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Transcript of Final Macquarie 151008(2)
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Macquarie Real Estate
Market Environment Assessment
United Arab Emirates Stage 2Presented by Group 1:
Nicholas Flinos 18723187
Sutarjo 20550723
Filipe Bernardo 21127301
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Executive Summary
The previous scope of the report (Stage 1) identified a number of potential opportunities andchallenges faced by Macquarie Real Estate Group (ME) to entering the United Arab Emirates
(UAE) real estate market. It outlined the UAEs vibrant real estate market with the key drivers of
the sector such as the high population growth rates, a youth-heavy age profile, huge inflows of
expatriates, higher liquidity levels in the region, and proactive government policies. The threats
identified are coming from the existence of big players such as Goldman Sachs, Deutsche Bank,
and Merril Lynch (recently acquired by Bank of America), to name a few, in the market.
This document will outline the deeper look at the real estate demand in UAE, in particular in
Abu Dhabi and Dubai, our entry strategy through a joint venture with Abu Dhabi Commercial
Bank and management consideration. It also looks at marketing strategies to enable ME to
achieve continued growth, increased profitability and market sustainability in the future. A case
study on an investment opportunity in Dubai International Financial Center (DIFC) is also
outlined.
It is imperative that we act quickly in this changing market place and drive key initiatives
through our brands, networking channels and technical expertise strengths. However, given the
current financial crisis, our final recommendation will be to put this strategy on hold given that
International Capital Markets have basically ceased operating and investment banks are either
merging, closing or performing badly.
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Table of Contents
Executive Summary....................................................................................................................................... ii
Table of Contents......................................................................................................................................... iii
1. Objectives.................................................................................................................................................. 1
2. UAE Real Estate Industry Overview ..........................................................................................................1
2.1 UAE National Competitive ..................................................................................................................1
2.1.1 Factors endowments....................................................................................................................1
2.2 Demand Conditions.............................................................................................................................4
2.2.1 Real Estate Sector in Abu Dhabi................................................................................................... 4
2.2.2 Real Estate Sector Overview in Dubai..........................................................................................6
3. Entry Strategy............................................................................................................................................7
3.1 Value Creation.....................................................................................................................................7
3.2 Scale of Entry ......................................................................................................................................7
4. Management Considerations....................................................................................................................9
4.1 Management and Organizational Structure .......................................................................................9
4.2 Proposed Organization Structure .....................................................................................................10
4.3 Staffing approach..............................................................................................................................11
5. Market Strategy ......................................................................................................................................13
5. 1 Target Market and Segmentation....................................................................................................13
5.2 Marketing strategy............................................................................................................................14
5.3 Product Strategy ...............................................................................................................................15
6. Joint Venture...........................................................................................................................................16
7. Abu Dhabi Commercial Bank (ADCB) .....................................................................................................16
8. Investment Opportunity Analysis ...........................................................................................................18
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8.1 Transaction Parameters....................................................................................................................18
8.2 Case Study Investment Opportunity..............................................................................................19
8.3 Target Building Specs........................................................................................................................20
9. Risk Assessments and Contingency Plan.................................................................................................21
9.1 Foreign Exchange Rate Risks.............................................................................................................24
10. Final Recommendations........................................................................................................................26
11. References: ...........................................................................................................................................27
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1. Objectives
The following is Stage 2 of a feasibility report to evaluate the opportunities for Macquarie RealEstate (ME) in establishing an Asset and Fund Management Portfolio in the UAE focusing
primarily on Dubai and Abu Dhabi. The report is the continuation of the Stage 1 which was looking at the companys industry,
market, S.W.O.T analysis and its financial performance. A comprehensive external environment
analysis, focusing on cultural, economic, political, social and legal environment of United Arab
Emirates as the target markets was also undertaken.
The objectives of Stage 2 is to outline a business plan by looking at; (1) the UAE real estate
industry; (2) entry strategy; (3) management consideration; (4) marketing strategy; (5) joint
venture; (6) Abu Dhabi Commercial Bank; (7) investment opportunity analysis and (8) risk
assessment and contingency plans. Final recommendation will be made in regards to entry into
the market.
2. UAE Real Estate Industry Overview
2.1 UAE National Competitive
2.1.1 Factors endowments Fast growing economy : The UAE is one of the fastest growing and wealthiest economies in
the world with a per-capita GDP of USD $49,700 in 2006. While oil export revenues of the
UAE plays a major part in the country's economic base, 39% of GDP, investments in the
non-oil based sectors of the economy have been increasing very rapidly. 1 The UAE
experienced an average economic growth rate (at constant prices) of 6 per cent over the past
ten years and a 2006 economic growth of 9.4 per cent thanks on faster expansion in the oil
1 United Arab Emirates business environment: Diversity of growth, retrieved fromhttp://www.portal.euromonitor.com.ezproxy.lib.monash.edu.au/portal/server.pt?control=SetCommunity&CommunityID=211&PageID=728&cached=false&space=CommunityPage , on August 27, 2008.
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and gas sector and higher-than-forecast expansion of the non-oil sectors . The countrys GDP
is expected to grow by 60% by 2010.2
Huge National Resources : The Oil & Gas industry is the key driver of the economy. The UAE
has large oil reserves and is an OPEC member. Oil and gas production has been the mainstay of
the economy in the UAE and will remain a major revenue earner long into the future, due to the
vast hydrocarbon reserves at the countrys disposal. Proven recoverable oil reserves are currently
put at 98.2 billion barrels or 9.5% of the global crude oil proven reserves.3
Development of Institutional Infrastructure: The booming UAE economy is fuelling
infrastructure development on an unprecedented scale. This has been depicted as a new era
of economic transition, characterised by a public-private partnership that is gradually taking
over the role traditionally held by government in infrastructure development. Housing,
tourist, industrial and commercial facilities, education and healthcare amenities
transportation, utilities, communications, ports and airports are all undergoing massive
redevelopment, radically altering the urban environment in the UAE. Reform of property
laws has also added impetus to urban development.4
Real Estate Trends in the Middle East : Real Estate is one of the key and high growth
sectors in the Middle East with the Gulf Cooperation Council (GCC) region being the hub of
real estate activity. Total projects underway in the Middle East (all industries) are estimated
to be US$1 trillion of which construction projects account for almost half of the value,
overtaking the traditionally largest oil & gas sector in terms of project investment. Most of
the real estate activity is driven by strong and fast growing economies on the back of high oil
prices, also by the significant liquidity in the ME region, which unlike in the past, is being
