Real Estate Market

Executive Summary

The real-estate market is a relatively new orientation in the UAE economy, particularly in Dubai financial market due to the increased focus on the oil industry in the country. The purpose of the paper is to conduct the financial evaluation of Gulf General Investment CO, define what shifts should be presented or have already been proposed to redirect the business and focus on new potential markets at both local and international levels. Being one of the major retailing and property companies, GGICO represents its financial sheets and transparent reporting along with the partnership evaluation to prove that the current position of the company has improved since the 2008 financial crisis. The findings suggest that the emphasis on the real-estate market and hospitality industry is a reasonable strategy to be introduced.

Intended Audience

The intended audience includes investors who can be attracted by new projects promoted by the company. The UAE government can also be interested in the new possibilities which GGICO provides.

Introduction

Gulf General Investments Co (GGICO) was established in 1973 as a public shareholding organization for the purpose of supporting the development of the local real estate through rentals and sales. In 2001, the company moved its main office to Dubai. Abdalla Juma Al Sari and Moawiyah S. Al Shunnar were the founders of the company, who worked on the promotion of GGICO, making it the leading enterprise. The companys journey to success is accomplished through the expansion strategy, with numerous subsidiaries that were established in the UAE and all over the world. The group is also engaged in a variety of business operations and major growth sectors with significant projects, hospitality, industrial and retail sectors. Finally, GGICO has established its mark on the corporate landscape by emphasizing its credentials, diversification strategy, and dynamic structure with the leadership competencies and capabilities to meet the requirements of the constantly growing UAE economy along with international markets.

Rationale for the Assignment

The purpose of this report is to explore the financial performance of the company as well as highlight the challenges, problems, and gaps which could be filled. As a result, some recommendations on how to improve the companys performance will be provided. The company reported the revenue of AED 115 million in the 2014 fiscal year as compared to the revenue of AED 110 million in the previous year. The company uses contemporary methods of bank payment, with the possibility of partial pre-payments for one year.

Null Hypothesis

To explore the financial performance of the company, the following hypotheses will be tested:

• H1: AED experienced a significant growth in revenues due to project development and the sales launched, which also take place in subsequent years.
• H2: The assessment of the companys performance and net profit increase is possible through the in-depth evaluation of annual reports and financial information. Investments, differentiation strategy, and mission could also be evaluated to correlate the analysis and draw reasonable conclusions.

Challenges

Currently, the company focuses on insurance, retail, hospitality, real estate development and manufacturing, which can guarantee growth, strong performance, and solid sustainability. However, competition and lack of flexibility can become a significant challenge for the company. Before reaching a steady growth and making a strong emphasis on the launched sales, the company experienced serious problems related to refinancing risks as well as GGICOs failure to pay off its long-dated debts. Additionally, there were also concerns about the negative company performance in terms of investments holdings along with the trends in Dubais real estate market. The essence of the problem lied in the lack of a contingency funding plan, except for the rollovers on which the company relied. However, these problems still exist, and the company is striving to solve them by means of backward integration, investment in hospitality, maintaining growth through expansion and geographic integration, and acquiring small but promising businesses.

Literature Review

Terminology

1. Rollovers involve a process of reinvesting funds which derive from a mature security into a new issue. This activity also allows making money for specific purposes, such as receiving immediate income.
2. Long-dated Debt is composed of financial obligations and loans for over one year term. It also includes any leasing obligations and financing that should come in compliance within one year period.
3. Real Estate Market is the property comprising natural resources, constructions and housing in general that can be sold, bought or rented.

Research Articles

Before analyzing GGICOs financial status and credit capability, it is essential to explore the Dubai Financial Market and real estate issues. In the studies by Moustafa, the emphasis has been placed on the corporatization of the Dubai Financial Market and analysis of three types of data on stock prices behaviour. The first one is composed of 13 stocks daily prices presented in the DFM for the last two years prior to its corporatization. The second set includes the prices of similar 13 stocks presented in the DFM after its corporatization. The final set of information is composed of prices of 31 stock presented in Abu Dhabi Security Exchange for the identified period right after the DFM corporatization. The results of the study revealed a connection between the performance of DFM and its corporatization, which can have relation to the financial market.

