News update

>> Gulf growth drawing global funds to set up shop

>> Middle East private wealth surged 11.6% in 2013

>> World Bank’s IFC considering return to sukuk market

>> Dubai faces moment of truth over looming property bubble

>> U.K. mandates banks for maiden sovereign sukuk “in coming weeks”

>> Dubai’s Emaar Malls attracts strong demand for debut sukuk

>> Gulf premium may vanish as views of region shift

>> Gulf’s billions insulate economies, markets from Iraq turmoil

>> CEO of Dubai’s Arabtec quits, leaving ownership, strategy in question

>> Dubai leads GCC corporate earnings

Setting KPIs for board members

A haven for real estate management?

Middle East investors splurge on global real estate

Mohammed Khalaf Al Habtoor on successful family businesses, polo and legacy.

>> Read more >> Read more>> Read more >> Read more >> Read more

JULY 2014 Vol. 3 - No. 4

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Summer blues For regional investors

Events and Promotions

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Growing a business is easier when you have support

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Setting KPIs for board members By Hisham Wyne

A board of directors mightn’t be the suited gents everyone sees in glossy pictures and in Hollywood. But they serve an essential purpose nevertheless.

Essentially, a board of directors is elected to champion the shareholder voice. For publically listed companies, this means standing up for everyone who has bought shares in the company. For family owned businesses and private concerns, matters are less black and white; it is often family members and friends that are elected to boards. There is a distinct overlap between owners and directors.

In a publicly listed company, the board of directors is at the apex of the management structure. It selects and evaluates the CEO of the company, and also examines

the structure of returns and dividends. Directors, in short, are tasked with ensuring a company continues to run in line with the wishes and expectations of its owners.

Directors aren’t managers – they are expected to keep the management in check on behalf of the company’s owners. There are many possible conflicts of interests between managers and owners – how high to set management salaries and bonuses is a classic example. But the distinction between manager and director blurs in Gulf family businesses, where managers actively involved in the running of the business are also owners who sit on the board of directors.

An effective board of directors will be bound by codes of conduct. Generally, these are agreed upon and passed by the board itself. Board members are expected to be knowledgeable about a company’s operations, products, markets, aspirations, competition and culture. They must be experienced and knowledgeable. And they must have access to the right information.

This right information comes to the board in the form of a ‘dashboard’ of KPIs, or Key Performance Indicators. The idea is to offer a high-level summation of key business scores that help directors evaluate business performance. Examples of KPIs can include net profits, gross revenue, incremental turnover, sales increases and hiring figures.

The KPIs that directors should have available to them are a tricky business. On the one hand, they should have adequate information about company performance. On the other hand, a report tracking 400 results risks information overload, and risks diluting the ‘K’ in KPIs. If performance measures really are ‘key’, 10 to 15 should be enough to offer a rough prognosis on business health.

But apart from KPIs that directors are given to aid the decision-making process, should there also be KPIs for directorial performance and governance? Mohammad Al Madani, Chairman and CEO of diversified business concern Al Madani Group, offers a clarification. “Boards of directors are generally advisory in nature. And those board members are tasked with doing a good job for the company. They have their reputation and influence on the line, which in family-run businesses is a strong incentive. If their ideas are working, they get listened to. If not, they get sidelined. But the advisory nature of director duties makes it difficult to line up specific KPI-driven goals to measure their performance.”

Al Madani notes that not all companies have purely advisory boards. “We have a board of managers. They’re like directors, but also have specific responsibilities in the business’ daily operations. Because they’re responsible for managing the business,

they have targets and benchmarks. When meetings are convened, they sit with the owners and look at how the KPIs are doing, and whether targets have been met. And if goals have been missed, the collective board looks at the reasons behind it and how to fix matters,” Al Madani explained.

There are certainly benefits to this structure. It allows the setting of performance metrics, and comprehensive review plans. It also allows those involved in making the operational rubber meet the business road a voice in making top-level decisions.

