By Massoud A. Derhally
Khalid Bin Kalban – who runs the biggest investment firm listed on the DFM – says sentiment in several sectors is clearly picking up
Things couldn't be any better for Khalid Bin Kalban, the CEO of Dubai Investments (DI). His firm, the largest investment company listed on the Dubai Financial Market, recorded revenues of AED2.6bn and saw its net income climb 58 percent last year to AED 320m from 2011 on the back of a recovery in the real estate sector and markets rebounding.
“Last year was a year of consolidation for all the companies," Kalban says in an interview with Arabian Business. “This year, 2013, and onward is going to be a growth strategy going forward."
To finance that growth, Dubai Investments plans to issue a AED1bn ($272m) Islamic bond, or sukuk. The bond offering will pay off debt and finance the expansion of more than 30 subsidiaries of DI in real estate, manufacturing and finance.
“Part of what we are borrowing now will pay partly some of the loans against some of the manufacturing units which were subjected to penalties and higher costs of borrowing," says Kalban. “Once we get that AED1bn we will restructure, maybe we will increase some of the capital of those companies, reduce their costs and their profitability will be higher."
The company wants to go to the market to take advantage of the low cost of financing by issuing the five-year sukuk at less than 5 percent. Kalban expects to close the deal and secure the financing by the end of April.
The company is also currently reviewing six entities as part of its acquisition and growth strategy which would cost it about AED280m.
“There is a positive trend in equity markets, in real estate and in manufacturing," Kalban says as he speaks about the potential for growth and expansion of his company's units. “The focus of our manufacturing is building materials and we see the construction activity happening around us in the GCC at a good scale. So our companies in glass and aluminium have secured good orders. The order book is full."
Saudi Arabia, the largest economy in the Arab world and biggest producer of oil globally, is spending more than $500bn to expand its infrastructure. An expected budget surplus in 2013 and the government drawing down its foreign assets, which stood at around $634.8bn at the end of November 2012, will help finance its expenditure plans in the event of any shortfall in revenues, Jadwa Investment said in a report last month. Construction is forecast to be the fastest growing sector in 2013, according to Jadwa. Qatar and the UAE are also spending billions of dollars on backbone and foundation projects.
Two thirds of companies in construction await new projects in local and regional markets or expect to restart stalled projects, the Department of Economic Development of Dubai's government said in a report earlier this month. “The rebound in construction-related activity is also reflected in manufacturing as cement and glass manufacturers are more optimistic," it said in a statement.
Last year, sales of Dubai Investments' glass manufacturing business in 33 countries across the globe reached AED600m.
“The market was taking a beating the last couple of years so now the performance of companies after restructuring and proper funding has improved," says Kalban. “Markets around us have improved, financial markets, real estate activity and manufacturing we see improvement across the board."
The Dubai Financial Market is up about 17 percent since the start of the year, Abu Dhabi is at a 39-month high, while Kuwait is at a nine-month high.
Dubai Investments will focus only on the Middle East and North African region as part of its growth strategy. Economic growth in the region was projected to have reached 5.3 percent last year, according to the International Monetary Fund.
The sale of two companies by the end of this year to international companies, which Kalban declines to identify, could reap the company as much as AED530m this year and boost Dubai Investments' profits more than three times.
“If we don't exit we will have a profit growth of about 30 percent; if the exit happens we will have growth of 200 percent," he says. “We want to bring a strategic investor to grow the business."
Though it recognises growth in emerging markets and the interest by companies from the region in China and India, Dubai Investments is unlikely to venture outside of the Middle East and North Africa region.
“It is very difficult for us to expand globally," says Kalban, adding: “we will have to look at our local and regional investment and look at global investment only at a later stage."
“We will continue expanding our existing businesses, especially on the manufacturing side," says Kalban, adding that company has a taken “a back seat" to industrial and real estate investments in Libya as well as Tunisia due to the turmoil in the North African countries.
Libya's economy was projected to grow 121.9 percent last year and growth is set to slow to 16.7 percent this year, according to the IMF. The North African country's economy contracted 60 percent as a result of the 2011 rebellion that toppled the regime of Muammar Gaddafi. Security challenges and political uncertainty have made the transition process and macroeconomic stability more difficult.
“We are waiting for the appropriate time," says Kalban. “What concerns me is mitigating the risks in a large manner. If the risks decrease then we're ready."
The company's foreign investments account for about 30 percent of its overall portfolio.
Dubai Investments is likely to pursue manufacturing outside Dubai due to the increasing costs associated with the industry as land and power expenses are on the rise, says Kalban.
“Governments now are reducing subsidies to whatever they were subsidising earlier...it is a fact of life, they are looking at their costs and saying why should we do this as a government? Let’s run those companies as a business and it is being run like a business," says Kalban. “Ten years ago the government was building the hospitals, the schools, now the private sector is coming in."
Though he says that the most challenging aspect for developers today is the source of financing as banks have tightened credit facilities after the collapse of the property market in 2009 and the ensuing financial crisis, Kalban, who is also the chairman of Union Properties remains upbeat about the future. The Dubai market is strong and the Gulf region has “a window of opportunity" over the coming three years for growth, he says.
“There are basic sectors of the economy - even during the financial crisis that held their position," he says. “You have investment going into real estate, with investment mainly directed towards tourism. More hotels are coming, more entertainment, and more theme parks. If you look at the general market, here and around us it has improved. The sentiment is coming from different directions. The equity markets have shown positive trends, real estate values have increased."
Asked about the rapidly rising rental prices, increasing asset values and if the central bank's recent memo asking local banks in the UAE to put a 50 percent limit on how much foreigners can borrow, Kalban says the intent of the regulatory authority has been to limit the scope of speculators in the economy.
“I think the central bank has started rethinking those guidelines,'' he says, adding: “You cannot cripple speculation. Speculation is the flavour, the spice of markets."
While federal authorities have not issued a definitive timeline for the implementation of the caps, Emirates Banks Association (EBA) chairman Abdul Aziz Al Ghurair said UAE banks have recommended mortgage loans should be capped at 75 percent of the property value for expats and 80 percent for UAE nationals.
In late January, central bank governor Sultan Nasser Al Suweidi told a local newspaper that the UAE central bank will not impose limits on mortgage lending without consulting commercial banks, and any new rules were not imminent.
“What they are trying to do, the central bank is trying to bring a balance between all the investors that are coming, what is available in the country and how the banks should be lending," says Kalban. “This is not the environment for speculators now. It's more regulated than ever. We are way away from 2007, I don't think that will repeat itself. People have learned. There is new money, good liquidity in the market."