2 Ibid. United Arab Emirates business environment: Diversity of growth.
3 http://www.uae.gov.ae/Government/oil_gas.htm . (assessed on August 21, 2008)
4 United Arab Emirates Year Book 2007- Infrastructure, retrieved fromwww.uaeinteract.com/uaeint_misc/pdf_2007/English_2007/eyb6.pdf , on August 25, 2008.
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largely invested in the region itself. In addition to that, the GCC populations are increasing
drastically. A significant amount of infrastructure is therefore needed to support this growth.5
Growth of the UAE Real Estate Market: The UAE has been described as the worlds most
buoyant property market driven by strong fundamentals and an element of entrepreneurship.
In 2005 it dominated the Gulf construction sector with US$35.42 billion worth of projects
under construction, accounting for 63.7 per cent of the total value of projects under
construction in the GCC states. Saudi Arabia occupies the second slot with Qatar in third
place, followed by Kuwait, Bahrain and Oman. Much of the success of the real estate sector
is attributable to new property laws that regularise the purchase of land and property for
nationals and grant varying degrees of property rights to non-nationals. Whilst the property
market has evolved significantly in Dubai, other emirates are only beginning to develop is
sector.6
Public Expenditure: Successful development necessitates good planning, adequate investment
and professional implementation. The UAEs success is based on all three of these cornerstones.
Abu Dhabi alone plans to invest over US$151.22 billion in the coming five years. US$87.19
billion will go to the construction sector, US$32.69 billion for development and expansion of the tourism sector, US$9.53 billion for new power and water projects and US$21.79 billion
will be spent on expanding the oil and gas sector. Not surprisingly, the significant increase in
economic, business and tourist activity in the country has led to a corresponding expansion in
airport and related infrastructure in the UAE, where the total investment on airport
development over the coming 20 years will exceed US$20.43 billion. Public transport
development and integration is also a major component of Dubais transport strategy with
much hope being pinned on the fully automated US$4billion Dubai Light Rail (DLR).7
5Gulf construction projects top US $1 trillion, 1 Nov 2007, retrieved fromhttp://www.arabianbusiness.com/503386-gulf-construction-projects-top-us-1-trillion , on August 25, 2008.
6 United Arab Emirates Yearbook 2007-Economic Development, retrieved fromwww.uaeinteract.com/uaeint_misc/pdf_2007/English_2007/eyb5.pdf , on August 25, 2008.
7 Ibid.
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2.2 Demand Conditions
2.2.1 Real Estate Sector in Abu Dhabi
Residential 8: Current demand for all types of residential property in Abu Dhabi has
outstripped available supply, with occupancy levels of approximately 97-98%
reported across the city. new buildings enjoy high absorption levels, with the majority being 100% pre-
let well in advance of construction completion. As a result, leases are generally
12 months.
Rental prices have steadily increased over the past six years, with a priceappreciation particularly marked at the upper end of the pricing scale.
Offices 9: Abu Dhabis office sector experienced development in spurts between 1978 and
2007. Since 2000 office supply has grown by 50% to a total of 460,000 m2 of
Gross Floor Area. Occupancy rates in purpose-built office buildings are typically around 98% The continuous flow of new organisations keen to establish themselves in the
Emirate, as well as the natural expansion of existing organisations against the
backdrop of benign economic conditions, serve as key demand drivers. These
factors are further reinforced by the Emirates economic diversification
ambitions, and the development of planned industrial, financial and free trade
zones. According to statistics supplied by the Abu Dhabi Chamber of
Commerce & Industry (ADCCI), there were approximately 60,000 licensed
businesses in the city.
8 Collier International (2007). Abu Dhabi Real Estate Overview. Retrieved fromhttp://www.dubaicityguide.com/adb/realestate/images/Abu%20Dhabi%20Market%20Overview%20Q4%202007.pdf , on September 28, 2008.
9 Ibid.
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Retail 10: The premier mixed use development, completed in 2000 is the Abu Dhabi Mall;
Rotana Hotel, commercial, Residential and Retail. New malls are set to open to challenge Dubais leading position in this sector. In
mid-2008, Aldar Properties are expecting to complete a modern Arabian Souq
(Shop Central), as part of its flagship Central Market development. The year
2010 is likely to represent a watershed for retail market performance in the city,
with Sorouh Real Estate set to open the Al Reem Mall with 130,000m of Gross
Leasable Area and the Al Yas development adding a further 300,000m of
leasable area. Hotels 11:
Abu Dhabi has been overshadowed by Dubai as a leisure tourist destination.
Demand for hotel accommodation in the city is driven predominantly by
business tourism, which accounts for 75% of overall market demand. In 2006
the Emirate witnessed average hotel room occupancy rates of 78.6%, while
serviced apartments achieved approximately 80%. The Abu Dhabi Tourism Authority (ADTA) is seeking to increase the market
share enjoyed by the leisure tourist segment to 40% by 2015. It plans to do soby developing destination attractions for cultural, sporting, and Meetings,
Incentives, Conferences and Exhibitions (MICE) tourism segments. The recent announcement of an agreement between Mubadala, a government-
owned investment authority, and Formula 1 founder Bernie Ecclestone that Abu
Dhabi will play host to the F1 racing circuit from 2010, has been hailed as the
first major step in the citys efforts towards becoming a more widely recognised
leisure tourism destination.