The downside includes a possible conflict of interest – the priorities of person A the manager might not be the same as the priorities of the same person A as a board member. The former would be interested in job continuity, while the latter should champion the needs of the business as a whole. But these risks can be managed through the directorial level involvement of other owners and shareholders, and policies of empowerment that tangibly link professional managerial growth with business success. © Zawya

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OPPORTUNITY

A Haven for Real Estate Management? By Hisham Wyne

Real estate is booming. And with that come new opportunities for property management firms.

With Dubai’s Expo 2020 offering a needed shot in the arm, the sector has been galvanized into new activity. Far from the days where the market was worried about unfinished projects and sluggish rents, the concern now is to stop the market rising into another overheated bubble.

Khalid Bin Kalban, managing director and CEO of Dubai Investments, has gone on record to say that real estate cycles are usually five years long, and the timing of the latest one suggests there are four years of strong growth left. Other indicators seem to match Kalban’s prediction. A report by real estate firm Cluttons saw real estate growth

rise as much as 51% in 2013. Real estate firm Damac has also ridden the market high towards a 79% increase in profit for 2014’s first quarter.

All this is good news for property management firms. Sometimes known as asset managers, property management firms take over assets on behalf of landlords. For residential buildings, they then handle the leasing, contracting, maintenance, rent collection and occupancy continuity.

But property management isn’t merely about paying the bills, ensuring tenants pay theirs, and walls don’t come crumbling down. It is a diversified activity requiring skillful management, with a remit that extends to retail areas, mixed use buildings, and entire communities. The Dubai Property Group is an example of a firm that manages its own communities, such as the vibrant JBR The Walk. Such property management must ensure a suitable mix of leisure, retail and F&B options, and maximize the overall value a community offers to tenants and visitors.

The reversal of the global recession, and greater dynamism in real estate is a global phenomenon. And that has bred opportunities in property management. Research indicates that the global real estate management market was worth $479 billion in 2011. Despite a battering due to weak markets in Europe, it is expected to hold its own. The residential segment remains

the most active, and in 2011 generated almost 57% of the entire market, chalking up revenues in excess of $272 billion. In the US, property managers earned an average salary of $63,570 per annum in the first half of 2012. While the lowest paid 10% made a mere $26,600 or less, the highest paid 10 percent were making above $113,400.

Dubai remains poised as a hub for property management. This is driven by twin factors – first that the city continues its allure as a destination for investment, and second that global investment flows are moving away from Levant unrest and European weaknesses to seek better returns in the UAE.

There are caveats, though. As the last superheated cycle showed, Dubai is excellent in rapidly building towers. Property management, on the other hand, is a medium to long-term activity that requires a suitable tenant mix, amenities and green spaces for sustainability. In years previous, the city gave the world many an iconic building. But well-rounded communities were hard to come by. Fast forward six years, and many projects are only now becoming the integrated living spaces they were designed to be.

Another concern for property management firms is their dependence on commissions,

or percentages of tenant rents. While revenue streams are easy to score in a growing market, the most recent figures from 2014 show that rents are stopping their meteoric rise. Real estate prices too are evening out after the initial boost from the Expo 2020 win.

In an environment where hype exceeds activity on the ground, property management firms will need to step up service levels to ensure a well-rounded tenant mix that delivers sustainability. Price and rent movements have the potential to trigger mass tenant movements as they seek lower rents in better priced areas. This disrupts business continuity and leaves units empty, generating an opportunity cost.

On that last point, property management firms should ideally offer guidance to property owners and landlords on acceptable price and rent points, advocating for market reality to temper expectations, thereby creating a move towards Pareto optimality. © Zawya

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MARKETS UPDATE

Summer Blues For Regional Investors Global markets powered ahead, shrugging off rising crude oil prices, and generally moderate growth expectations in the global economy. S&P 500 was on a six-day rally, hitting a new high, while the Dow Jones Industrial Average also climbed to an intra-trade high, as investors took heart from the U.S. Federal Reserve’s dovish pronouncements.

