Tips on how to make your first business grow

New businesses are set up everywhere, especially in tough times like these. Whether it’s by choice or by necessity, starting your first business has several things going for it: a way to create wealth and opportunity when both seem to be in short supply, and a  chance to be your own boss.

Destruction is painful, but it creates opportunity. Now is a great time for entrepreneurs to reset their agendas for the next 10 years.

Although millions of people set up businesses each year, even highly competent professionals often manage to fumble the basics. Veterans of big companies, for example, often fail to spend enough time laying the foundations necessary for their new ventures to grow. These can run the gamut from lining up financing to buying the computer and accounting systems necessary to run even a one-person show. It’s also a good idea to consult with an accountant, lawyer and, possibly, an insurance agent before setting up shop.

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Uncertainty and risk create arbitrage and opportunity

Already deep into 2010’s first quarter, property markets worldwide are trying to benefit from the aroma of economic optimism – although its source is unclear, especially in light of the current financial markets positions. Despite 18 months of continuous stimulus, positive economic growth remains elusive, but much desired not only in UAE. In January, for instance, UK reported a 0.1% GDP growth for Q4’09. Although that’s a discouraging ninety times slower than China’s, a UK Government spokesperson hailed it as a “continuing abatement of the deterioration”. Despite continued economic uncertainty and the consequent elevation of market risk, capital allocations to real estate as an asset class are again reaching record volumes according the latest Global Capital Trends report from Real Capital Analytics, showing that this investment asset has survived the worst of its excesses and has emerged with investor respect intact.

To explain this controversial development, analysts and fund managers from around the world agree that risk in a recovery year,  managed and minimized, represents opportunity. Therefore,  2010 real estate investment strategy involves core assets. However, the current appetite for opportunistic or value-add assets remains thin. Inevitably by overcrowding the traditionally stable markets of London, Paris, and parts of Asia, there is  also a demand for assets  in  markets with raising prices and lowers yields. Big-time investors are also  reluctant to invest back heavily into the US despite the higher yields and relatively under-priced opportunities that are emerging in many US cities.

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• Global transactions fall to $380 b in 2009
  
• Q4 volume surges as rebound takes hold

Globally, the volume of commercial property sold in 2009 was $381 b, with nearly 11,000 properties selling in deals valued above $10m, according the latest Global Capital Trends Report, released by Real Capital Analytics. Overall, the volume of  transactions was off 30 % from 2008 while the number  of properties sold dropped 40%. China was the only country to post a significant gain in 2009, up 139 % to a total of $156 b, which constituted an astounding 41% of global volume. Without China, global transaction volume would have registered a 52% decline last year. While the annual comparisons reflect broad declines since 2007, quarterly data show a marketplace that appears to be making a remarkable recovery. Volume surged in Q4 to $147 b, the first quarterly increase on a yoy basis in seven quarters. So far, investment activity is rebounding in a clear V shape, but risks remain, and some fear the V could easily become a W.

Nevertheless, sentiment among investors is much improved and 2010 is starting with a broad but cautious sense of optimism.

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UAE investor sentiment remains cautious

Despite that the Dubai World default was averted by confirmation from Abu Dhabi government interaction, investors’ sentiment remains cautious. Some damage is already done. The authorities have been largely  muted since the debt restructuring announcement and that also has not help to improve the investor sentiment. With uncertainties on debt restructuring and the related media coverage, investors are not holding their breath for a quick recovery in the UAE.

The initial expectation for details regarding the restructuring plans of Dubai World’s US$22bn debt was end of January, while the plan was aimed to be released by the end of April. As of mid-February, there is still little clarity regarding the debt restructuring. And this uncertainty has been creating a snowball effect in the corporate sector as the companies and banks can’t yet estimate the eventual losses they have to take with the restructuring.

Dubai Worlds’s debt restructuring of US$22bn amounts to almost 34% of Dubai’s GDP, according BofA Merrill Lynch Global Research. As the restructuring goes beyond repayment of bonds and syndicated loans and include all type of liabilities, domestic liquidity and the economic activity will be hit.

Significant deleveraging in Dubai and a further damage in corporate balance sheets across the UAE is expected. As Abu Dhabi and Dubai economies are intertwined with low level of transparency, it’s hard to assume that Abu Dhabi will escape unscathed from Dubai restructuring. UAE’s total debt redemptions over the next three years average $30bn annually, and Dubai accounts for roughly 2/3 of these redemptions. Hence, a scenario for forced deleveraging that will hurt UAE corporates is still likely despite Abu Dhabi’s strong fiscal position.

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Since the November standstill announcement, little information was released from either Dubai World or the government to reassure investors. Discussions with creditors have been inconclusive to date and it is expected the market to remain nervous until more clarity is given.

The bailout from Abu Dhabi to help repay the US$4bn Nakheel bond in December has significantly enhanced  confidence in investors that Abu Dhabi will continue to play a supportive role in debt restructuring processes for Dubai Inc credits, which suggests that  the likelihood of an extreme downside scenario for Dubai World creditors, such as bankruptcy/liquidation, or restructuring with a punitive haircut is now much lower.