10 Ibid. Collier International (2007). Abu Dhabi Real Estate Overview.
11 Ibid.
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2.2.2 Real Estate Sector Overview in Dubai
Offices 12:
Dubai offices are experiencing a boom in both the demand and supply of space. The limited delivery of new office accommodation over the past few years has
resulted in a persistent market undersupply, with the result that the market has
seen tremendous increases in office rental rates while occupancy rates remain
steady at between 97% and 99% in most available office buildings. Prime office rental growth in the whole of Dubai has been strong over the last 2
years with CAGR of circa 40% since 2005. At the same time occupancy rates
have increased to 100% in Q2 2007 from 95% in Q2 2005. The creation of Free zones has boosted the Office space demand
Retail 13: Current retail space in shopping malls is estimated by CBRE to be 1.3mn m2
and this is forecast to increase to 2.8 mn m2 by the middle of 2011. The retail
space is dominated by malls and there are expected to be 40 malls in Dubai
within the next 5 years.
Hotels 14: Occupancy is, according to the Department of Tourism, 82% in 2006 which is
down from circa 86% in 2005. At the same time, the number of hotel rooms is
expected to grow by approximately 30,000 rooms over the next four years. This
represents an increase of 100% so there are potential concerns for over supply.
12 Collier International (2007). Dubai Real Estate Overview. Retrieved fromhttp://www.dubaicityguide.com/realestate/images/Dubai%20Overview%20Q4%202007.pdf , on September 20,2008.
13 Ibid.
14 Ibid.
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Dubai retail sqft per capital is 10sqft per capital compared with 20sqft per
capital in the 05.
Airport Growth to provide capacity for further tourism
3. Entry Strategy
3.1 Value CreationThis transaction is a unique opportunity to showcase Macquarie Real Estate (ME)s financial
discipline and focus on returns by executing the first pure opportunistic real estate fund within
the region. In doing so, ME will develop a first - mover advantage and be in a position to capturefuture demand by establishing a strong brand name. ME will also develop skill sets in the
following:
equity raising through real estate private equity analysis and fund raising;
real estate financing (structuring the debt facilities to support the asset acquisitions)
real estate investment banking (structure and advise the fund on asset acquisitions, and
exit the fund through a possible IPO)
It will strengthen the relationship between ME and partners throughout the Gulf s
financial industry
It will give ME the platform to potentially expand its real estate investments further
following the successful execution of this transaction.
3.2 Scale of Entry
We are recommending a small-scale entry into the UAE market with the long term intention of establishing ME as a leading Fund and Asset Manager in the region. The initial, single fund
would prove the sounding board for the execution of similar, future funds. Our structure would
utilise equity efficiently, maximise gearing and allow for the efficient exit of the portfolio either
through trade sale or through IPO.
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Initial Investment:
1. ME would seed the fund at between 15 - 25%;
2. Other Seed investors would be invited to join the Fund equity structure;
3. The ME Real Estate team (perhaps via a regional investment bank), would raise equity;
4. ME Real Estate team would appoint exclusive finance providers to provide asset
backed financing;
5. A 3rd party (perhaps Macquarie Asset Management) would manage the properties as
well as act as development manager for any potential greenfield sites;
6. ME and the Seed investors would source and advise on property selections;
7. ME and the Seed Investors would have positions on the Investment Committee;
8. Transaction structuring (together with preferred legal counsel), fund raising and
execution of seed asset acquisition is expected to take between 4 6 months.
ME would consider the following key parameters:
ME will be a seed investor in the fund with between [US$50 - 100] million Equity
investment;
ME can introduce other Seed investors to the transaction (UAE Government, local and
international investment banks)
ME will then go to market to raise as much as possible (total Funds of between US$300million US$500 million) from third parties, mostly coming from institutions and high
net worth individuals eager to co-invest along with the Seed investors
Seed investors will have a position on the Investment Committee together with ME
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The success of the fund is based on the ability of the ME Real Estate team to implement
the structure (together with legal counsel) raise the required capital, and control and
manage the Funds direction. The ME Real Estate team must have extensive real estate,
finance and investment experience.
4. Management Considerations
4.1 Management and Organizational Structure
Organizational structure is the formal division of a firm (e.g. product divisions, national
operations, and functions), the location of the decision-making responsibilities within the
structure (e.g. centralized or decentralized), and how people link together and interact to
coordinate activities. Organization structure reveals vertical operational responsibilities, and
horizontal linkages, and may be represented by an organization chart. The complexity of an
organization's structure is often proportional to its size and its geographic dispersal. 15
There are three dimensions of organizational structure: 16 (a) vertical differentiation , which
refers to the location of the decision-making power within the structure is concentrated (e.g.
centralized in the office of upper-level managers or decentralized to the lower managers);however, in practical, it is not a definite choice between centralization and decentralization but
depending on the type of decision and the firms strategy, for instance decision related to overall
firms strategy is typically centralized but operating decisions such as marketing may be
decentralized; (b) horizontal differentiation , refers to the formal division of the organization
into subunits where the decision is made on the basis of function, type of business, or
geographical area; and (c) the establishment of integrating mechanisms to coordinate subunits.
15 C. W. L. Hill, (2009). International Business: Competing in the Global Marketplace. 7th ed., McGraw-Hill/Irwin.USA. Page 451.
16 Ibid. Page 452-461
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4.2 Proposed Organization Structure
Macquarie's organisational approach is designed to be non-hierarchical where management of the organisation is largely delegated to the Executive Committee, a central group comprising the
Chairman, Managing Director, Deputy Managing Director, Head of Risk Management and head
of Macquarie 's six major business Groups. The Board and Executive Committee set up overall
guidelines and specific parameters within which the six business Groups have substantial
discretion in the conduct of their various businesses. Business activities are carried out by
Divisions, which focus on particular products and markets and work in close cooperation. 17 The
fund and assets management division is a division under the Macquarie Real Estate Group.
