Dubai
by InvestorsOffshore editorial
staff, March 2012
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The contents of this report have been compiled in good faith by
Investorsoffshore.com to provide assistance to investors, but do
not constitute investment advice or recommendations. Investors should
not rely upon the information given in order to choose types or
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For decades to come, people will point to Dubai's 200-storey, 828-metre
Burj Khalifa tower, the tallest in the world, as representing both
the peak and the nadir of the city-state's adventurous grasp for
regional leadership in a startling range of sectors: real estate,
shipping, commodities trading, equities, Islamic finance, e-commerce,
air transport and banking.
The investors who bought into Dubai's real estate boom in the last
stages of the world's financial bubble, from 2005 to 2008, nursing
their losses, will not be comforted at hearing that many parts of
the city's complex web of commercial and financial operations are
doing quite nicely, thank you, or at least have survived the crash
more or less intact, and are now ready to rise again.
Not so for the real estate sector. We will examine it in more depth
below; but even here there are signs of life among the ruins, and
a general feeling among real estate professionals that the bottom
has been reached. If that's the case – and it's a big if –
then there are good investments to be made.
Where And What Is Dubai?
The city, one of the seven Emirates making up the United Arab Emirates,
is a shimmering collection of skyscrapers and spectacular architectural
structures rising out of the desert sands at the eastern end of
the Persian Gulf, and until 2008 could easily be labeled the economic
success story of the previous ten years.
Dubai lies on the south-eastern shore of the Persian Gulf near
the strait of Hormuz, strategically located at the cross roads of
Europe, Africa, the Middle East and Asia, making it a gateway to
over 1.5 billion consumers located in countries surrounding the
Red Sea and the Gulf.
The city has grown rapidly in recent years from little more than
a fishing port to a wealthy and decidedly cosmopolitan and modern
location. Local emiratees make up a mere 22% of the population with
Indians, Pakistanis, Iranians and Southeast Asians and latterly
westerners choosing to make Dubai their home. The population remains
predominately Muslim. However, in contrast to growing hostility
towards western values elsewhere in the Middle East, ethnic and
religious tensions are rare and Dubai has gained a reputation as
something of a safe haven where westerners can go about their business
without fear of attack, and crime in general is very low.
Modern Dubai is the product of more than 20 years of intensive
development. Prior to that, Dubai was a small trading port, clustered
around the mouth of the Creek. It had grown gradually from a fishing
village inhabited in the 18th century by members of the Bani Yas
tribe. A flourishing Indian population settled in Dubai and was
particularly active in the shops and alleys of the souk. The cosmopolitan
atmosphere and air of tolerance began to attract other foreigners
too: by the 1930s, nearly a quarter of the 20,000 population was
foreign, including 2,000 Persians, 1,000 Baluchis, many Indians
and substantial communities from Bahrain, Kuwait and the Hasa province
in eastern South Arabia.
Dubai's population has increased tenfold since the 1960s to approximately
1.9 million, and now hundreds of hotels accommodate the expat workers
and tourists who help run the economy.
This diversity discourages any real ethnic tensions and while war
and the threat of war might simmer further north, it creates far
less tension in Dubai than many might imagine it would. There are
large groups of Indians, Pakistanis, Iranians and Southeast Asians.
The population is, however, 95% Muslim. Arabic is of course the
official language but English is widely spoken as are Urdu, Malayalam
and from the Philippines, Tagalog.
Dubai’s desert climate ensures plenty of year-round sunshine,
with temperatures regularly exceeding 40C in the summer, and 30C
in the winter making the city and its locale a very popular choice
as a second or holiday home location for Europeans and Americans,
especially since ownership rules have been relaxed to allow foreigners
to buy property in Dubai.
The city’s rapid growth as a financial and commercial powerhouse
has also spawned the rapid development of impressive leisure facilities
such as golf courses and hotels (including the world’s first
seven star rated hotel, the Burj Al Arab). When combined with its
coastal location and attractive beaches, Dubai has become one of
the world’s premier tourist destinations. As a result, the
city is served by good transport links, both by air and by sea.
Transport Is The Key
The spectacular growth of Dubai has been no accident. With what
must have seemed like limitless oil reserves, the ruling family
consciously set out to create a modern, diversified financial centre,
beginning with the trading activities that had been its historical
life-blood. Jebel Ali, home of a huge man-made port, has the largest
free-trade zone in Arabia, housing an ever growing list of international
corporations which use the zone for both manufacturing and as a
redistribution point. Dubai's harbor is the most important port
in the Middle East and is ranked among the world's top 15 in terms
of container throughput. Following the success of the Jebel Ali
free zone, the government has developed Dubai Internet City (DIC),
which has a highly developed technical infrastructure. The DIC occupies
3,200 hectares in the South of Dubai, near the Jebel Ali Free Zone.