However, the government support mechanism and its communication will now be viewed, quite rightly, as a more unpredictable process and spreads are likely to remain volatile until a formal standstill agreement is reached.

Below are highlighted  the key implications or risks in the near term for investors,  outlined in the latest MENA Quarterly report from Bank of America Merrill Lynch – Global Research, dated 15 February 2010 and authored by the Emerging Markets research team at Bank of America Merrill Lynch Global Research.

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Jones Lang LaSalle, the world’s leading real estate investment and advisory firm, has today unveiled its ‘Top 10 for 2010’ projections of the trends expected to shape the UAE real estate market for 2010 and beyond.

Blair Hagkull, Managing Director, Jones Lang LaSalle MENA said: “In 2010 the UAE real estate market is moving away from the off-plan sales model towards a longer term model based on secure cash flows. Real estate investment vehicles are being redefined as more interest is shown towards co-investment vehicles.  However the general downturn in market performance is not affecting all locations or assets type equally.

The level of returns is expected to be more stable in quality projects and locations as they are performing comparatively better than others. This flight to quality is significant as these are signs of maturity in a constantly evolving market.”

The key predications are:

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The latest BofA Merrill Lynch Global Researchreport, titled “BofA ML Economics – Global Economic Weekly: Risk Flare” dated 5 February, authored by the Global Economics Team at BofA Merrill Lynch Global Research. forecasts that GDP Growth of the United Arab Emirates will reach 2% in 2010, while in 2011 is expected to near 5.3%. According the report inflation will remain as low as 1% and eventually increase to 3% during the next year.

Major chapters of the report cover economic developments around the world.

Global: Risk flare
Despite nervousness in the markets, the growth forecast remains the same. A key signpost of economic healing is bank lending. While policy actions have opened up much of the capital markets, bank lending remains weak due to both weak supply and weak demand for bank credit.

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Arab Union for Real Estate Development (AURD) Secretary General Dr. Ahmad Mattar said on Monday that the Arab real estate activity volume is estimated at USD 27 trillion dollars.

Speaking in a press release circulated on the sidelines of the First Arab Investment Conference here today, Mattar said: “Given its fixed and growning assets, real estate is competitive and outstands oil and gas.” There are 69 million homes and four million citiizens work in the real estate sector and there are 135,000 entities that work in the real estate related businesses, he said, noting that real estate sector has an 18 percent share in the total Arab economy.

According to the 2009 Arab Economic Report, real estate activity volume was quoted at USd 324 billlion in 2008, “a source of pride figures”, he said.

The conference kicked off activities on Sunday with the aim of opening new horizons of business opportunities and Arab and international partnership in the Arab world.

It is also aimed at exploring the housing needs of citizens, improve the real estate movement in the Arab world and provide job opportunities.

The conferees are expected to review work papers concerning encouragement of real estate investments, dangers of speculation in the sector and the establishment of an Arab real estate bourse.

The participants are also to examine the role of the Arab League in the removal of obstacles facing the Arab investor.

Rents expected to drop further

According to the Jones Lang LaSalle’s ‘Dubai Real Estate Market Overview’ report last month, Dubai’s current stock of office space stands at 43.6 million square feet. The current vacancy level is estimated to be 33 per cent of that or about 14.4 million square feet. In addition, the 2010-2012 pipeline of new supply has been revised 33 per cent  due to delays and project cancellations to 40 million square feet from 60 million square feet. Roughly  54.4 million square feet  will most certainly remain vacant, that calculates  to a vacancy rate of 65 per cent.

Average Grade A rentals such as in  Downtown Burj Khalifa or Dubai International Financial Centre, are currently at Dh250 per square foot and are estimated to decrease even further before stabilizing by 2011 at the earliest.

Approximately  54.4 million square feet priced at a Dubai average of Dh150 would yield roughly Dh8.2 billion of annual revenue for landlords. So what do you do when you can’t rent all this space?

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SHUAA Capital, the leading financial services institution in the GCC, has today published its UAE Vision 2010. The vision provides an overview of the UAE’s market outlook for 2010 with a special focus on the banking, real estate and telecom sectors as well as stock briefs for more than 25 UAE listed companies. In addition, the 80 page report also reviews UAE’s markets throughout 2009. The report also revisited the UAE Vision 2009’s expectation of a 21% gain across UAE markets in 2009, which came slightly below the SHUAA Capital UAE Index’s 23% gain for the period.

Looking at GDP growth, the report’s author, Dr. Mahdi Mattar, Head of Research and Chief Economist, SHUAA Capital said: “2009 has been a difficult year for the UAE. However, we expect the Emirates to emerge from the recession in 2010, and we are forecasting real GDP growth of 2.5% this year, up from – 3.5% in 2009. This growth will largely be driven by strong projected real GDP growth of 4.1% in Abu Dhabi. The Capital will benefit from a recovery in oil prices and output this year, as well as strong growth in the non-hydrocarbon sector, which will be supported by government investment and spending. Meanwhile, we anticipate Dubai’s economy to contract 0.4% year on year in 2010, as the key construction and real estate sector continues to be a drag on growth in the emirate.”

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