Macquaries philosophy is to provide individual businesses with a balance between operating
freedom, controls on risk limits and observance of professional standards. This unique
management style encourages a sense of ownership and entrepreneurial endeavour among its
people, and has produced a stream of major financial innovations throughout Macquarie's
history. Therefore, the worldwide product divisional structure is proposed under this plan as
shown on the below organizational structure.
17Macquarie Group Limited. (2008). Company Profile . Retrieved fromhttp://www.macquarie.com.au/au/about_macquarie/company_profile/mgmt_organisation.htm , on October 3,2008.
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Domestic International-UAE
Macquarie GroupHQ
Functional UnitsFunctional Units
MacqarieSecurities
Treasury &Commodities
Investmt &Development
Finance
RE Investmentbanking and
advisoryFund & Assetmanagement
DevelopmentManagement
Real EstateResearch
Banking &Finance
FundManagement
MacquarieCapital Real Estate
The advantages of the worldwide product divisional structure are that each division is self-
contained, the entity has full responsibility for its own value creation and enhances the value
creation activities and facilitate transfer of companys core competencies. The lack of local
responsibilities allocated to area or country managers is the primary disadvantage of this
structure. 18 This structure is well-suited to the current Macquaries philosophy and this plan entry
strategy that is the Joint Venture. With this structure, the division could adjust the business
strategy to the local conditions (local responsiveness) in exchange of the transfer of knowledge
(know-how) and other business strategy approach.
4.3 Staffing approachThe UAE population is essentially a small one. However, after the discovery of oil and its export
in the last four decades, it has experienced very rapid growth, the result of a combination of high
natural rates of increase among the UAEs indigenous population, and a massive inwardmigration of expatriates who now comprise more than three quarters of the population. Thus, a
small indigenous population, a large expatriate population, and immense wealth generated by oil
are the dominant socio-economic features of the UAE. Female participation in the UAE labour
18 Ibid. Hill (2009). Page 458-459.
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force remains small - 16.3 per cent in 1999. However, incentives and legislation aim to change
this situation. Greater female participation is seen as a way of increasing the UAE indigenous
labour force and lessening the countrys dependence on foreign labour. 19
There are over 150 nationalities working and living in Dubai, representing over 80 percent of
Dubais population. Dubai attracts a highly skilled workforce, which is absorbed by the
countrys growing number of international companies, professional service firms and financial
institutions. Education standards are high, with almost 20 percent of the population possessing a
university degree or higher qualification. The literacy rate currently exceeds 90 per cent. Dubai
has a developed and highly-skilled professional labour force, comprised for most expatriates
from around the world. 20 The government has, in recent years, adopted an Emiratisation Plan
to promote the employment of UAE nationals by setting up a federal institution responsible for
Emiratization. Tanmia (the National Human Resource Development & Employment
Authority) was set up specifically to address Emiratization issues. Its remit involves: (a)
recommending relevant Emiratization policies to the UAE federal government; (b) creating job
opportunities for the UAE national workforce in partnership with both the public and private
sector; and (c) addressing the skill gap of the national workforce through the provision of
learning and development interventions and resources. 21
Considering the current development in the UAEs labour market, a geocentric staffing approach
will be used. The geocentric approach refers to seeks of best people for the key jobs throughout
19Shihab. M. Economic Development in the UAE. Retrieved fromhttp://www.uaeinteract.com/uaeint_misc/pdf/perspectives/12.pdf , on October 3, 2008.
20 Pricewaterhousecoopers (2006). Doing Business in the Dubai International Financial Center. Retrieved fromhttp://www.difc.ae/operating_in_difc/doing_business/Doing%20Business%20in%20the%20DIFC-%20April%202006.pdf , on October 3, 2008.
21 Rees, C. J. et al. (2007). Emiratization as a strategic HRM change initiative: case study evidence from a UAEpetroleum company. Int. J. of Human Resource Management . Vol 18:1, page 3353, retrieved fromhttp://web.ebscohost.com.ezproxy.lib.monash.edu.au/ehost/pdf?vid=7&hid=103&sid=7647c31b-94a4-4739-9167-8b39cddd6751%40sessionmgr104 , on October 3, 2008.
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the organization, regardless of nationality. 22 Utilizing the current labour market, a senior division
manager will be appointed from the Macquarie HQ to maintain the corporate culture, overall
firms strategy and the management network. However, the key staff will be searched from
country such as UK and USA, in particular, given the proximity of the UK to the UAE and
expertise they may have in the UAE. The local counterpart, that is the Abu Dhabi Commercial
Bank (ADCB), would provide the local expertise.
According to PriceWaterHouseCoopers research, the average basic salary for Junior Manager is
about US$24,000-US$54,000, Middle Manager is US$54,000-US$84,000 and Senior Manager is
US$84,000-US$180,000 exclude airfare from and to home country (considering 80% of employees in UAE are expatriates) and other fringe benefits such as accommodations. 23 Since
Macquarie Real Estate Middle East chose to adopt geocentric staffing approach, Macquarie
need to develop rigorous scheme and ready to compete in the compensation benefits with other
firms to attract potential employees and finding suitable candidates which match with Macquarie
requirements.
5. Market Strategy
5. 1 Target Market and SegmentationMacquarie Real Estate Middle East as the real estate investment company of Macquarie Group
will focus predominantly on real estate fund and asset management and private equity
investments. Macquarie Real Estate Middle East will specialize in the sponsorship, establishment
and management of specialist listed REITs and unlisted investment vehicles.