It offers state of the art facilities and sites for manufacturing,
offices, housing, and academic, research, distributions and logistics
institutions.
More recently has come an equivalently grandiose airport. Dubai
International Airport is second only to Tokyo in the number of daily
transit passengers it handles and second only to Seattle as a sea-air
hub. In November 2005, in anticipation of a huge increase in the
numbers of tourists, business travellers and rising trading volumes,
the Dubai authorities announced the launch of a project to build
the world's largest airport in the Jebel Ali Free Zone.
The airport, initially known as the Jebel Ali International Airport
(JXB), but since renamed the Al-Maktoum International Airport, will
be a massive undertaking, with total infrastructure costs expected
to hit USD33 billion. When completed, the airport will have six
concourses, and be capable of handling more than 120 million passengers,
and more than 12 million tonnes of cargo per year.
Like Jebel Ali, the airport has proven resistant to the downturn,
clocking up increases in passenger and cargo volumes in the second
half of 2009 and in 2010. Indeed, by 2015, Dubai International Airport
is expected to become the world's busiest airport for international
passenger traffic, with throughfare of 75 million passengers, up
from 47.2 million recorded in 2010.
“Increased liberalization, GDP growth and increasingly affluent
and mobile populations in emerging markets will combine to propel
air travel growth worldwide,” said Paul Griffiths, Dubai Airports
CEO. “Dubai is extremely well positioned to capitalize on
that growth. We are eight hours from two-thirds of the world’s
population and on the doorstep of two of the most dynamic markets
in the world – India and China. The combination of rallying
tourism and Dubai’s established role as a trading hub linking
economies in the Far East, Europe, Africa and North America, are
also key advantages.”
Dubai International is now ranked the world’s 4th busiest
airport in terms of international passengers according to Airport
Council International’s (ACI) latest annual published figures,
ahead of Amsterdam, Singapore and Tokyo. The ACI international freight
traffic monthly ranking for February 2012 also lists Dubai Airports
Cargo as the world’s 4th busiest for international air cargo
volumes, ahead of Tokyo, London and Frankfurt.
Then Came Finance
During the 1990s and the 'noughties', the Arab Emirate launched
a series of tax-privileged and more or less self governing financial
sectors, including the Dubai International Financial Centre (DIFC),
which provides a legislative roof for six primary sectors of focus
within the DIFC: Banking Services (Investment Banking, Corporate
Banking & Private Banking); Capital Markets (Equity, Debt Instruments,
Derivatives & Commodity Trading); Asset Management & Fund
Registration (Fund Registration, Fund Administration & Fund
Management); Reinsurance; Islamic Finance and Back Office Operations.
The DIFC offers benefits such as zero tax on income and profits,
100% foreign ownership, no restrictions on foreign exchange or capital/profit
repatriation, operational support and business continuity facilities.
By the end of December 2011, the number of registered companies
operating from the DIFC reached just under 848. The free zone is
currently home to 21 of the world’s top 30 banks, six of the
world’s 10 largest insurers, six of the top 10 law firms and
eight of the top 20 money managers
The DIFC also houses the The Dubai International Financial Exchange
(DIFX), a bourse, the Dubai Metals and Commodities Centre (DMCC),
incorporating the Dubai Gold And Commodities Exchange (DGCX), and
the Dubai Mercantile Exchange (DME), focusing on energy trading
starting with crude futures.
Real Estate
It may not have been the original intention of Dubai's rulers to
create a major international real estate centre; but it happened
to them nonetheless, originally because of the need to provide accommodation
for the swelling numbers of expatriate workers sucked in by the
infrastructure construction programs. Eventually the real estate
sector took on a life of its own, and the financial problems which
now beset the Emirate can be traced to this cause. The rulers created
Dubai World as a quasi-state financing agency for real estate development,
and when the Emirate was infected by the world-wide property collapse
in 2008, it was Dubai World that was found to be over-extended.
As late as November, 2008, the authorities were maintaining a brave
front, with Mohammed Alabbar, Chairman of Dubai’s Advisory
Council, quashing fears over Dubai’s debt obligations which
were estimated to amount to USD10bn.
In his first major public address as the head of the Advisory Council
set up to manage the impact of the global financial crisis in Dubai,
Alabbar said: “There has been a lot of talk about the debt
obligations of Dubai. There is confusion and therefore concern about
how much Dubai owes, and how this debt will be refinanced. Let us
put an end to that speculation."
“Currently, the Dubai government’s sovereign debt obligations
stand at USD10bn (AED37bn). While our key sovereign assets are currently
being evaluated, I can give you a rough estimation of its value
being over USD90bn. And this does not include our airports, bridges
and the Metro.”