The Fed’s well anticipated decision to taper by another USD10 billion was accompanied by a statement that was interpreted as subdued, while at the same time delivering a generally upbeat assessment of the economy. As a consequence, both bond and equity markets rallied, volatility measures reached new lows, and emerging market assets gained as well.

Despite the Fed’s steady approach, analysts fear risk of inflation in the near term in the world’s largest economy.

Meanwhile, the European Central Bank is battling deflation, suggesting that global central bank monetary polices may start to divert. The market is still digesting the ECB’s comprehensive monetary package delivered earlier this month, and investors are expecting more loosening to massage growth.

The European economy expanded by a modest 0.7% in the first quarter. Business survey also suggests a leveling off after a brisk start to the year. As such, any catalyst will have to come from the ECB.

Both the Japanese and Chinese governments are eyeing more economic stimulus. In Japan, deregulation, pension and labour market reform and corporate taxes are expected to be discussed, while the Chinese are combining looser monetary policy with higher fiscal expenditure for the economy to gain traction.

The Bank of England is way ahead of the curve, signaling that it may start raising interest rates as early as the end of the year. Defying expectations, the resilient UK economy is expected to grow 0.8% in the

first quarter, with analysts expecting annual growth of 3.1%.

Supported by strong job creation, wealth effects from the recovery in the housing market, increased confidence, and muted price pressures, UK consumption continued to grow at a reasonably strong pace, despite being slower than pre-crisis records.

Largely insulated from global ebbs and flows, the Gulf region is in the midst of a correction after rallying for much of the year. Dubai has shed 8% since June 1 when MSCI upgraded UAE and Qatar markets. Qatar also lost 9 percentage points since then, while Abu Dhabi has declined 4% points. The incoming Ramadhan season, which has coincided with the holiday season this year has also accelerated the decline.

In addition, the Iraqi conflict has provided the added incentive for investors to head for the exits.

The Gulf is no stranger to regional turmoil and the latest crisis has already led to higher prices and perhaps more demand for stable Gulf crude oil. But a prolonged oil price rally could deflate global sentiment and derail growth in key trade partners in Asia.

Oil

Brent has risen more than USD5 in recent weeks as insurgents attack Iraqi cities and threaten oil infrastructure. Brent touched

USD115 per barrel on June 20, however, major oilfields south of the country, which export at least 2.5 million barrels per day (bpd) of oil, remain unaffected.

Currency

The British pound slipped against major currencies on news that the Bank of England was contemplating raising interest rates. Still, the sterling is near its 5 ½ year high against the American dollar at $1.7064. The U.S. currency was nearly flat against the yen at 102.13 yen, while the euro declined 0.1% to $1.3593.

Gold

Gold had its best week in four months, rising 3% bas investors piled into the safe haven. The yellow metal stood at US$1,315 per ounce on news of Ukraine and Iraq crisis. © Zawya

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Date Close Date Close Date Close