The government of UEA has been developing Dubai International Financial Centre (DIFC) and
has been becoming the world's fastest growing international financial centre. It aims to developthe same stature as New York, London and Hong Kong. It primarily serves the vast region
22 Hill, C. W. L. (2009). Page 630. opcit.
23 PriceWaterHOuseCoopers (2006). Opcit.
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between Western Europe and East Asia. Since it opened in September 2004, the DIFC has
attracted high calibre firms from around the globe as well as its region. A world-class stock
exchange, the Dubai International Financial Exchange (DIFX), opened in the DIFC in September
2005. The DIFC is a 110-acre free zone. It is part of the larger vision of His Highness Sheikh
Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler
of Dubai, together with the Government of Dubai, to create an environment for progress and
economic development in the UAE and the wider region. 24
In line with the opportunity offered by the environment and Government of Dubai above,
Macquarie Real Estate Middle East will use Dubai as a stepping stone to show its presence to the
market and investors and aiming to tap the potential market at the surrounding UAE markets.
5.2 Marketing strategyTo ensure that Macquarie Real Estate Middle East is able to tap the expected target and market
segment, dedicated team is expected to be developed. The team to be categorized into the
following four specializations:
Capital Transactions Team:incorporating the identification, analysis and execution of deals.
Capital Management: incorporating the fund management of existing and future funds.
Portfolio Management: incorporating asset management with professionals divided by
asset type specialization; e.g., offices, retail, industrial, residential.
Operations: incorporating legal, compliance, due diligence and accounting
The team under the leadership of appointed manager should bring the experience needed to
achieve Macquarie Real Estate Middle Easts goal of making product and investment expertise
available to advisers and their clients. Macquarie Real Estate Middle East team should offerservices to be clearly differentiated in the offerings compared to other players by developing lean
24 Dubai International Financial Centre (DIFC), retrieved from http://www.difc.ae/ on 28 Sept 2008.
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model portfolios, deliver strong information ratios, plus access to advice and expert backup that
is appropriate for an increasingly sophisticated market.
Macquarie Real Estate Middle East is proposed to offer specialist manufacturer of managed
funds in REIT as opposed to many other major players who offer integrated services combining
asset management with fund, superannuation or platform administration. In the future
Macquarie Real Estate Middle East to develop well positioned and branded product offering in
the UEA financial sector.
5.3 Product Strategy
The Dubai International Financial Centre (DIFC) focuses on several sectors of financial activity:
Banking Services (Investment Banking, Corporate Banking & Private Banking); Capital Markets
(Equity, Debt Instruments, Derivatives and Commodity Trading); Asset Management and Fund
Registration; Insurance and Re-insurance; Islamic Finance & Professional Service Providers. 25
Related with the infrastructure offered by the DIFC, Macquarie Real Estate Middle East is
expected to provide seed capital for the funds, and occasionally warehouses assets onto its own
balance sheet with an aim to then syndicate the deal to a small group of investors. MacquarieReal Estate approach is to focus on expertise on areas of business where Macquarie Real Estate
will be able to add the most value, and deliver real advantage to clients with a portfolio of assets
and a future pipeline of deals in key investments which generate value add to its investors and
clients.
25 Ibid. Dubai International Financial Centre (DIFC).
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domestic banking system. Moody also notes that a number of major changes, initiated by the
bank's management team, are strengthening ADCB's franchise.
The largest bank in the UAE, in terms of assets, is Emirates NBD (ENBD) which came into
being in October 2007 with the merger of Emirates Bank International (EBI) and National Bank
of Dubai (NBD). In 2007, the top five local banks in the UAE (in terms of market share as a %
of the aggregate balance sheet size of the 16 listed banks in the UAE):
1. Emirates NBD 26.9%
2. National Bank of Abu Dhabi 14.8%
3. Abu Dhabi Commercial Bank 11.2%4. Mashreq Bank 9.3%
5. Dubai Islamic Bank 8.9% 29
Abu Dhabi Commercial Bank has broadened and improved its range of offered products and
services, and strengthened its overall risk management framework, enabling it to compete more
effectively in the increasingly competitive United Arab Emirates banking sector. Furthermore,
the financial strength rating (FSR) upgrade recognized the bank's improving asset quality and
better provisioning coverage of non-performing loans, more diverse funding mix and increasing
core earnings and profitability.
Going forward, ADCB's D+ FSR could benefit from: (i) sustained strong financial performance;
(ii) reduced funding and credit concentrations; and (iii) more diversified income-generating
streams. On the other hand, the bank's FSR could come under pressure in the case of (i) a
significant deterioration in financial performance resulting from its recent rapid growth; (ii) a
material elevation in risk profile; and (iii) a severe deterioration in the operating environment, in
light of the overheating property and equity markets. 30
29 Financial services to the United Arab Emirates, retrieved from http://www.austrade.gov.au/Financial-services-to-the-UAE/default.aspx on 28 Sept 2008.
30 Moody's upgrades Abu Dhabi Commercial Bank's financial strength rating, opcit.
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Considering that Macquarie has been doing joint venture with ADCB and learning that ADCB
performance is rated as sustained in strong financial performance. Macquarie Real Estate
Middle East will be part of Macquarie International within the joint venture structure that has
been established to ensure that Macquarie Real Estate Middle East can utilize ADCB strong
performance and market understanding to proliferate Macquarie Real Estate products into
targeted market.
8. Investment Opportunity Analysis
8.1 Transaction Parameters
The following broad structure is proposed:
Composition: The aim would be to create a fund that has [80%] core revenue
generating buildings/ projects (predominantly Commercial) and up to [20%] of
potential trading book (of developments within defined investment parameters). This
would provide the fund with stronger returns however the mix can be finalised during
the structuring period based on feedback from Seed investors.
Fund Size: Equity of between US$400Mn US$500Mn, leveraged at an average of 75% for operating assets and 65% for development assets. Total investment size of
US$960Mn US$1.2Bn for operating and US$450Mn US$570Mn on development
assets. Total portfolio could be between US$1.4Bn US$1.7Bn.
Asset Size: We would assume an average individual investment size of US$200Mn
which would see the fund holding between 7 10 properties.
Expected Returns: Hurdle Rate 15%, expected returns 20% - 25% IRR.
