First, the Investment Corporation of Dubai's board (the investment arm of Dubai's government) was restructured with Mohammed Alabar (also chairman of Emaar Properties) along with two others removed.
Most volatile MENA funds over 1-yr
| Rank | Fund | Volatility |
|---|---|---|
| 1 | Makaseb Emirates Opportunities | 62.7 |
| 2 | SAIB Gulf Industrial Companies | 62.2 |
| 3 | TNI MENA Real Estate Active | 55.3 |
| 4 | Makaseb Emirates Equity | 54.0 |
| 5 | Makaseb Qatar Equity | 53.4 |
Source: Trustnet Middle East
Then, Ahmed Humaid Al Tayer, chairman of Emirates-NBD, the largest bank in the region, was appointed as chairman of Dubai’s financial district DIFC. He replaces Oman Bin Sulaiman. In addition to this, the chairman of Nasdaq Dubai resigned.
Later on in the week - just before start of the long holiday period in the region, Dubai announced it had successfully sold $5bn in bonds (through placement with National Bank of Abu Dhabi and Al Hilal Bank) from the second tranche of its $20bn program. This assuaged the nerves of investors who were wondering the fate of the Dubai-owned property company, Nakheel. However, immediately after this announcement, Dubai further announced the $5bn raised was mean't for other purposes, and not repayment of Nakheel’s bond amounting to $3.5bn.
Performance of MENA property funds over 6-mths
| Rank | Fund | 6-mth % |
|---|---|---|
| 1 | Al Dar Real Estate | -6.8 |
| 2 | Albilad Akar SAR | -0.2 |
| 3 | TNI MENA Real Estate Active | 0.0 |
| 4 | AB Invest Saraya Real Estate MENA | 0.0 |
| 5 | Markaz Real Estate | 0.6 |
| 6 | CAAM Al Qasr GCC Real Estate & Construction Equity | 1.5 |
| 7 | Samba Real Estate | 5.7 |
| 8 | NCB AlAhli Global Real Estate | 31.0 |
| 9 | Riyad Global Property | 33.2 |
Source: Trustnet Middle East
If this was not enough, Dubai further stated the appointment of a chief restructuring officer at Dubai World. More importantly, Dubai World which has $59bn in liabilities, sought a "standstill" agreement from creditors and has asked them if it can postpone its forthcoming payments until May. Whether the "standstill" counts as a default depends on whether Dubai is asking investors to defer their claims or telling them to.
Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Supreme Fiscal Committee, said in a statement: "Our intervention in Dubai World was carefully planned and reflects its specific financial position."
This "nailed the coffin" for financial markets, which had gone up significantly since March, and were looking for some kind of excuse to correct. The timing of Dubai World's announcement was key also, as it was done just after markets closed in the region for the holiday period; most regional traders were not in a position to react.
Subsequent to Dubai World’s announcement, a wave of risk aversion was prompted globally. The dismay was very apparent in the spread widening seen for regional bonds and the Credit-default swaps (CDS).
The recent issued Government of Dubai bond (with 2014 maturity) in October, dropped from 101 to 90 immediately. Nakheel’s bond saw a jaw-dropping move from 111 to 70 in a span of 24 hours. Dubai Govt 5 year CDS widened by over 250 basis points (bps) to trade at 600 bps. Even CDS for Abu Dhabi Government widened by 65 bps to trade at 170 bps.
Both the European and Asian financial markets responded to Dubai World's announcement with significant declines, but the regional markets still remain on holiday until 1 December due to Eid.
Oil prices collapsed by $74 from $78 a barrel even without US markets operating which remained shut on Thursday due to Thanksgiving. As usual, the credit-rating agencies, who act mostly ex-post (and not ex-ante), quickly downgraded all government-related debt for Dubai. Moody’s downgraded DP World senior debt to Baa2 from A3.
Dubai, which borrowed $80bn in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world's steepest property slump in the worst global recession since World War II. Home prices fell 50 per cent from their 2008 peak, according to Deutsche Bank AG.
"People are worried about the contagion effect, events like this bring back all the bad memories from the global financial crisis," said Nader Naeimi, a strategist at AMP Capital Investors, which holds $75bn in assets.
Going forward, real estate investors are sensing a fire-sale of prime properties. Istithmar, the investment arm of Dubai World, was one of the most prominent investors in "trophy" properties during the global boom. Last month, Istithmar sold two developments in London's West End for much less than it paid for them two years ago. Great Portland Estates, the London-based property developer, bought the buildings, one in Regent Street and another near Oxford Street, for just £10m (€11m).
Even if Abu Dhabi and the other Gulf states take effective action to reassure investors about the solvency of Dubai, investors may still demand significantly higher risk premiums on investments in the region. Hence there are risks for the Western banks with exposure in the region and for companies where Dubai and Middle Eastern wealth funds are major shareholders.