By Massoud A. Derhally
Legendary Dubai investor Shehab Gargash explains why - despite pushing his own firm’s IPO back to 2015 - sentiment in the UAE is picking up
The sale of his company’s shares to the public may not be taking place because of unfavourable market conditions. Yet Shehab Gargash is bullish and optimistic about the future.
“Two important things happened recently, the regional turmoil politically with the Arab Spring and the adjustment in valuations in the more developed regional markets, the Gulf,” Gargash says. “Taking both of them into consideration, I think the future looks very promising for the Gulf. The macroeconomics are very sound, the valuations are attainable, the exaggeration premium has been flushed out.”
As managing director of Daman Investments, one of the UAE’s most prominent financial services firms, Gargash’s opinion is one that is widely valued.
Indeed as the global economy appears to be faltering, China, the world’s second-largest economy, is witnessing a decline in growth, and Europe is grappling with its debt crisis and the fate of the euro. There appears to be little room for optimism. But as investors contemplate what will galvanise a global recovery, Dubai’s economy is slowly making a comeback.
The combined market capitalisation losses in the Abu Dhabi and Dubai stock exchanges between September 2008 and end-March 2012 exceeded $100bn, according to a June report by the International Monetary Fund.
“Equity markets have become significantly more correlated with global markets since September 2008, and market volatility increased after the crisis, but seemed to have settled down since the beginning of 2011,” the Washington-based organisation said.
Though initial public offerings are scarce in the emirate compared to the boom peaks witnessed in 2008, investor confidence in real estate, which accounts for about thirteen percent of gross domestic product, is rebounding.
Dubai’s economy continued to grow in the first half of 2012 even as oil prices declined and uncertainties lingered about the state of global economy and debt crisis in Europe, according to Jones Lang LaSalle Inc.
Even though few major investment transactions remain due to the lack of quality stock being offered to the market at prices investors feel are attractive, “investor sentiment towards Dubai real estate continues to improve, with increased sales of individual residential properties,” according to the Chicago-based broker.
Dubai’s economy could expand as much as five percent in 2012 from about three percent last year, as trade, retail, transport and tourism continue to grow, according to the Dubai Economic Council.
Perhaps a testament to a rebound in investor sentiment is Gargash’s ability to increase his shareholder base of Dubai-based Daman Investments, the company he established in 1998.
In June, Daman sold, as part of its strategy to broaden its shareholder base, a 22.7 percent stake through a private placement which values the company at AED440m ($119.8m). The total number of issued shares increased to 2,588,235 from 2 million. The new shares were issued at a premium of AED70 (70 percent) above their nominal value of AED100 per share.
“Looking at our environment, where our end game of our capitalisation is an IPO, I venture it will be in 2015 or beyond,” Gargash says. “If it happens earlier, it means that the market has gotten better and faster than we expected.”
Daman’s plan is for one third of the company to be publicly held, while the original investors retain a third and the rest is held by investors that came in between such as the recent private placement.
Gargash doesn’t have a target figure for the share sale, which he anticipates will take place in 2015 instead of this year. The amount he aims to raise will depend on the needs of the company at the relevant time.
“It’s important to note that everybody who is in a situation like us, in a pre-IPO, has their eye on the market to see who jumps in first as that will be a very big test as to the ability to raise money from the primary market,” he says.
Engineering group Drake & Scull raised $324m on the Dubai Financial Market in March 2009, the last IPO on the bourse, while Eshraq Properties, the largest IPO on the Abu Dhabi exchange, raised $224m in May 2011. The market has been dry since and the Dubai Financial Market is down more than 70 percent from its peak in 2008.
An earlier offering of Daman, Gargash says, would depend on an improvement in market conditions and a rebound in investor appetite, which plunged in 2008 when Dubai’s six-year construction and real estate boom came to a halt.