Alabbar also estimated the total debt obligations of affiliated
companies at USD70bn, compared with assets valued at USD260bn. The
total value of the assets of the government and affiliate companies
in Dubai was put at over AED1,300bn.
“The government can and will meet all its debt obligations
going forward. Let there be no doubt about this fact,” he
told an audience of financial business leaders from the region and
around the world.
On the state of Dubai’s real estate sector, Alabbar said:
“Today, the real estate sector is witnessing a healthy correction.
This is a consequence of global financial conditions – and
is inherent to the very nature of the market. As we all know, real
estate is cyclical. Monitoring supply and sales, the Advisory Council
is managing this important sector of our economy, ensuring that
new supply is properly managed and that current and future demand
is adequately met.”
Investor confidence was bolstered in February by the forging of
a deal between Dubai’s finance department and the UAE which
would see the UAE purchase USD10bn in bonds from Dubai in order
to provide the emirate with liquidity. The loan carried a 4% coupon.
“This issuance will provide Dubai Government with the necessary
liquidity to substitute the liquidity that has dried up globally
in the last 12 months and accordingly meet all upcoming financial
obligations. This programme will secure the necessary funding for
Dubai to meet its financial obligations and continue its development
programme,” said the Finance Ministry in a statement.
But it didn't, and after property values fell by 50% in just 12
months, the chickens finally came home to roost in November 2009
when Dubai World announced a debt moratorium for at least six months.
The government said it intended "to ask all providers of financing
to Dubai World . . . to 'standstill' and extend maturities until
at least 30 May 2010". The total debt of Dubai World amounted
to USD59bn, and it was one small short-term component of that, falling
due in December 2009, which the company was unable to finance.
“This issuance will provide Dubai Government with the necessary
liquidity to substitute the liquidity that has dried up globally
in the last 12 months and accordingly meet all upcoming financial
obligations. This programme will secure the necessary funding for
Dubai to meet its financial obligations and continue its development
programme,” said the Finance Ministry in a statement at the
time.
World markets initially fell, but soon recovered, and as before
Abu Dhabi, the richest of all the Emirates, stepped into the breach
with further short-term financing.
Dubai World announced in May 2010 that an agreement in principle
had been reached with the Coordinating Committee (CoCom) representing
the company's financial creditors on the restructuring of USD23.5bn
of its debt. The CoCom accounts for approximately 60% of the bank
lenders.
“We are pleased that we have received unanimous support in
principle of the CoCom on the headline economic terms to our restructuring
proposal," said Aidan Birkett, Chief Restructuring Officer
of Dubai World. "This is an important milestone and reflects
our efforts to achieve the best possible solution for all stakeholders.
The proposal puts the Company on a sound financial footing and reflects
the continued support of the Government of Dubai and its lenders.
It offers the Company the ability to maximise the value of its assets
over the medium to long term.”
Dubai World said that the company's debt would amount to USD14.4bn
after the restructuring comprising of two tranches of USD4.4bn and
USD10bn with five and eight year maturities, respectively. As announced
on March 25, 2010, the Government is converting USD8.9bn of debt
and claims into equity while maintaining 100% ownership of the company.
An agreement between Dubai World and its creditors was finally secured
on October 2010.
Meanwhile, Dubai Holding Commercial Operations Group, the non-financial
arm of Dubai Holding, the state-owned company through which the
government finances its infrastructure projects, has also been stung
by the financial crisis and collapsing property prices in the region,
announcing in June 2010 a USD6.2bn loss for 2009. DHCOG said revenues
had fallen by AED9.5bn with its property arm hit by falling property
prices and project delays. At the time of the announcement, units
of Dubai Holding were holding talks with creditors in order to obtain
more favourable terms for part of the group's USD12bn debt. DHCOG
itself later reached a deal with lenders to convert a USD555m revolving
credit facility into a five-year term loan. However, on January
3, 2011, Moody's Investors Service downgraded to B3 from B2 the
notes issued by Dubai Holding Commercial Operations MTN Ltd. under
its Medium Term Note (MTN) programme. "Despite the limited
information so far regarding the new terms, Moody's believes that
the banks may now be in a preferential position vis-à-vis
bondholders," says Martin Kohlhase, AVP-Analyst at Moody's
in Dubai. "Moody's has accordingly reflected this by downgrading
the debt instruments' ratings to B3," Mr. Kohlhase adds.
