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Is education still a good business in the GCC?

Date : 10/10/2017
Author:  Marmore MENA Intelligence

The education sector is known to be an anti-recession industry making it a major draw after the recent oil crisis. The GCC education sector offers USD 90 billion in infrastructure opportunities alone, based on government budgets on building schools, colleges and universities. Over the past decade, a growing market for education in GCC has attracted large numbers of foreign institutions in addition to regional players entering the market. This trend will likely continue given the regional growth in student enrolment in educational institutions, governmental privatization initiatives and increasing government education spending. A growing inclination toward private schools providing international curriculum also opens the door for a truck load of investment opportunities in the GCC education industry. GCC’s K-12 education market stood at USD 67 Bn of which the share of private schools accounted for USD 8.1 Bn (GFH).


Challenges faced by GCC education industry

 Despite the growing government spending on education by gulf countries averaging 15.8% of government expenditure in GCC, the quality of education remain below par to global standards. It is reflected in high level of unemployment among youths with an unemployment rate as high as 27% (World Economic Forum).
While Gulf governments may be eager to prioritize the hiring of nationals particularly in the private sector, a significant gap in skillsets and cultural and structural barriers continue to hinder women’s economic inclusion. Women in the Gulf are nearly invisible from workforce in some sectors. Unemployed young women holding higher education indicate an abundance of wealth in human capital that is not being utilized to its full potential. In Saudi Arabia, as much as 80 percent of female job-seekers hold university degrees (Oxford Gulf & Arabian Peninsula Forum). In Qatar even though 60% of graduates are women, they represent less than 37% of the workforce as of 2016.
The shortage of teachers in the region is also the second highest in the world as teaching profession is of less interest to the locals who prefer to work in highly paid public sector jobs. Although region has a lower pupil-teacher ratio of 17 compared to the world average, the countries face challenges in recruiting highly qualified teachers. Growing demand for teachers at international schools in the UAE of at least 14,000 over the next five years and in Saudi Arabia of 183,600 by 2030 will pose further problems. Low availability of highly qualified teacher also result in lower level of knowledge transfer to students, which is clearly visible in poor ranking for GCC countries in skill diversity of graduate category, a component of Competitive index measurement. Effectively addressing these challenges together with tapping into the growth opportunities discussed below highlights the attractiveness of education industry in the region.

Improving the quality of education and increasing institutions offering international curriculum
 The GCC governments have been trying to enhance the quality of education through a number of measures like establishing quality assurance authorities, setting up guidelines, and encouraging technology-driven education. The government’s commitment to improve the quality of higher education and closing the skill gap between graduates and industry, could open opportunities for more private and foreign universities to come up in GCC.
However, in the past four schools including Oxford English School were closed down by SEC in Qatar as they did not meet the education standards in line with the country's drive to ensure the best learning conditions and levels for students. In addition, few foreign higher education institutions in Qatar and Saudi also had to face a setback due to recruitment challenges and government control in fees structure.
 But growing enrollments ratio and government understanding the need of quality private institutions points to much more optimism. Subsequently domestic access to high-quality education will also contain the migration of citizens and expatriates seeking education abroad to an extent. Currently, educational projects worth over USD 50Bn are in different stages of development across GCC nations, with the Saudi Arabia on top of the leaderboard. King Faisal University in Saudi Arabia is the largest project with an estimated value of USD 14.7Bn followed by The Sabah Al-Salem University in Kuwait, worth USD 3.0Bn.The popularity of international schools in the GCC region is also on a rise due to the presence of a large number of expatriates coupled with the desire of the local residents to send their children to institutions offering high-quality education. In 2015, the UAE international schools have generated a revenue of USD 2.5 Bn annually, accounting for 7% of the global tuition fees (The National).
 Growing Youth population base and number of Enrollments
 The region is experiencing growing base of youth population with people in age group less than 15 years expected to reach 13.5Mn by 2020 representing 23% of the entire population while one third of the population will be below 25 years (United Nations Population Division). The above conditions have translated into enrollment growth across the GCC’s education sector, particularly in private enrolments which grew at CAGR of 7% from 2010 to 2015. In 2015, private schools accounted for as much as 70% and 57% of primary and secondary enrolments in UAE and Qatar respectively.