22-Jun-14 4489.1 22-Jun-14 4803.8 22-Jun-14 12460.15

19-Jun-14 4593.27 19-Jun-14 4803.79 19-Jun-14 12453.76

18-Jun-14 4522.3 18-Jun-14 4781.28 18-Jun-14 12591.32

17-Jun-14 4495.24 17-Jun-14 4749.04 17-Jun-14 12520.36

16-Jun-14 4468.67 16-Jun-14 4783.38 16-Jun-14 12562.54

15-Jun-14 4609.28 15-Jun-14 4831.57 15-Jun-14 12773.2

12-Jun-14 4836.86 12-Jun-14 4931.78 12-Jun-14 12978.86

11-Jun-14 4665.24 11-Jun-14 4876.49 11-Jun-14 12912.81

10-Jun-14 4693.2 10-Jun-14 4869.67 10-Jun-14 12970.81

9-Jun-14 4771.1 9-Jun-14 4948.1 9-Jun-14 12969.65

8-Jun-14 4972.78 8-Jun-14 4997.86 8-Jun-14 13149.55

5-Jun-14 5100.68 5-Jun-14 5055.42 5-Jun-14 13232.06

4-Jun-14 5018.78 4-Jun-14 5018.96 4-Jun-14 13142.69

3-Jun-14 5072.92 3-Jun-14 5063.96 3-Jun-14 13221.29

2-Jun-14 5151.21 2-Jun-14 5133.54 2-Jun-14 13551.18

1-Jun-14 5056.32 1-Jun-14 5157.66 1-Jun-14 13696.98Source: Zawya.com

LIFE AFTER MSCI UPGRADE

ABU DHABI INDEXDUBAI INDEX QATAR INDEX

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Middle East investors splurge on global real estateHigh net-worth Middle East investors have always had a penchant for real estate investments in places like London, New York, Paris and that’s likely to grow over the medium term.

The CapGemiMiddlei World Wealth 2014 report suggests Middle East have allocated a quarter of their wealth in real estate – second only to Latin Americans in the world. And the strategy appears to work well for them as the number of ultra-high net-worth individuals from the Middle East grew 16% last year – second highest in the world.

The propensity for Middle East’s well-heeled to invest in real estate will likely grow over the next decade, according to real estate consultant CB Richard Ellis.

“We predict their 10-year spending in global commercial real estate outside their home region will reach USD180-billion,” noted CBRE in its latest report. “At the highest level, we do not think that the geographic distribution of the USD180 billion spending pot is going to be that different to the recent past.”

Indeed, Europe will remain a clear favourite with around 80% of the real estate allocations, but the balance between the

U.K. and continental Europe will change.

“In the next decade, the U..K is expected to see a significant share of allocated capital targeting core plus and value-add investments, but continental Europe is expected to see three times the level of direct investment by Middle Eastern investors than was the case in the previous 10 years,” CBRE noted.

CapGemini’s survey showed that London was the Middle East investors’ favourite property hunting ground as they poured in 44% of the USD20-billion invested in real estate over the past two years. Paris was a distant second with 15% of the allocation will Milan garnered 4% of real estate funds.

“Offshore capital featured strongly in Q1 2014, representing more than 40% of all transactions in Europe,” said Jones Lang LaSalle in a report. “Middle Eastern investors dominated the scene, acquiring not only in traditional markets such as the U.K. but actively exploring opportunities in Spain and Italy; Greece is also appearing on the radar.”

In Greece Astir Palace Resort has been acquired by the Jermyn Street Real Estate Fund – an Arab fund which includes investors from the UAE, Kuwait and Saudi Arabia as well as the Turkish Doğuğ Group.

With regional sovereign wealth funds sitting on more than USD2-trillion in assets under management, and crude oil comfortably in triple-digits, fund managers will need more avenues to park their capital.

However, conditions back home are hardly conducive to absorb the investments. Uncertainty in promising but troubled markets such as Egypt, Iraq and the Levant, means limited options for Middle East investors. In addition, stable but small markets of Dubai, Abu Dhabi and Doha are not deep enough to absorb the inflows.

“It is important to understand just how small the Middle Eastern institutional real estate investment market is before exploring the complexity of local players and their thinking,” said CBRE.

Between 2007 and the end of 2013, a total of USD6.5 billion is known to have been invested in standing commercial real estate in the Middle Eastern region, according to Royal Chartered Accountants.

“A number of factors contribute to the region’s low investment volumes, but fundamentally it is due to the lack of available investment-grade product, rather

than an absence of demand,” the CBRE said.

Despite advances in Abu Dhabi, Dubai and Doha, the quality of real estate assets remains low in the wider region primarily due to restrictive laws, lack of a transparent and illiquid markets.

In addition, the dominance of state-owned entities is another factor hindering growth.

“This is a rather pertinent point in a region where many investment deals take place between government entities, raising question marks over their neutrality,” CBRE noted.