The problems of Dubai World and Dubai Holding have inevitably had
a knock-on effect in terms of the local real-estate market. Consultancy
Colliers International says that continuing uncertainty over the
availability of financing, job-security worries and a general lack
of transparency are hampering recovery, with prices having fallen
to 2005 levels. According to advisory firm Jones Lang LaSalle, the
value of transactions decreased by 65% while the number of transactions
has decreased by 53% year-on-year from the third quarter of 2009
to the third quarter of 2010. Meanwhile, there was a 6% decline
in asking prices and a 12% decline in achieved prices between Q4
2009 and Q4 2010. Oversupply remains a problem with several new
projects due to come on stream.
There was a ray of hope glimpsed in early in 2011, when Knight
Frank's quarterly survey showed that house prices in Dubai inched
up 0.6% in the first quarter of 2011, and were up 2.1% in the six
months ended March 31, 2011. And in February 2012, the real estate
agents Cluttons, which has had a presence in the Middle East since
1976, asserted that the Dubai residential real estate market is
"now more secure and transparent, enticing investment back
to the city".
Cluttons has seen an upward trend of local buyers looking to invest
in a property market. Proactive sellers, it said, are now looking
to trade up as property prices have fallen and as a result, more
serious buyers, as opposed to speculators, are once again searching
for high-end properties. Interestingly Cluttons is now seeing more
GCC nationals investing in the UAE, and seemingly these buyers are
replacing investors from Europe or USA.
Since 2008, Cluttons has also seen a return to property financing
by the banks. At that time, nearly 70% of lenders withdrew from
this type of finance. Now 95% of those lenders have come back to
the market, the firm says, led by Tamweel who returned to mortgage
finance in November 2010.
According to the Dubai Land Department, the number of sales during
the fourth quarter of 2011 reached 2,605 compared with 1,589 in
the third quarter. This represents an increase of 64% quarter on
quarter. Cluttons suggests that this a trend that is set to continue.
Mario Volpi, Head of sales and leasing for Cluttons Dubai comments:
“Dubai has definitely learnt lessons from the past, and as
such more and more transparent legislation is being passed at government
or federal level, which can only improve the prospects of buyers
and sellers alike. It is still a buyer’s market, since the
global recession, however now with the return of accessible financing,
sellers are now enjoying a high number of buyers in the market,
therefore experiencing quicker sales”.
On the other hand, there are plenty of other experts that are of
the view that property prices in Dubai have yet to bottom out. Alan
Robertson, CEO, Jones Lang LaSalle MENA said in the firm's “Top
Trends for UAE Real Estate in 2012” report that 2012 is set
to be another difficult year for real estate investors, although
he expects the Dubai market to become more polarised. "As the
performance of the best quality projects will improve, average prices
are expected to decline further in 2012 within this increasingly
two tier market," he noted.
With increasing investor interest in the UAE market, Jones Lang
LaSalle expects a higher volume of transactions in 2012, with this
growth being driven by private investors and high net worth individuals
rather than investment institutions. The majority of whole building
sales will be in the residential sector, the firm predicts, with
a preferred asset price of AED 30 – 70 million. There will
remain few sales to institutional investors as this sector remains
constrained by the shortage of investment grade stock and "unrealistic
asking prices", it adds.
The Kuwait investment bank Global Investment House (GIH) is also
not optimistic that real estate prices in Dubai will rebound in
2012. In a study published in January 2012, GIH said that it anticipates
prices to reach a new low in mid-2012, with heavy supply likely
to keep values down in the months beyond.
Both Jones Lang LaSalle and GIH also warn that political instability
in the region may also have a negative effect on Dubai's real estate
market. "The local real estate market will continue be impacted
by regional and global events during 2012 as, the UAE is not immune
from the on-going impact of the Arab Spring and the economic troubles
of the Eurozone," says Robertson. "As we enter 2012, the
real estate sector will inevitably be susceptible to any potential
geo-political changes within the region, with the recent escalation
of rhetoric between Iran and the West being the major cause of uncertainty.
The worsening European debt crises and its impact on the global
economy will be the other major external challenge to the UAE real
estate market in 2012.”
Buying Property In Dubai
Buying property in Dubai is a relatively straightforward business,
and there are many estate agencies and consultancy services catering
for international buyers such as expats, those in search of a second
home and investors hoping to earn rental income and/or capital appreciation.
Financing a property purchase in Dubai will vary depending on which
developer one buys from, one’s own budget and financing options
available at the time. A typical financing structure from a Dubai-based
developer might involve: a 10% deposit payable on signing; a further
10% after 30 days; five payments on each stage of construction;
and a 20% final payment upon completion. Alternatively, if a more
flexible payment term is needed, then it is possible to obtain a
longer term mortgage. Some developers and agents will also have
struck deals with locally-based banks to offer more favourable terms.
In general, access to mortgage financing is more restricted than
previously, as is the case just about everywhere.
