasingly segmented, there's increasing diversity, and it's certainly increasing in terms of geography. In 2007 we'd anticipate some new types of development coming into play. In particular, you're likely to hear three initials being used very aggressively, and that's TOD - transit oriented development.
Business consultant specialising in fund management and property
We experienced myopia on a near biblical scale earlier in the year with the stock market. It's quite likely that the same misguided perceptions are rising in the property market. One thing that has to be acknowledged is that the market in Dubai is still a speculative one, despite repeated claims that it is moving to a more mature stage. How can that be when developments are still not running to schedule, and several have been cancelled? Add in the extraordinary spectacle of one developer offering free cars and a raffle for a jet airliner and it becomes difficult to see quite how this adds up to a stable market.
Oil company shares are signalling that crude prices may rebound to a record in 2007. Global demand is still 86 million barrels, OPEC will not tolerate a bearish price spiral and supply shocks from Russia to Iraq together with the continuing spectre of Iran should underpin prices. The best bet for 2007 continues to be battered oil and gas equities on Wall Street and in the City in London and Russian oil and gas global depository receipts. Forget the Dubai Financial Market (DFM) issue, shares of Nymex, owner of the biggest energy exchange, more than doubled since its initial public offering six weeks ago, the best performance for any IPO this year. The value of energy industry IPOs in 2006 more than doubled that of last year, reaching US$7.4bn and I don't see why the run is over if the global economy continues to grow. Everyone expects a rebound in local shares. The local markets are still suffering from the malaise surrounding the KSA and in Dubai, several hundred thousand new investors registered at the DFM alone in the first six months of the year.
Investment banks are going to need to generate large fee incomes to pay the increasing hordes they are hiring so we can expect to see more IPOs. But when they get tiny allocations such as in the DFM issue, even a 100% premium on day one of trading will not cover costs. Returns from the retail credit card scene or counting the dwindling margins on auto loans in a traffic choked market. But the Central Bank is going to have to rap some knuckles again over the leverage issue.