Tenant Mix: Seed assets would have mostly International companies across different
industry segments, to diversify risk exposures across the tenant base. Acquisitions
would also be sought for Government tenanted buildings for further risk control. Fund
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could ultimately source Sale and Leaseback Opportunities from regional Banks and
Companies.
8.2 Case Study Investment Opportunity 31
A well known conglomerate in the UAE, with a recognised Real Estate activity in the
region is developing and selling a G + 11 office building (Target) in the Dubai
International Financial Centre (DIFC)
The DIFC is a 110-acre free zone. Since it opened in September 2004, the DIFC has
attracted high calibre firms from around the globe including Goldman Sachs, Morgan
Stanley, Merrill Lynch, Barclays, Deutsche Bank, Clifford Chance, Standard Chartered
and Lloyds TSB. The Dubai International Financial Exchange (DIFX), opened in the
DIFC in September 2005
The DIFC entities operating within it focus on Banking Services (Investment Banking,
Corporate Banking & Private Banking); Capital Markets (Equity, Debt Instruments,
Derivatives and Commodity Trading); Asset Management and Fund Registration;
Insurance and Reinsurance; Islamic Finance; Business Processing Operations and
Ancillary Services
Over the next 2 3 months a number of DIFC office buildings will come online. The
entire space has already been pre-let - ML have 1 floor.
Despite that additional space, the DIFC have informed us that there is currently 800,000
sqft of excess demand from DIFC registered entities, with the Target being the next space
coming online. The Target has only 230,000 sqft capacity and is expected to be leased
out quickly once available.
31 This case study was developed inline with the Marketing Strategy discussed in Section 6. Some figures are madeup for the purpose to illustrate the case only. Other information such as date, location, zone or area are obtainedfrom the Dubai International Financial Center at http://www.difc.ae/ .
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DIFC Lease Terms are for 5 years, with rent reviews every 2 years all reviews are
handled by the DIFC in consultation with the Owner.
We believe that the opportunity for an Owner to generate strong returns with very little
development or market risk. The financing side would support 75% LTC via an asset backed
financing with competitive pricing reflecting the quality of the tenants.
8.3 Target Building Specs
The DIFC is a designated free zone, with 100% freehold rights and a tax free
environment on real estate investment/ profits.
The Building is located in a prime location of the DIFC, positioned between the Gate
Precinct and the Ritz Carlton Hotel (under construction).
The Building will be completed in 12 months (September 2009). It is expected to be the
first of the new buildings to be ready as it is only G + 11.
The building has 10 levels of office space with retail on the ground floor.
The building offers 6 levels of parking and 4 basement floors and is constructed to meetthe high end international standards in terms of infrastructure, design, and health
facilities.
At a fee of 20% of the gross rent paid, the DIFC manage the leasing of the asset. The
remaining 80% net rent is free from charges.
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9. Risk Assessments and Contingency Plan
The financial services industry is characterised by a complex environment where competitioncan move very quickly and barriers to the entry of new firms are low. Management of that risk is
therefore critical to Macquaries Real Estate Middle East. In response to this complexity and
change, development of superior key resources is an essential ingredient in generating above-
normal return on funds. In fact, firms facing rapidly changing environments are unlikely to
survive over the long term unless they possess assets and capabilities that can cope with
changing, unpredictable conditions. Acknowledgement and appropriate development and
deployment of valuable intangible assets and capabilities by management enabled a firm in such
an environment not only to survive, but to consistently outperform rivals .32
Potential conflict-of-interest problem areas include security valuation, trade allocations, affiliated
transactions between the firm and its clients or among the firm's clients, soft dollar transactions,
investment performance reporting, and personal trading activities of investment personnel. The
chief compliance officer (CCO) should work with the advisory firm's senior management to
identify potential violations of the firm's compliance program and establish disciplinary actions
as well as escalation procedures for compliance violations. Conflicts can be reduced if the CCO
reports to the board of directors of the advisory firm or that firm's parent. The CCO review
process should be handled by someone other than an officer whom the CCO monitors. The CCO
should seek independent outside sources to help identify and resolve compliance issues. 33
Within Macquarie business operation, before an international office can be set up or undertake
new activities, Risk Management Group (RMG) analyses the proposed activities, infrastructure,
resourcing and procedures to ensure appropriate risk management controls are in place. 34
32 V. Clulow, J. Gerstman and C. Barry (2003), The resource-based view and sustainable competitive advantage:the case of a financial services firm, Journal of European Industrial Training , Vol.27, No.5, p. 220-232.
33 T.M Majewski (2006), Conflicts of interest chief compliance officers face in implementing compliance programsfor investment funds and investment advisers, Journal of Investment Compliance, Vol. 7, No. 4, p.23-27.
34 MGL Financial Report, 2008, p. 40, retrieved fromhttp://www.macquarie.com.au/au/about_macquarie/acrobat/riskmgtreport2006.pdf accessed on 10 Oct 2008.
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Globalization, deregulation and excess capital have been a boom for the world economy over the
last three decades, generating an impressive level of wealth and comfort in both the developed
and developing world. But this same mix has also proved combustible, creating an almost
predictable pattern of excess leading to turbulent financial markets. 35 Pension funds have moved
quickly to assess their financial positions today following the Chapter 11 insolvency investment
banking giant Lehman Brothers voluntary and Bank of Americas takeover of Merrill Lynch,
but many are also being advised the unwinding of financial positions could significantly affect
asset returns and volatility. 36
Global real estate market conditions currently facing some challenges such as credit squeeze has
accelerated a repricing of risk in a number of markets, refinancing risks in some markets, sharp
decline in almost all global listed real estate markets which many now priced well below
reported net asset values, asset price reductions in some markets (more evidence in UK than US)
but no evidence of lower prices in Australia; however the evidence of continued increases in
Asia. The positive side is that there is continued demand from institutional investors for quality
real estate investments, although at present waiting for some evidence of financial and real estate
market stabilization. 37
By understanding the risk above, Macquarie Real Estate is expected to adopt Conservative
approach, diversity of funding sources to enable liquidity including diversity by product,
geography, tenor and currency and concentration limits to ensure a good spread of maturing
liabilities. Macquarie Real Estate Middle East is expected to apply MGL guideline in the risk
35 Impact of Subprime Crisis is Mixed for Asset Management Industry, retrieved fromwww. berkshire capitalcorporation.com/documents/3Q2007NewsletterFinal.pdf , accessed on 3 Oct 2008.