For a fixed-rate loan, repayment periods typically vary from five
to fifteen years in length, and rates usually rise as the term progresses.
Floating rate mortgages are typically available on loans of between
fifteen and twenty-five years. The UAE’s mortgage market has
expanded rapidly in recent years, but, as elsewhere, the credit
crunch forced lenders to up interest rates and apply stricter loan-to-value
rules. However, as previously noted, lending conditions are starting
to ease and in 2011, many banks began to slash mortgage rates as
property prices began to stabilise. Mortgage interest rates tend
to start at around 6.5 to 7%, but in mid-2011, Standard Chartered
Plc cut its interest rates in the UAE to 4.99% - then the lowest
interest rate offered in the country. In similar fashion, HSBC Bank
Middle East Ltd. cut mortgage rates to 5.49% from a high of 9.5%
in 2009.
Mortgage interest rates in Dubai have, in the past, followed key
US Federal Reserve rates, because of the peg to the US dollar. However,
successive interest cuts by the Fed prompted the Central Bank of
the UAE to set its first benchmark interest rate (overnight repurchase
rate) at 4.75% in September 2007. Overseas residents have traditionally
paid a slightly higher interest rate than residents.
If employed, mortgage payments are made via a salary transfer while
self-employed buyers meet payments by writing a post-dated cheque
or by a standing order.
There are legal and geographical limitations on the ability of
foreigners to own freehold property in Dubai. In March 2006, a long-awaited
Dubai property law was issued, but Law No.7 of 2006 stipulated that
freehold is limited to UAE and GCC citizens and companies wholly
owned by them, as well as public shareholding companies. However,
the law also stipulated that upon approval of Dubai's ruler, non-UAE
nationals may be given the right to own properties in some parts
of Dubai.
In August 2006, the Dubai International Financial Centre Authority
(DIFCA) published draft legislation that would allow foreign freehold
ownership of property in the DIFC. The laws included the DIFC Real
Property Law 2006 and the Strata Title Law 2006. These laws, enacted
in June 2007, allow for foreign companies and individuals to hold
freehold ownership of real estate within the Dubai International
Financial Centre.
The Governmental And Economic Background
The emirate of Dubai is strategically located between Africa and
the Middle East and between the Far East and Europe, making it a
gateway to over 1.5 billion consumers located in countries surrounding
the Red Sea and the Gulf. It has a superb infrastructure with the
consequence that it has become a key link in the global transport
and distribution system.
Dubai is served by more than 170 shipping lines and more than 86
airlines offering links to over 100 cities worldwide. The strong
shipping and transportation sector is composed of most of the leading
regional and international freight forwarders, insurers and shipping
agents. It has a rapidly developing high quality manufacturing sector
and a buoyant and prosperous domestic market. In a nutshell its
infrastructure and services match the highest international standards.
Evidently, most of the Emirate's wealth has been built on the back
of vast mineral deposits. However, the rulers of this oil-rich territory
were quick to realise that oil wealth will not last forever, and
set about putting in place a series of investor-friendly tax, regulatory
and legal policies to attract companies, individual investors and
wealthy retirees from all over the global to live, work and do business
in the city.
Partly as a result of these policies, economic growth over the
early part of the past decade was experienced at rates that would
be the envy of any pro-business western economy. Government figures
revealed that the gross domestic product of the UAE as a whole grew
by 15% to AED337 billion (US$91.7 billion) in 2004, whilst the economy
of Dubai grew at an even faster pace as it GDP expanded by 16.7%
to a little under AED100 billion. Dubai’s economy has grown
by an average of 10% per year since 1995 – the fastest growth
rate in the world, according to Dubai’s Department of Economic
Development.
There are no elections or legal political parties in the UAE. Power
rests with the seven hereditary sheikhs who control the seven traditional
sheikhdoms (Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Qaiwain, Ras
al-Khaimah and Fujairah) and choose a president from among themselves.
Sheikh Khalifa bin Zayid al-Nuhayyan, the ruler of Abu Dhabi has
been President since 3 November 2004, following the death of the
UAE's Founding Father and first President Zayid bin Sultan Al Nuhayyan.
The Vice President and Prime Minister is the ruler of Dubai, which
was Sheikh Maktoum bin Rashid al Maktoum until his death in January
2006, following which the role was assumed by his brother and heir,
Sheikh Mohammed bin Rashid al-Maktoum. There is also a Cabinet,
and its posts are distributed among the seven emirates. (The members
of the Cabinet are the government ministers, such as Minister of
the Interior, etc.)
The parliament is known as the Federal National Council (FNC).