Increasing M&A deals and high margins a sign of huge growth potential

The growth prospects has already attracted significant interest in the education industry investment landscape as the number of announced private equity and M&A transactions has increased to 24 transactions in the period from 2014 to 2016.
Amanat Holdings has acquired a 16 percent stake in the UAE education provider Madaares in 2016, aiming to cash in on the booming sector. Dubai based Gems Education purchased stakes in four academic institutions during 2013-2014. One of the major cross-border deal was the acquisition of National Training Institute in Oman by Babcock International Group of the UK. GEMS Education that runs 88 schools in UAE and abroad, registered a profit of USD 131.5 Mn in 2016, more than doubling the profit from previous year.

 Going forward, the rising awareness among parents regarding the importance of quality pre-primary education is going to be the key driver of growth. Saudi Arabia aims to build 1,500 nurseries by 2020 and UAE aims to increase pre-primary gross enrollment ratio to 95% under its Vision 2021. The tertiary segment is another promising segment for which enrolments are forecasted to grow at a CAGR of 5% from 2015-20 to 2.47mn in 2020, with Qatar and UAE expected to grow the fastest at a CAGR of 9% each during the period (GFH). This will subsequently convert into rise in enrollment rates for higher education thus providing huge scope for both private and public institutions.

This article is published in "Marmore Blog"


Tags:  Business, Education, GCC

 Current rating: 0 (3 ratings)

Self storage buildings are alternative real estate asset class

Date : 10/07/2017
Author:  Ahmad Hayat


Self-storage buildings are facilities in which individual enclosed units, typically ranging in size between 50 sf to 400 sf each, are rented to private and commercial users to store items for the short-term. The concept originated in 1954 in San Antonio, TX to serve military members who needed to store their belongings. By the 1970s, the self-storage concept had gained wider commercial appeal (from a number of alternative users) and became an established business, commonly known as “mini-storage”. Today, self-storage generates US$ 32.70 billion in aggregate revenues (Source: IBISWorld), and is considered an “alternative" real estate asset class.

(A)  Fundamentals for self-storage: demand and supply factors, which influence rental and occupancy rates.
Key demand drivers: Key demand drivers for the sector have been favorable in the past 5 years, which include positive population growth, strong job creation, internal migration, rising household income, and declining living space:
• Population growth: Household formation and number of residents are the main drivers for demand of self-storage space. The trend has been favorable; the US population increased from 309.3 million in 2010 to 324.9 million in 2016, an annual growth rate of 0.86%. The trend is projected to continue at a healthy rate of 0.70% over the next 5 years. 
The Metros with population growth higher than the national average are more desirable self-storage locations. The favored cities include Dallas-Ft. Worth (1.35% CAGR), Phoenix (1.38% CAGR), Houston (1.33% CAGR), Atlanta (1.34% CAGR), and Los Angeles (1.23% CAGR).

• Employment growth: After the 2008 financial crisis, the U.S. economy added 14.97 million non-farm jobs between December 2009 and December 2016. Current non-farm total employment stands at 144.7 million, exceeding the previous peak level (in January 2008) by 6.3 million.  The current unemployment rate is 4.8% (BLS).

• Internal migration: Residential migration is a major driver of demand for self-storage space during transitional periods. The top 5 states for internal residential migration within the U.S are Washington State, California, Texas, Florida, and North Carolina.

• Rising Median Household Income: Median household income has a strong correlation with need and affordability of additional space for storage.  Since the downturn in 2008 and 2009, the U.S. median household income has increased at a CAGR of 1.35% reaching US$ 56,516.  Median household income is considered an affordability metric for residents of the area surrounding the self-storage facility (please see below).

• Smaller residential units: The average apartment size in a multifamily property declined form 1,247sf in 2014, to 1,102 sf by year-end 2015. 53% self-storage users state that the primary reason behind having items stored is lack of space, this is followed by the need of temporary storage when moving, and having unwanted or unneeded items.