36 Lehman Brothers bankruptcy sparks Monday meltdown, 15 September 2008, retrieved fromhttp://www.ipe.com/news/Lehman_Brothers_bankruptcy_sparks_Monday_meltdown_29122.php , accessed on3 Oct 2008.
37 Global Real Estate market Condition, Macquarie Group Limited Citi5thAnnual Australia & New ZealandInvestment Conference, London 2008, retrieved fromwww. macquarie .com.au/au/about_ macquarie /acrobat/C_WRS_Mar08.pdf, accessed on 3 Oct 2008.
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management framework which incorporates active management and monitoring of market,
credit, equity, liquidity, operational, compliance, legal and regulatory risks.
Commercial Banking Business Environment Rating (CBBER) for UAE is 66.0. The equivalent
figures for the US and the eurozone are 84.8 and 81.4, respectively. 38 Within the CBBER, the
most important aspect is the banking market element of the limits to potential returns. This
element accounts for 42% of the overall CBBER. The UAE's rating for this element (65.6) is
about the same as the overall CBBER and is higher than the country element of the limits to
potential returns (54.1). This indicates that the UAE has a highly sophisticated commercial
banking sector. 39 In this case Macquarie Real Estate Middle East might find challenging
competitor.
UAE's real Gross Domestic Product (GDP) is poised to record a slower growth rate of 6.4 per
cent in 2008 and 6.1 per cent in 2009 compared to an eight per cent surge in 2007 as a result of
soaring prices, however according to Merrill Lynch analysts, UAE's overall fiscal stance has so
far been prudent with revenue growth outstripping overall spending. 40 Macquarie Real Estate
might expect slowing down in property fund investment compared to previous year, but the
growth potential is still available.
Macquarie Real Estate Middle East which will operate through joint venture might gain
significant benefits derived from joint ventures by reducing the risks through capital and
resource sharing, gain advantage to gain access to UEA market by leveraging Abu Dhabi
Commercial Bank (ADCB)s knowledge of local markets. However there are possibilities that
joint venture fails or will not work successfully even though Macquarie has experience in doing
joint venture with the ADCB. Some factors that might have negative impact are market
38 UAE Commercial Banking Report 2008, retrieved from http://www.businessmonitor.com/banking/uae.html ,accessed on 3 Oct 2008.
39 Ibid. UAE Commercial Banking Report 2008.
40 UAE's real GDP growth seen to slow down in 2008, retrieved fromhttp://www.zawya.com/story.cfm/sidZAWYA20080129034935 , accessed on 3 Oct 2008.
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development, ADCBs inability (reluctance or refusal) to honor contractual obligations and
regulatory uncertainty. Another problem is the issue of management such as friction and a lack
of cooperation in decision making. Projects might doomed to failure if there is not a well-
defined decision making process in place that is predicated on mutually recognized goals and
strategies. According to Johnson (2001), the joint venture contract should set out how funding
requirements will be satisfied, including whether, and what to extent, funds should be made
available by the parties to the joint venture and on what terms. The intended duration of the joint
venture, and any renewal provisions, should be clearly set out in the agreement. In some cases, it
may be appropriate to include buy-sell provisions. The contract should specify which decisions
require approval by the board, and whether decisions are to be made by simple majority asopposed to a specified majority or unanimous approval. 41
9.1 Foreign Exchange Rate Risks
For the last to year, the value of UAE Dirham has been declining against Australian Dollar
which from business perspective is not good for Macquarie Australia because the value of Dollar
to be transferred into Macquarie Australia from Macquarie Middle East will be less in value.
However the UAE dirham jumped into the highest level (AUD 0.4/dirham) recently. 42 The
situation was related to the Australian dollar that was at a 25-year high of 98.49 US cents in mid-
July - levels not seen since the days of a fixed exchange rate. But it has rapidly backtracked over
the past six weeks, hurt by falling commodity prices, a stronger US dollar, and the prospect of
interest rate cuts from the Reserve Bank of Australia (RBA). 43
41 H.E. Johnson (2001), Reducing the Risks in Joint Ventures, CMA Management , Dec2000/Jan2001, Vol. 74,No.10, p.34-37.
42 http://au.finance.yahoo.com/currency/convert?from=AED&to=AUD&amt=1&t=2y.
43 Exporters happy with falling dollar, The Sydney Morning Herald, 7 Sept 2008, retrieved fromhttp://news.smh.com.au/business/exporters-happy-with-falling-dollar-20080907-4b9o.html , accessed on 11 Oct2008.
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Strengthening value of UAE dirham will be favorable for Macquarie Australia, which will offerhigher value of Macquarie Real Estate Middle East operation when the revenue to be transferred
and converted into Australian Dollar.However as the business environment is volatile company facing volatile of UAE exchange rate
against Australian dollar as well. When financial environment in the Australia is changing such
as Reserve Bank of Australia policy in the interest rate or increasing commodity price which will
make Australia dollar strengthening against other currency in the future, then the value of UAE
dirham to be converted into Australian dollar will be less as well.
Even though in the near future increasing value of UAE dirham will favorable for Macquarie, for
long term perspective Macquarie need to mitigate the risk of falling UAE dirham such ashappened in the last two years by doing hedging.
Tabel. The Value of UAE dirham (AED) against the Australian dollar (AED) from October
2006 to October 2008.
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10. Final Recommendations
We propose the following steps:1. In the short-term, this strategy will be put on hold considering the current financial crisis.