It was established on 13th February 1972 and is considered a landmark
in the country's constitutional and legislative process. The FNC
advises the Cabinet and the Supreme Council but cannot overrule
them. According to the constitution, the FNC consists of 40 members
who are drawn proportionately from each of the seven emirates. Each
ruler appoints the members for his emirate.
The UAE was a founding member of the Gulf Cooperation Council (GCC)
created at a summit conference in Abu Dhabi in 1981. The members
of the GCC include Saudi Arabia, Kuwait, Bahrain, Qatar, the Sultanate
of Oman as well as the UAE. The country is also a member of the
League of Arab States, the Islamic Conference Organization, and
the United Nations.
On January 1, 2003, the unified customs area of the Gulf Co-operation
Council came into effect, covering Kuwait, Qatar, Oman, Saudi Arabia,
Bahrain, and the United Arab Emirates (including Dubai). Yemen has
been in negotiations with the existing member states for a number
of years, and hopes to join by 2016.
One major selling point for Dubai is that its enormous oil revenues
mean that the government has no need to raise income through direct
taxation. Accordingly, the emirate is characterized by an almost
complete absence of taxes. This means that there are no withholding
or capital taxes and, with the exception of banks and oil companies,
no corporate income tax is payable by businesses in Dubai. (Oil
companies pay up to 55% tax on UAE sourced taxable income whereas
banks pay 20% tax on taxable income).
Despite a relatively small population, total non-oil imports surpassed
AED1 trillion in 2009 and soared by 20% in 2010 and by 43% in the
first nine months of 2011. The reason is that Dubai is the major
re-export centre for the region and the emirate accounts for about
three-quarters of the UAE's total non-oil exports. Many of the economies
of the region served by Dubai are still at a relatively early stage
of development, so there is plenty of long term scope for diversification
and expansion in the future. Another important consideration is
Dubai's rapidly developing role as a supplier to such emerging markets
as India, the CIS, Central Asia and South Africa.
There are no foreign exchange controls, quotas or trade barriers.
Import duties are extremely low, and many products are exempt. The
UAE dirham is freely convertible and is linked to the US dollar,
the currency in which oil revenues are paid. The current exchange
rate is AED3.6730 = USD1 and no revaluation has occurred since 1977.
This has made investing in Dubai particularly attractive for European
investors, given the US dollar’s recent weakness against the
euro and sterling.
The Dubai International Finance Centre
In July, 2003, the Federal Cabinet of the United Arab Emirates
(UAE) approved a Federal Decree allowing the Dubai International
Financial Centre (DIFC) a large degree of sovereignty. The approval
of the Decree, which allows for Financial Free Zones to be established
in the UAE, marked a significant step forward for the Centre.
In January, 2004, the Dubai Financial Services Authority (DFSA)
announced 12 new laws relating to operations within the Dubai International
Finance Centre (DIFC), providing a wide-ranging corporate legal
envelope.
In 2006, the Companies Law contained in the 2004 package was updated.
In April 2007, the Dubai International Financial Centre (DIFC)
held an official inauguration ceremony for the DIFC Courts, an independent
judicial system designed to deal with matters arising from and within
the DIFC, and which is expected to raise the bar of legal standards
within the region. An October 2011 decree from Sheikh Mohammed bin
Rashid Al Maktoum, expanding the DIFC Courts’ jurisdiction
to allow any businesses to use the English language DIFC Courts,
was made following calls from the region’s business community
for a common law English-speaking judicial option for all. The Court
is now open to businesses from all over the Gulf Cooperation Council
as well as the international business community.
The Real Property Law, enacted in June 2007, guarantees ownership
of freehold land and buildings, and other interest in land, within
the DIFC. The Law is based on the underlying principles of English
common law, but also incorporates the Torrens system of land registration,
well known in countries such as Australia, New Zealand, Canada and
Singapore.
Under the Real Property Law, land transactions are registered in
a central register administered in the DIFC. Once registered, the
Law certifies them to be fully effective. Unlike some other systems
of land registration, title interests registered under the Real
Property Law are “indefeasible”. In practical terms,
this means that persons buying real estate in the DIFC, lending
on the security of real estate in the DIFC, or taking a lease of
real estate in the DIFC, can be assured that their investment is
backed by the full protection of the Law.
Dubai’s financial centre is regulated by the DIFC Financial
Services Authority. The advantage Dubai has over other more established
financial jurisdictions in this respect is that the DFSC has had
the opportunity to draft a body of regulation pretty much from scratch.
This has allowed Dubai to build on a framework of established international
best practice, whilst avoiding some of the flaws and complexity
inherent in the older jurisdictions where regulations have been
constantly amended and patched up to keep pace with developments
in the financial markets. The DFSA’s rules are written in
English and have been drafted after extensive consultations with
leading financial institutions.
