Bob McMillen: Live from Dubai

Bob McMillen of MAC Sharaf Securities gives his thoughts on events in Dubai.

Bob McMillen was a well-known figure in Asia in the nineties and noughties, most memorably at the helm of Thai stockbroking firm Seamico Securities as it flourished after the Asian crisis.

Inter alia, renaissance-man McMIllen is also a movie producer (Satan's Playground).

In 2007 he migrated to Dubai, where his newly founded MAC Group (a Dubai-based investment bank, of which he is chairman) joined with local partners to create MAC Sharaf Securities. He has the role of vice-chairman at this firm, which is one of Dubai's top 20 stockbrokers.

To those of us who go back a long way with Bob McMillen, we know that he has been through infinitely worse than what Dubai is now experiencing. Bob is the kind of guy who could survive an apocalypse. AsianInvestor thinks readers will enjoy and learn from his straight-shooting views about likely opportunities in Dubai.

Can you summarise what has happened?
At this stage, all that has been announced is a request of creditors for a standstill until May 2010. Rothchilds has been appointed as financial advisors. It only affects part of the Dubai World Group, not DP World, the listed ports company, nor Istithmar World. Quite honestly, it is the right thing to do, probably 12 months later than it should have been done.

How big is the problem?
The official announcement says this only relates to $26 billion of debt.

Of the $88 billion in Dubai debt, $3.7 billion is due in 2009 (now deferred to May next year) and $12.3 billion next year. The bulk of the remainder does not fall due until 2011 ($18.9 billion) and 2012 and after ($53 billion). This is not a bad payment schedule.

Has full disclosure been made on debts? I do not think so. Private debt is also a problem. Personal guarantees are common and this too will need to work its way through the system.

Why did it happen?
Let's be clear, the world has been in the grip of a financial tsunami for the last 12 months. Dubai could not be immune to its effect.

Let's not let the bankers off the hook. Who did they lend to? Not to the Dubai government, but to companies (separate legal entities), which are a part of a group owned by parties related to the government. I strongly doubt that the documentation on loans had full guaranties from the owners. It is therefore also, at least in part, due to poor lending procedures.

Are local banks at risk?
The fact that the [UAE] central bank has guaranteed all bank deposits is significant in two ways. Firstly, it is another demonstration of Abu Dhabi's support for its brothers in Dubai. Secondly, it shows the strength of the resolve to ensure that Dubai and the United Arab Emirates will survive.
Is Dubai different to anywhere else?
It is not a country; it is an Emirate, a state, part of the UAE. Very few people focus on that.

Abu Dhabi, the capital of the UAE, has shown some support for Dubai. Will they show more? Who knows, there is brotherly rivalry as one would suspect, but at the end of the day, it is all one country. You have to ask yourself, "If Abu Dhabi money was used to save Barclays, why wouldn't they help Dubai?"

Dubai, in its own way, is a very open economy; to some, too open. This said, no taxes and the ability for banks, brokers, fund managers, certain manufacturers etc to own 100% of their own business in the centre of one of the world's fastest growing regions, should not be underestimated.

The growth Dubai has seen is unlikely to be repeated in the region in the near future, although Qatar and Abu Dhabi are very much construction sites too. The infrastructure in Dubai is wonderful, suitable for real companies to do real regional business.

What about Dubai property?
Without question there is a major problem here and the smaller and some of the larger developers will falter, even fall.

So what? That is business at the end of the day. The banks (including many foreign banks) have been lending in a very haphazard manner. Easy money, so everyone/family has a high rise building and a hotel. That will have to stop.

I truly believe that there is strong regional demand for Dubai property and also strong international demand. Dubai has to sort out and clarify visa issues associated with properties. Once this is done, once supply is taken up, after one or two years perhaps, we will see the prices come back.

Are property prices fairly valued?

Let's be serious, Dubai property is very cheap and there is no tax. It is possible to buy very good completed office property in the DIFC for around Dh2,000 per square foot. We know; we just did it.