Given the impact on investment banks over the last three months proceeding with thisstrategy in the short term would not be commercially prudent, irrespective of the fact that theUAE is somewhat sheltered from the impact given the huge level of activity currentlyunderway in the region.
2. Once we evaluate that market conditions have corrected themselves and investment bankingopportunities gather momentum we recommend for:
ME to unlock significant value by working with local partners, Abu Dhabi CommercialBank, to structure, implement and manage real estate funds and asset portfolios focusing
on two main jurisdictions: Dubai and Abu Dhabi; Recruit the best people in the market using the geocentric staffing approach;
3. In the long-term, using Dubai and Abu Dhabi as the stepping stone to show its presence to
the market and investors and aiming to tap the potential market in the surrounding UAE and
the wider Gulf markets particularly the oil rich Qatar.
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11. References:
AMEInfo (11 April 2006). Moody's upgrades Abu Dhabi Commercial Bank's financial strengthrating. Retrieved from http://www.ameinfo.com/82782.html
Berkshire Capital Securities LLC (2007). Impact of Subprime Crisis is Mixed for AssetManagement Industry, retrieved fromwww. berkshire capitalcorporation.com/documents/3Q2007NewsletterFinal.pdf
Business Monitor International (2008). UAE Commercial Banking Report 2008, retrieved fromhttp://www.businessmonitor.com/banking/uae.html
Collier International (2007). Abu Dhabi Real Estate Overview. Retrieved fromhttp://www.dubaicityguide.com/adb/realestate/images/Abu%20Dhabi%20Market%20Overview%20Q4%202007.pdf
Collier International (2007). Dubai Real Estate Overview. Retrieved fromhttp://www.dubaicityguide.com/realestate/images/Dubai%20Overview%20Q4%202007.pdf
Dubai International Financial Centre (DIFC), retrieved from http://www.difc.ae/
Euromonitor. (2008). United Arab Emirates Business Environment: Diversity of growth. Retrieved from
http://www.portal.euromonitor.com.ezproxy.lib.monash.edu.au/portal/server.pt?control=SetCommunity&CommunityID=211&PageID=728&cached=false&space=CommunityPage .
Exporters happy with falling dollar. The Sydney Morning Herald , 7 Sept 2008, retrieved fromhttp://news.smh.com.au/business/exporters-happy-with-falling-dollar-20080907-4b9o.html
Financial Services to the United Arab Emirates. (2008, June 11). Retrieved fromhttp://www.austrade.gov.au/Financial-services-to-the-UAE/default.aspx
Gulf construction projects top US $1 trillion. (2007, Nov 1). Retrieved fromhttp://www.arabianbusiness.com/503386-gulf-construction-projects-top-us-1-trillion .
H.E. Johnson (2001), Reducing the Risks in Joint Ventures, CMA Management ,Dec2000/Jan2001, Vol. 74, No.10, p.34-37.
Hill, C. W. L. (2009). International Business: Competing in the Global Marketplace. 7th ed.,McGraw-Hill/Irwin. USA.
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http://au.finance.yahoo.com/currency/convert?from=AED&to=AUD&amt=1&t=2y.
Macquarie Group Limited. (2008). Company Profile . Retrieved fromhttp://www.macquarie.com.au/au/about_macquarie/company_profile/mgmt_organisation.htm
Macquarie Group Limited (2008). Treasury & Commodities Activities . Retrieved fromhttp://www.macquarie.com/ae/en/treasury_commodities.htm
Macquarie Group Limited. (2008). Risk Management Report [excerpt from Financial Report2008, p. 40], retrieved fromhttp://www.macquarie.com.au/au/about_macquarie/acrobat/riskmgtreport2006.pdf
Macquarie Group Limites. (2008). Citi 5 th Annual Australia & New Zealand Investment
Conference, London. Retrieved fromhttp://www.macquarie.com.au/au/about_macquarie/acrobat/C_WRS_Mar08.pdf
Oil and Gas. http://www.uae.gov.ae/Government/oil_gas.htm .
Pricewaterhousecoopers (2006). Doing Business in the Dubai International Financial Center.Retrieved fromhttp://www.difc.ae/operating_in_difc/doing_business/Doing%20Business%20in%20the%20DIFC-%20April%202006.pdf
Rees, C. J. et al. (2007). Emiratization as a strategic HRM change initiative: case study
evidence from a UAE petroleum company. Int. J. of Human Resource Management . Vol 18:1,page 3353, retrieved fromhttp://web.ebscohost.com.ezproxy.lib.monash.edu.au/ehost/pdf?vid=7&hid=103&sid=7647c31b-94a4-4739-9167-8b39cddd6751%40sessionmgr104
Shihab. M. Economic Development in the UAE. Retrieved fromhttp://www.uaeinteract.com/uaeint_misc/pdf/perspectives/12.pdf
T.M Majewski (2006), Conflicts of interest chief compliance officers face in implementingcompliance programs for investment funds and investment advisers, Journal of Investment Compliance,
Vol. 7, No. 4, p.23-27United Arab Emirates Yearbook 2007. (2007). Economic Development. Retrieved fromwww.uaeinteract.com/uaeint_misc/pdf_2007/English_2007/eyb5.pdf
United Arab Emirates Year Book 2007. (2007). Infrastructure . Retrieved fromwww.uaeinteract.com/uaeint_misc/pdf_2007/English_2007/eyb6.pdf .
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V. Clulow, J. Gerstman and C. Barry (2003), The resource-based view and sustainablecompetitive advantage: the case of a financial services firm, Journal of European IndustrialTraining , Vol.27, No.5, p. 220-232
www.ipe.com (15 September 2008). Lehman Brothers bankruptcy sparks Monday meltdown,retrieved fromhttp://www.ipe.com/news/Lehman_Brothers_bankruptcy_sparks_Monday_meltdown_29122.php
www.zawya.com . UAE's real GDP growth seen to slow down in 2008, retrieved fromhttp://www.zawya.com/story.cfm/sidZAWYA20080129034935
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