Given the recent state of uncertainty in many regional markets, Middle East investors will continue to divert their funds to stable markets in Europe, U.S. and increasingly Asia. Which is a pity, given that there is so much latent demand for real estate investments right here in the region.© Zawya

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CITY% OF REAL ESTATE

ALLOCATIONLONDON 44%PARIS 15%MILAN 4%LYON 3%LOS ANGELES 2%DUSSELDORF 1%WASHINGTON 1%ATLANTA 1%BARCELONA 1%BERLIN 1%Source: CB Richard Ellis

ME REAL ESTATE ALLOCATIONS IN PAST TWO YEARS

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NEWS UPDATES

Gulf growth drawing global funds to set up shopInternational asset management firms are showing renewed interest in setting up in the Gulf, drawn by markets performing better than those in more volatile emerging economies.

Despite high incomes and large sovereign wealth funds, countries such as the United Arab Emirates, Qatar and Saudi Arabia have traditionally been serviced from London or New York. – Reuters

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Middle East private wealth surged 11.6% in 2013The UAE ranks 12th in the world by proportion of millionaire households, with 3.3 per cent - 33 out of every 1,000 households - holding private wealth of at least $1 million, according to The Boston Consulting Group’s (BCG) fourteenth annual global wealth management report.

Private financial wealth in the Middle East region grew by 11.6 per cent to reach $5.2 trillion (Dh19 trillion) in 2013 with GCC countries leading the wealth surge, according to the report.-Zawya.com

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World Bank’s IFC considering return to sukuk marketThe International Finance Corp (IFC), the World Bank’s lender to the private sector, is considering a return to the Islamic bond market, an IFC official said.

A sukuk issue is still in the early stages of discussion but would likely be in the 2015 fiscal year, which starts next month, Mouayed Makhlouf, IFC director for the Middle East and North Africa, said on the sidelines of a news conference in Dubai on Sunday, giving no further details. – Reuters

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Dubai faces moment of truth over looming property bubble “Keep calm. There’s no bubble”, proclaimed a giant poster on a 40-storey building overlooking a Dubai highway, advertising a property finding portal late last year. That may have been true at the time, but the risks are rising.

A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real estate projects in the last few months, after cutting back sharply in the wake of Dubai’s 2008 crash. – Reuters

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U.K. mandates banks for maiden sovereign sukuk “in coming weeks”The British government has mandated banks to arrange a five-year 200 million pound ($336 million) sukuk - the world’s first Islamic bond to be issued by a Western sovereign. - Reuters

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Dubai’s Emaar Malls attracts strong demand for debut sukuk Emaar Malls Group , a division of Dubai’s Emaar Properties , raised $750 million via a debut Islamic bond issue and was able to drive down the cost of the deal due to strong investor demand.

The 10-year sukuk received orders worth more than $5.4 billion, showing the growing attraction of investing in the region as its economy recovers from the after effects of the financial crisis and other emerging markets suffer from political and economic problems. - Reuters

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Gulf premium may vanish as views of region shiftLong a key feature of the Middle Eastern bond market, the “Gulf premium” is fading and may vanish entirely as soon as this year if the region continues to gain ground as a mainstream investment destination.

The premium is the mark-up that issuers in the Gulf have to pay over developed-country issuers when they sell similarly rated paper. It has existed since the birth of a significant flow of international bonds from the Gulf about a decade ago. – Reuters

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Gulf’s billions insulate economies, markets from Iraq turmoil For years, the rich oil states of the Gulf have struggled to insulate themselves from political turbulence in the rest of their volatile region. Markets’ reaction to the insurgency in Iraq suggest they may finally have succeeded.

Saudi Arabia and Kuwait face the potential disintegration of a country on their borders. At the very least, the turmoil in Iraq looks set to widen the Sunni-Shi’ite divide which has poisoned politics across the region. – Reuters

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CEO of Dubai’s Arabtec quits, leaving ownership, strategy in questionThe chief executive of major Dubai construction firm Arabtec resigned on Wednesday after a tumultuous six weeks during which the company’s share price plunged as much as 50 percent and a major backer of the firm cut its shareholding.

The Arabtec saga dragged down the Dubai stock market and illustrated the opaque nature of corporate affairs in the region, as investors were left uncertain about the fate of one of the Gulf’s biggest and fastest-growing contractors. – Reuters

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Dubai leads GCC corporate earningsThe Gulf region’s corporate sector earnings jumped 12.1% in the first quarter of the year, with the construction, real estate and financial services sectors leading growth in most countries.