Due to an increased orientation of the government to the oil industry, real estate and tourism sectors were underexplored, but they have recently become of incredibly importance for the country economic prosperity. The influence of the tourism industry on the UAEs performance has been promoted to deal with the global financial markets that affected the development of the Dubai Financial Market. According to the author, the integrated model of real estate markets shows the international market setting prices for real estate investments matched with the international asset pricing model. Therefore, such a position provides the risk of global market price integration into the UAE economy, which can have a direct influence on the local real estate market. The task of the UAE policy makers is to trace these shifts and prevent the challenges. The rationale for paying attention to the real estate market in the UAE is justified because it is currently experiencing a significant rise due to increased space. Dubais real estate markets have demonstrated evident signs of growth starting from 2012, when the sector witnessed a gradual recovery and performance rise.

As it has been presented in the beginning, the rating downgrades focus on ASNICs higher financial position because of its connection with the main shareholders creates a vulnerable credit profile of Gulf General Investment Co. In fact, the company is still highly indebted, with the ratio of debt-to-capital amounting to 68 % in the end of 2015. The companys purpose to serve its debt has decreased significantly because the earnings have been influenced by the critical conditions in Dubais real estate market.

In the studies by Al-Malkawi and Pillai, attention is paid to the performance analysis of construction and real estate companies in the UAE during the global financial crisis. Such an evaluation can enhance understanding of the current state of affairs in the real estate market as well as reveal possible ways can improve GGICOs strategies. Specifically, it has been found that the business cycle has a negative influence on the performance of the real estate market in the UAE. There is also a significant downgrade in profitability, liquidity, activity, and leverage percentages after the financial crisis. The authors recommend that the companies ensure transparent reporting in terms of credit capability and real estate management. The integration of regulatory policies in the sector can prevent a crisis in real-estate companies.

Buckey and Hanieh have also provided a brief overview of the property situation in Dubai and the Gulf. Specifically, the article explores the importance of liberalized real-estate ventures in providing financial sector development in the Gulf. Since the beginning of the 2000s, oil revenues have significantly shaped the countrys budget. However, the rapid growth of the real estate market has provided a new stance of economic and financial development. With specific attention to the diversification strategy, the government focuses on the regulation of real-estate markets to highlight the influence of these regulations on the Gulf financial situation. By means of examination of the influence of real-estate market and project development on equities, banking credit, and Islamic financial markets, the authors have reconsidered the current urbanization in the sector, namely in the process of re-engineering, along with the emergence of capital groups whose concentration activities are associated both with the financial sector and the real-estate market.

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Summary

As it can be seen, Gulf General Investment CO has selected the right path and preferred investing in the real-estate market to generate profit immediately as well as ensure long-term accumulation of revenues for rental services. A steady growth is also ensured by the real-estate market as well as through active expansion into the international market. In fact, the companys future growth is supported not only by real-estate and renting services but also by investment in the hospitality industry, which is another promising source of revenue for the Gulf economy.

Justification for Methodology

Data Collection

As it has been stated, information collection and processing is performed predominantly through the qualitative method, implying the analysis of research articles on the theories, strategic frameworks and overall situation in the market. The quantitative analysis will involve evaluation of statistical information presented in the financial statement and introducing figures and percentage shifts in the report to understand the progress and challenges in numerical terms. The synergy of both parts could expand the understanding of the current financial situation in the company as well as fill in the gaps through the delivery of recommendations. The research articles will provide an empirical analysis of the situation at both international and the Gulf Financial Market to trace differences and similarities. The financial information is presented in the sheet for the 2013-2014 fiscal years.