Supply: The key supply metric for the self-storage market is he average stock of self-storage per capita.  The national average of self-storage space per capita is 7.7 sf (Source: Self-Storage Almanac).
According to Cushman & Wakefield, new self-storage supply is at its highest level since 2006.  New developments are generally focused on population growth centers.
It is also important to note that the market for self-storage still remains fragmented.  The largest 10 players represent 20.52% of the total self-storage square footage.
Key results: The combination of strengthening demand and increasing amounts of supply (to cater to such demand) have translated into increasing rental growth as well as higher occupancy rates.
• Climate Controlled: Average U.S climate controlled rental rates increased to $ US 1.62/sf signifying a 3.6% increase in rental rates in comparison to 2015 (Marcus & Millichap).
• Non-Climate Controlled: Average U.S non-climate controlled rental rates increased to $ US 1.29/sf signifying a 4.0% increase in rental rates in comparison to 2015 (Marcus & Millichap).
• Occupancy: The average occupancy rate for publicly listed self-storage REITs has increased since 2014.  Occupancy rates increased from 89.9% in 2014 to 91.5% in 2015 (MJ Partners).

When investing in self-storage projects, we look at the following parameters:
1. Population within a 3-mile radius should generally exceed 100,000: A densely populated area provides a strong demand base for a self-storage facility.
2. Median household income within a 3-mile radius should generally exceed US$ 50,000: Reasonably high median household incomes indicate a greater affordability and need for self-storage facilities.
3. Traffic count: A high number of vehicles passing by the property on a daily basis (e.g. 20,000 +) indicates that the property is located on a key route and is visible for future users.
4. Supply situation: We try to invest in areas where the overall supply within the sub-market is below the national average supply of 7.8 sf/person within a 3-mile radius (unless otherwise justified due to above-average demand).
5. Competing properties and their occupancy: We look into competing properties to assess rental rates while adjusting for differences in quality and specifications.  We typically target sub-markets which have high occupancy rates (e.g. 90% and above)

(B)  Capital Markets: availability of capital, which influence transaction volumes, sales prices, and cap rates.
As yields on core real estate have declined, institutional investors (pension funds, REITs, etc.) have been increasing their allocation to alternative real estate, including self-storage, in order to enhance the average yield on their real estate portfolios.  The self-storage segment became a prime beneficiary of this trend: it is becoming increasingly institutional, and prime (Class A) properties are now trading currently at cap rates below 5%.  As shown in Figure 1 below, the weighted average cap rates (Class A through C) for self-storage properties in 2016 was at 6.4%; a steep decline form 9.5% in 2000.


Furthermore, the spread between multifamily and self-storage cap rates has decreased over the last 10 years as shown in the table below.  This reflects the increasing desirability of self-storage properties by institutional buyers, which has triggered higher transaction volumes and lower liquidity risk premiums for such assets.  The spread between self-storage and multifamily cap rates has declined from 240 bps in 2005 to 107 bps in 2016.



In addition, during times of economic crisis (e.g. 2008 and 2009), the spread between self-storage and multifamily cap rates decreases due to the perception of self-storage being a counter-cyclical sector.

Key self-storage investors: As mentioned above, the growing pool of self-storage buyers has increased considerably over the past 10 years.  Today, buyers for self-storage include:
• Self-Storage REITs: in 2015 the transaction volume for self-storage REITS reached $US 2.8 billion. Key players in the segment include: Public Storage, Extra Space Storage, CubeSmart, Sovran, National Storage Affiliates.  In addition, there are a large number of private REITs actively participating in this segment.
• Diversified REITs: Northstar Realty Finance Corp., W.P. Carey Inc., Investor Real Estate Trust, ACRE Reality Investors, Inc.
• Pension funds: a number of pension funds have separate allocations for self-storage acquisitions.
• Regional and high net worth families.
Due to a lack of high quality properties available for sale, a larger number of investors are seeking to undertake greater amounts of leasing risk, e.g. sales completed upon receipt of certificate of occupancy.