We bought a property in the centre of the financial district. It is leasing for up to Dh375 per square foot per annum. It does not take a rocket scientist to work out the yield on something like that, even if the DIFC takes 20% in fees.

Residential sites in Dubai are even cheaper, good sites come in at prices up to Dh2,000 with averages at closer to Dh1,000. These are beach properties in a tax free environment. Try and get a good new property in Bangkok for Dh100,000 per square metre, you will find it hard, and Bangkok is one of the cheapest places in the developing Asia. What is the price per square metre in Hong Kong now?

Are the myths about Dubai true?
'There are thousands of cars at the airport'. If there are, I did not see them. I do see armies of lawyers, accountants, bankers and businessmen coming in.

'Dubai is a ghost town'. Not true: Zuma is full on a Thursday (read 'your Friday') night. You almost get knocked over in the rush in the new Dubai Mall...the newest in town and the largest in the world (of course!).

'Hotels are empty'. Again, not if you believe the Jumeriah Group which just announced 77% occupancy in their hotels so far this year. Sure prices have fallen, but five 5-star hotels opened just down the road in Abu Dhabi (100 miles down the road) last month.

'The schools are empty'. False, in fact there is a waiting list at my daughter's school and it only opened 18 months ago and it covers a full city block.

'People are leaving in truck loads'. That is true; workers in the building sector are leaving. But, as I said, a lot of professionals are now coming in. Last month it was announced that the population of Dubai went from 1.6 million to 1.7 million in the last 11 months.

If anywhere has suffered from the "Tall Poppy Syndrome" it is Dubai. This upstart market which bought 20% of the London Stock Exchange, 30% of Nasdaq Dubai, it even bought the QE2, so of course when it falters the naysayers will come out. And I hope this will be a sobering influence on Dubai Inc.

You paint a picture that it's already some kind of paradise. Is that what you're trying to depict?
Definitely not. There is a lot yet to be done. I only hope that this recent fall from grace will encourage the powers that be to listen more to people such as us, and I say that with humility, but let's face it, there are not many people who prospered during the 1997 collapse in Thailand.

Suggestions might include:

1. Get on common ground with Abu Dhabi as to what is going to resident visas;

2. Get on common ground with the legislators and the central bank in Abu Dhabi on getting laws up to date...from listing regulations to bankruptcy laws. Make it a consistent, modern platform for growth;

3. Use the best attribute you have: the ability to make quick decisions. Now is the time to clean the deck and take Dubai into the lead in the region. It is so close and yet it has not done it yet. Don't get me wrong, I believe that it can, especially now with the added incentive of recovering from this latest shock.

4. Upgrade the level of advice you are getting.

5. Use the stock market as a catalyst for recovery, list many of the public entities that you have available. It is one way of solving the debt/equity imbalance while giving the young markets time to grow. The stock market could also be used to raise equity for private companies if the laws are sorted out soon.

6. Be much more proactive in fully disclosing the situation. Once people believe that this has been done, we are on the road to recovery.

What is MAC Sharaf's angle in this?
Well, as you know, many of my team have been through this before in Asia. This environment does not shock us, indeed we see a lot of opportunities. We can use our skills of debt and capital restructuring, advisory services listing and capital raising advice, cross border M&A and equity research.

I also believe that there will be a lot of possible roles for us in helping Dubai companies sell assets and to raise capital, locally and internationally.

We have done all that we should do: reduce salaries and reduce headcount, with the underperformers being culled and our stakeholders kept fully informed of our status.

As I said previously, we also bought a new office at a very good price half what it would have cost us 18 months ago, so all-in-all we are happy. We did all that last year. This year we have been focusing on helping our clients handle this very new environment.

There is one simple question which should be asked: Where else in the region would you set up your HQ? Most of the big institutions -- from HSBC to IBM to Reuters -- have already answered that question - Dubai.

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