UAE Outperforms Emerging Markets Driven By Non-Oil Sector Growth

The UAE’s non-oil sectors are driving the economy and outperforming oil sectors, with manufacturing and hospitality at the forefront of growth, according to Arjuna Mahendran, chief investment officer of Emirates NBD.

Although traditionally the non-oil sectors that usually drive growth are real estate and construction, this year has seen them being replaced by new industries.

“The non-oil part of the GCC is growing very rapidly, as governments invest in infrastructure and consumer driven growth,” said Mahendran.

“The heavy lifting in terms of the five per cent economic growth [in the UAE] is coming from hospitality and manufacturing, which means going forward construction and real estate will lead the charge but manufacturing is a sector that you should not really discount,” he added.

Dubai’s tourism industry in particular has been booming steadily in the last few years: Hotel occupancy rates reached up to 83.6 per cent in January 2014, fuelled by the emirate’s record air passenger traffic, according to the latest MENA Hotstats survey. The average room rate (ARR) increased by 10.8 per cent to reach $402.15 during the month, in turn boosting revenue per available room (RevPar) by 9.5 per cent to $347.17.

Neighbouring Abu Dhabi has also seen an uptick in the number of tourists. Hotel revenues in the emirate rose 11 per cent to reach Dhs1,585 billion in the first quarter of 2014, according to latest figures from Abu Dhabi Tourism & Culture Authority (TCA Abu Dhabi).

Around 834,771 guests checked into the capital city’s hotels and hotel apartments in Q1 2014, up 32 per cent from the same period last year. Guest nights also rose 22 per cent year-on-year to reach almost 2.6 million during this period with occupancy averaging 79 per cent, up from eight per cent last year.

On the manufacturing side, Dubai’s strategic location makes it a pivotal hub for the sector across the region. “The UAE and Dubai in particular sits at the cross roads of three huge demographic cohorts in Africa, India, the Indian subcontinent and Central Asia, and those three regions have a deficit of manufacturing capacity so Dubai can really benefit,” said Mahendran.

This comes on the back of the overall recovery of the economy: “The UAE has had a spectacular recovery since 2012 that reflects the general recovery that we’ve seen from the 2009 downturn.”

However, it is not only the non-oil sectors in the UAE that are seeing growth, earnings growth (or annual return on investments) has also grown steadily.

“MSCI is classifying the UAE and Qatar as emerging markets, yet the stock market behaviour is not like that of emerging markets. UAE has seen a spectacular earnings growth,” said Anita Gupta, equity strategist, Emirates NBD Wealth Management.

“The GCC markets have had a spectacular performance in the last five years and DFM has risen 220 per cent over the last five years,” she added.

Mahendran attributed the dip in emerging markets to China’s slowdown, which was caused by the country’s anti-corruption drive and a reduction in infrastructure spending: “China’s slowdown has a knock on effect on emerging markets such as India, Turkey and Brazil, who usually supply China with raw materials. The decrease in demand of these materials from China has in turn affected the economies of the suppliers. This pattern will continue till July, because the economic giant has to solve the hangover of bad debts affecting the banking system.”

It will be two years until China can begin to solve its debt problem, predicts Mahendran.

UAE REAL ESTATE DULL

Although growth has been evident in the UAE’s oil and non-oil sectors, this is not the case with the real estate market in the UAE, which according to Mahendran, has become flat.

Three factors have caused the real estate market to slow down, states the CIO, including the government discouraging excess speculation in the residential side of the real estate market, banks discouraged from lending beyond a certain limit to the real estate sector, and property developers preventing the easy transfer of titles to condominiums in their projects. These factors have cooled the UAE real estate market, he added.