The DFSA has also been accepted into the international capital
market regulator IOSCO (International Organisation of Securities
Commissions).
In January 2012, Sheikh Mohammed Bin Rashid Al Maktoum enacted
changes to the Dubai International Financial Centre (DIFC) Law No
1 of 2004 (Regulatory Law 2004), under which the regulation of DIFC
Anti-Money Laundering (AML) and Combating the Financing of Terrorism
(CFT) requirements for Designated Non-Financial Businesses and Professions
(DNFBP) in the DIFC is transferred to the DFSA.
Abdulla Mohammed Al Awar, Chief Executive Officer of DIFCA said:
“This move further portrays the co-operation between DIFC
bodies to ensure that the highest standards of compliance are achieved.
It also comes in line with our commitment to the continuous development
of DIFC’s legal and regulatory framework and providing the
ideal platform for our clients to grow and prosper.”
The Dubai International Financial Exchange
The Dubai International Financial Exchange (DIFX, latterly rebranded
NASDAQ Dubai - see below), opened for trading for the first time
on September 26, 2005. The stated aim of the DIFX was to become
the leading exchange in its region for equities, bonds, funds, Islamic
products and other securities, and a gateway for international and
regional investment, and in this it appears to have largely succeeded.
In August 2007, the Dubai Government announced the consolidation
of its holdings in the Dubai Financial Market (DFM) and Dubai International
Financial Exchange into a new holding company, Borse Dubai. The
government stated at the time that the move was in line with the
Dubai Strategic Plan 2015, and demonstrated its commitment to position
Dubai as the leading capital market in the region.
DIFX and DFM continue to be regulated by the Dubai Financial Services
Authority (DFSA) and the Emirates Securities and Commodities Authority
(ESCA) respectively.
Explaining the role of Borse Dubai within the new structure, DFM
Chairman Essa Kazim, who was appointed as the Chairman of Borse
Dubai, said that the company is intended to be a facilitator, allowing
DIFX and DFM to explore joint opportunities for the development
of capital markets in the region and in the broader context of global
exchanges.
He commented at the time of the announcement that: "Both exchanges
will share best practices, maintaining operational efficiency at
international standards. Borse Dubai will boost confidence among
issuers, investors, and intermediaries who will benefit from a presence
in both exchanges, as well as a broader and more varied range of
services."
On November 20, 2008, the DIFX was rebranded as NASDAQ Dubai to
reflect the growing links between the exchange and NASDAQ OMX Group.
NASDAQ OMX acquired a one-third stake in NASDAQ Dubai in February
2008, with the remaining two-thirds owned by Borse Dubai. Then,
in December 2009, it was announced that the Dubai Financial Market
had made an offer (which was accepted) to Borse Dubai Ltd. and The
NASDAQ OMX Group Inc. enabling DFM to acquire 100% of NASDAQ Dubai.
The aim of this transaction was to widen DFM’s asset classes
for investors, to allow the company’s shareholders to benefit
from the future growth of NASDAQ Dubai and to further develop closer
operational links between the two exchanges.
The DIFX has ambitions to become the exchange of choice for the
listing of Islamic finance instruments, and took major steps towards
this goal with the listing of over 100 Sukuks, or Islamic bonds,
in 2007. In December that year, Dubai's Jebel Ali Free Zone listed
a AED7.5 billion (USD2.04 billion) Sukuk on the DIFX, confirming
the exchange’s status as the largest in the world for Islamic
bonds.
The DIFX is also a significant draw for the listing of conventional
bonds, and in February 2007 Dubai Holding Commercial Operations
Group (DHCOG) listed bonds worth USD2.46 billion on the exchange,
in the largest corporate bond issue in the Middle East under a European
Medium Term Notes (EMTN) programme.
Commenting on the listing, Mohammed Al Gergawi, Executive Chairman
of Dubai Holding, stated that: “The DIFX is a gateway for
both regional and international investors. Following its rapid growth,
the DIFX is the ideal platform for Dubai Holding to list this important
issue of bonds, the first it has ever made. As an exchange that
operates to high international regulatory standards, the DIFX provides
expanding opportunities for the business and financial community.”
2008 saw the first dual listing take place on the DIFX, that of
Netsol Technologies Inc., a California-based IT company with extensive
interests in the Middle East, which is also listed on the US NASDAQ
exchange. Furthermore, 2008 also saw the first Chinese company,
(China Security and Surveillance Technology, Inc.) list its shares
on the DIFX, as well as the mandatory reporting of all over-the-counter
equities trades introduced.