Data Analysis

The data analysis will refer specifically to the sectors involved in GGICOs operations and investments, such as the hospitality industry and real-estate market. It also highlights other financial and marketing activities, such as the major business acquisitions, shifts in revenue and profits as well as overall financial and risk assessment and measurement. As soon as all dimensions are analyzed, it will be possible to define the gaps and provide the corresponding recommendations. Data analysis will also involve the evaluation of GGICOs mission and vision, its recent operations, declines in revenues, and underpinnings for the highlighted risks. The evaluation of costs on raw materials, equipment, and housing must also be introduced to understand how it could promote new assumptions regarding the value of the results.

Findings, Suggestions and Recommendations

While evaluating the financial statement, the emphasis should be placed on credit risks faced by the company. Specifically, the amount of financial assets introduced the maximum credit exposure, which equalled 89,619 from related parties, which is much lower than it was in 2014 (189,626). Re-insurance contract assets have increased from 185,626 to 226,787. In general, the receivables and cash percentage witnessed growth.

Further, the company continues to invest funds with the related parties at FVTPL and investments evaluated at FVOCI, including the investment made by AED. The previous year witnessed entrance of the company in the agreement with the third party for selling all holdings and controlling oversees investments. Importantly, the management process of properties sales is carried out by the companys directors in the view that expenses incurred until the highlighted date are fully recovered and the projects should be re-performed to restart the construction of other project. Hence, the managements assessment of the new profit of the project properties is made on the premise of fair evaluation.

External Information Analysis: Industry Changes and Competition

As it can be seen, GGICO is under the threat of external processes because the international real-estate market is underexplored, particularly in terms of its influence on the Gulf market. The company, therefore, should strike the balance between the internal processes related to fundraising, real-estate operations, rental functions, and stock prices establishment with correlation to the international standards of handling this sector. The task of the companys manager is to keep pace of these shifts and understand how it can affect the UAEs economy, price rates, and future shifts in the real-estate market, foreign investments, and overall assessment of business operations. Apparently, the evaluation of the worlds competitors in the sphere, particularly their strategic frameworks, mission, prices, and orientation must be conducted. Therefore, the differentiation strategy is among the best ones which could be employed in the companys network.

As an example of the right strategy, GGICO has established a partnership with the Italian property company Orion Holdings to create a joint venture in the UAE. The project is composed of 2 towers with 200 apartments, which should have been completed in 2015. Such cooperation is a step forward in the development of international relationships. Furthermore, it is a good strategy for attracting foreign investment to the development of the Gulf economy, particularly Dubai financial market. Hence, GGICO Properties is a subsidiary guided by the company to extend international cooperation and approach international standards. It can also help the company to sustain a competitive advantage and cope with the problem of debts.

In fact, the company has chosen the right strategy in the light of previous complications, challenges and negative credit history because of the financial crisis. GGICO has learnt the lessons of the past and started reconsidering the role of international investments in the countrys economic and financial development. In such a way, it will also be essential to become more resistant to the internal borrowings and risks in real-estate markets because more and more investors from the West are striving to cooperate with the UAE in an attempt to expand their influence. The focus on the hospitality industry and real-estate sector can distract attention to the oil industry, which is regarded to be the main source of profits.

Conclusion

In conclusion, it should be stressed that GGICO has definite advantages because of the possibility to open new routes in the real-estate sector and hospitality industry development. It is also distinguished by the balance the company strikes between internal and external activities, accepting investments from foreign businesses that are ready to invest in the construction of hotels, restaurants and other buildings which could bring in profits to the UAE economy. Previously, the companys narrow orientation has led to an evident decline in the credit history and funding because of the worlds financial crisis. However, the timely development of new strategies and frameworks allowed the company to re-develop its previous policy and establish multiple partnerships with Western investors as well as introduce new projects which do not relate the oil industry, being the major source of revenue in the Gulf region. Hence, the financial sheet analysis has proved that the company is on the way to success, offering new opportunities and developing new methods of fighting against credit vulnerability.

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