“I don’t think the market environment is conducive, liquidity is not there, the appetite is not there and investor sentiment is not there generally,” Gargash says. “We are on track and are about to begin phase two of our capital raise which will be at a premium over phase one.”
Looking forward, Gargash is bullish about a rebound in investor sentiment.
“People will maybe look at it maybe strangely but I think real estate will make a comeback in the UAE,” Gargash says. “It’s the home of real estate in the region more or less. I think the financial services sector will become interesting and some of the less invested areas but I think they are the long shot, things like agriculture in some of the countries around the region may see investment.”
These comments come amid a spate of positive reports regarding the property sector in the UAE. Emaar, the country’s largest listed developer, posted a 146 percent growth in second-quarter net profits, buoyed by rents, and its retail and hospitality divisions. Union Properties posted a $29m profit in the second quarter, as opposed to a huge loss for the same time a year previously. Nakheel, Dubai’s largest developer by assets, saw a 36 percent increase in profits in the first half to $209m.
Last month, a report from Bank of America Merrill Lynch claimed that Dubai property was a worthwhile investment, due to projected population growth in the emirate and strong existing infrastructure.
“The real estate sector provides a good exposure to growing consumer spending mainly led by tourism and sizeable household consumption,” the report stated.
“Dubai should benefit the most, in our view, given a more open and diversified economy, its greater sensitivity to continued population growth and superior past infrastructure investment.”
All of these appear as positive indicators given that Dubai property prices fell as much as 60 percent from their 2008 peak. Values have been rising in premium areas across the first half of this year.
Looking forward, Gargash doesn’t believe that the government’s traditional hands-off policy towards the economy will change.
“It has, in the long term, proven wise,” he says. “Sometimes we argue and we moan about the government not being activist but in the longer term it has helped rather than hurt when the government left things for the market to determine.”
“I think the government is putting its house in order,” Gargash says. “Nobody ever thought it would be a short-term solution, you don’t have the paralysis that was there in the early days. There is a plan being put together, it's going to be tough, it’s going to be difficult and it’s going to be over a long period of time. But the more clarity there is the more communication with the market there is, the better for everybody.”
Still, Gargash says he would like to see a direct injection of liquidity by the government into certain sectors “in order to spur economic activity, to spur the money circulation and to spur the multiplier effect.”
Though banks in the UAE are awash with liquidity, they have, for the most part, remained cautious about lending. Bank deposits in the UAE fell 1.7 percent to AED1.1 trillion ($301bn) in June, the third month in a row of falls according to the latest central bank data, while lending grew 3.2 percent from a year earlier in June.
“I don’t think the banks have done their fair share to spur activity post-crisis,” Gargash says. “The banks are cautious, abundantly cautious and that hurt rather than helped the economic bounce back. I would like to see the government a little more forceful with the banking industry in order to get the banks off their chair and more active within their economy.”
While Dubai has anchored itself as a logistics, aviation and tourism hub, what will put the fizz back into investor confidence? As the emirate tries to evolve from its debt crisis the metrics are likely to change, says Gargash.
“Pre-crisis capital optimisation, doing the most with as little capital possible was the flavour,” he says, adding: “Post-crisis, properly capitalised companies are the ones that are going to be looked at favourably.”
For Daman, that means the company will be looking to beef up its balance sheet, look to opportunities closer to home and to be a little cautious in politically volatile countries of the region.
“I think in the period ahead, people will have less appetite for risk than previously,” Gargash says.
“Political risk is a totally new element when looking at the Middle East for investors from the Middle East,” he says. “A Middle Eastern investor pre-crisis used to discount the political risk of any of the Middle Eastern countries because he is from the region. Not any more. Some countries are today more volatile politically, therefore riskier and become no-go areas for the regional investor.
“The more established economies, the more stable they are politically, and the economies that are more stable politically are going to get the lion’s share of intra-Middle East money.”finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Always a worthwhile commentator and voice of sanity in the madness of markets, when he goes for an IPO that will be an important market indicator.