The value of equities traded on the DIFX increased by 37% to USD97m
in November 2010, from USD71m in November 2009, an increase which
came after NASDAQ Dubai’s outsourcing of its trading, settlement,
clearing and custody functions for equities to Dubai Financial Market
(DFM) in July 2010, as part of a strategy to increase trading of
its equities by individual investors and merge them in one liquidity
pool with institutional investors.
However, the bourse suffered from a drop in business in 2011 in
line with other exchanges in the region. The value of equities traded
on NASDAQ Dubai in 2011 was USD674m dollars, down 48% from USD1.3bn
in 2010.
Individual investors accounted for 5.8% of the traded value of
all shares traded on NASDAQ Dubai in 2011. Arqaam Securities was
the most active Member of the exchange in 2011, accounting for 25.1%
of equities traded value, followed by Al Futtaim with 23% and Deutsche
Bank with 17.3%.
The FTSE NASDAQ Dubai UAE 20 index ended 2011 at 1,374, down 4%
from the end of November 2011 and down 24% from the end of 2010.
The index tracks 20 liquid stocks listed on DFM, the Abu Dhabi Securities
Exchange and NASDAQ Dubai. It has been designed as a hedging and
investment mechanism for GCC and international investors.
Commenting on the 2011 trading report, Jeff Singer, Chief Executive
of NASDAQ Dubai, said: “NASDAQ Dubai is working with other
UAE capital markets bodies to further strengthen the country’s
listing and trading infrastructure, in preparation for an upturn
in market sentiment. The exchange is also preparing for new product
listings, including derivatives, and aims to expand its debt market.”
The Dubai Gold And Commodities Exchange (DGCX)
The DGCX commenced trading on November 22, 2005, and was the first
international commodities derivatives market in the Middle East
region. DGCX offers a range of commodities, commencing with gold
futures, with electronic trading accessible from anywhere in the
world. Transactions on the DGCX take place on a state-of the-art
electronic trading platform.
The exchange is established within the Dubai Metals and Commodities
Centre (DMCC), which is a strategic initiative of the Dubai government
created to establish a commodity market place in Dubai. The DMCC
is also a free zone authority offering 100% business ownership,
a guaranteed 50 year tax holiday and freehold property options.
The DGCX is regulated by Emirates Securities and Commodities Authority.
Annual volumes for 2011 on the DGCX registered substantial growth
of 110% from 2010 to reach just over 1 million contracts, representing
a value of USD185.13bn, the highest level since the exchange's launch.
By December 19, 2011, more than 10 million contracts had been traded
on the exchange since it opened.
As with 2010, currencies drove the majority of volume growth on
the exchange, accounting for 88% of total contracts in 2011. Indian
Rupee futures continued its exceptional growth, with just under
3.2 million contracts traded in 2011, 563% more than in 2010.
Precious metals accounted for the remaining 11% of the exchange’s
total volumes, registering 443,889 contracts in 2011. Silver futures
emerged as the strongest performer of the year in the precious metals
segment, rising by 40% from 2010 to 44,870 contracts in 2011.
Stephen Gaterell, Chief Executive Officer, DGCX, said, “The
Exchange’s performance in a year which saw increasing economic
uncertainty is a testament to its ability to offer a unique platform
to manage and mitigate currency and commodity price risk. As we
embark on 2012, we aim to further develop our technology infrastructure
as part of offering an even better trading environment for our Members.
We will also be looking to expand our product offering and diversify
our business across other markets. The Exchange is also considering
measures to further increase liquidity and volume in existing futures
contracts. With volatility high in today's economic environment,
we expect greater trading volumes across precious metals, energy
and
currencies on DGCX.”
The Dubai Mercantile Exchange
The Dubai Mercantile Exchange, which trades oil, reported in January
2012 record trading volume growth of 19% for 2011. In 2010 daily
trading in DME Oman averaged 2,898 lots (equivalent to 2.9 million
barrels per day), representing a year-on-year increase of 35%. The
DME also announced that it delivered more than 145 million barrels
of crude oil during 2011, with an underlying increase in Average
Daily Volume (ADV) to 3,505 contracts per day. These were the highest
figures seen by the DME since the exchange began trading in 2007,
with new records on total volume being set in consecutive months
during July and August.
DME says that the adoption of DME Oman as the basis for setting
the Official Selling Price (OSP) for Dubai crude by the Dubai Department
of Petroleum Affairs in June 2009 further reinforces the growing
acceptance of the DME Oman contract as the third global crude oil
pricing benchmark. DME contracts were migrated seamlessly onto CME
Globex thereby allowing market participants to access the world’s
three crude oil benchmarks on a single electronic platform.
As part of its proposition to provide market participants with
a flexible and comprehensive suite of trading and hedging tools,
the DME launched four new DME Oman related contracts in 2010:
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