The UAE’s overall corporate sector saw the biggest jump in earnings, rising 26.5% year-on-year; Dubai’s publicly listed companies justified their share rally with a 45% increase in earnings.- Zawya.com

Read full article. © Zawya

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Truth: He dreams of his business going places

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“Everybody dreams of becoming like Steve Jobs. Even I aspire to be like him, at least for five minutes.”

Mohammed Khalaf Al Habtoor, vice-chairman and chief executive officer of the Al Habtoor Group, got up close and personal at the Emirates NBD Global Business Series. Here are excerpts from the interactive session held at the Habtoor Grand Hotel on May 28, 2014.

On Lessons Learned

My father started the business in the 70s, and I joined him in 1989. He belonged to the ‘old school’ thinking, with a traditional approach to business. Even today, he is not the typical boss -- he likes to know what each employee is doing, but he doesn’t intrude in their affairs.

When I first expressed my dislike towards hotel management and insisted on joining the UAE Air Force to become a pilot, he allowed me to do so. The two years of pilot training gave me discipline and an appreciation of the importance of team work, which I have incorporated in my life ever since.

When I returned to Dubai after completing

my hotel management studies, I was summoned by my father. Instead of offering me a plush position at our hotel, he asked me start from scratch. I worked for one and a half years, saw closely how the industry functions, and endured abuse from customers too. But the experience made me the man I am today.

On Playing Polo

Polo has taught me patience, teamwork and the importance of time. It is a difficult sport compared to football or cricket as you are dealing with an animal and you need to master the skills to control it. This can get very challenging, but I enjoy challenges.

On Expanding the Business

My father wasn’t keen [initially] due to fear that the hotels might fail to attract crowds. I understood his apprehensions. However, I had a feeling that expanding our hotels would be a successful step. So, I convinced him to spread out our brand and pursue the hospitality vertical. The hotel industry was booming in Deira so we started a venture there, which was a success.

Four years later, the focus started shifting away, towards [downtown] Dubai. We were quick to seize the opportunity and built hotels on this side. Now, we are building a huge complex in the Habtoor City with three hotels (1,600 rooms), and of course, expanding our footprint in other countries.

On Measuring Success

There are always risks in whatever you do. Even if you have zero percent risk, if something happens in the region, you will still get affected. The key is to minimize the risk by sharpening your business acumen and expertise. Everybody makes mistakes but it is important to learn from them.

On Plans to Go Public

Presently, the Group is functioning as a public company: operations, management, governance and transparency are just like any other public company. We are ready to go public. However, we have postponed the official announcement as the company is in the process of devising strategies to minimise the risk appetite. We do not want our partners to face any difficulties.

On the Secret to Success

We have mastered the art of networking and communication. We know how to deal with 206 nationalities present in Dubai.

On Motivating Staff

When we hire a person, we envisage a career path for him/her. The key to keeping your employees happy is to appreciate their work. This will not only motivate them, but also build their loyalty towards the company.

Our responsibilities have been well-defined. We can, therefore, strike a balance

between our personal and professional lives and do good work too.

On Being a Role Model

I have three boys and three girls—the youngest is 5 years old and the eldest is 22 years old. I have never pressured my children when it came to studying. I gave them freedom to choose the course and university according to their interests. However, I do keep a check on what they are doing.

On the Future of Al Habtoor

We have budgeted for the next eight to 10 years so we know exactly what projects we’ll be working on and what will be our expansion plans, locally, regionally and internationally. Right now, we may be in the top 100 companies of the region, but I want us to be in the top 10 list eventually. Moreover, I want to keep my father’s vision and mission intact and be in the top 10 companies of the world.

On Legacy

I would want to be remembered as a person who took his family business to exceptional heights, took his father’s legacy forward and created success stories. I’d also like to be remembered as a good family person, who took care of not only his children, but also siblings and other family members.

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