This article is published in “Engage Q1-2017” – click to view the publication


Tags:  Business, Real Estate, storage

 Current rating: 0 (3 ratings)

Real Estate Market and New Electricity & Water Regulations

Date : 09/03/2017
Author:  Abdulrahman Al-Sanad

Since 2014 oil prices witnessed a huge fall due to many factors including geopolitical issues. This in return made all sectors to slowdown, which had impacted the consumer purchasing power to be more cautious. Real estate was one of the main sectors affected by the oil prices fall, prices of real estate properties went down as well as the demand. Government, in return, has de-subsidized diesel and gas, which raised the cost of living. Vacancies increased, especially for investment sector, in return rents decreased due to the decrease in demand and high supply.

In 2016, the value of investment, industrial and retail properties have witnessed slight decrease after a decline of 5-7% in 2015 due to the fall in oil prices, and the value of offices has remained stable with a slight increase in rental rates and sales price through 2015 and 2016.

Recently, a new bill (20/2016) was passed to increase utilities expenses for electricity and water consumption. This new law is set to be effective in May 2017 for the commercial sector, August 2017 for the investment sector, and February 2018 for the industrial sector.

The following graphs show visualizes the set increases:

In Kuwait, the non-Kuwaitis represent 70% of the population. As per Kuwait law, non-GCC nationalities cannot purchase any property leading the expatriates to the option of renting. Therefore, the investment sector is one of the dominant sectors in Kuwait’s real estate market. The new law will negatively affect this sector leading to an escalation in cost of living, which makes Kuwait less appealing to expatiates. This will lead to higher occupancy and lower rental rates. 

Regarding the commercial and industrial sectors, these increases will have a high impact as well due to the poor economy conditions effects on the purchasing powers of consumers. This will lead to huge decrease in sales that will have negative impact on current businesses and upcoming businesses affecting all sectors including real-estate. Therefore, it is also expected that the supply will surpass the demand, which leads to high number of vacancies. 


This article is published in "Engage Q4, 2016" - click to view the publication


Tags:  Business, Oil, Real Estate

 Current rating: 0 (3 ratings)

Active vs. Passive Management

Date : 27/02/2017
Author:  Talal Al-Othman

Blog - Active vs. Passive Management

For the past few decades, one of the most debated topics in finance has been the argument of:
Which strategy is better, Active or Passive Management?

Each side can make a strong logical case to support their arguments, yet no clear winner has emerged. So, which strategy is the better? Before we can answer that question, let’s explore how each strategy is defined along with their associated benefits and risks.

Active Management refers to a manager, or team of managers, actively trying to outperform a specific benchmark through the use of  analytical research, forecasts, and judgment in making investment decisions on what securities to buy, hold and sell. The majority of Mutual Funds are categorized as actively managed products.  Advantages of active management include: Flexibility; altering
the weights of their holdings against the outperforming/underperforming areas of their respective benchmark. Research; carrying out exhaustive research to identify which areas to invest in. Defensive Measures; minimizing potential risks by applying instruments such as shorts, options and swaps.

Ironically, some of the risks of active management are derived from the benefits they offer, such as: High Fees (cost of research), Style Limitations (long-short Funds in a rally), and Stock Picking Risk (choosing non-performers).

Both strategies should be treated as tools, not rules, to be utilized on a case-by-case basis, depending on risk appetite and market conditions

Passive Management is defined as a management approach based on investing in exactly the same securities, in the same proportions, as an index such as the S&P 500. It’s termed passive because managers don’t make decisions about which securities to buy and sell. Managers apply the same methodology of portfolio construction the index uses. Index Funds and ETFs are classified as passively managed investments. As implied in its definition, the benefits of passive management include Diversification, Simplicity, and Low Fees. The drawbacks of passive management involve Total Market Risk, Non-flexibility, and Limited Returns. Today, the industry has finally come to the realization that the answer to our original question is evident when the question is asked differently; “Which strategy is better for you, at this time?“ Traditionally, Active Management tends to do well during times of volatility, while Passive Management tends to outperform in the long run.

Therefore, both strategies should be treated as tools, not rules, to be utilized on a case-by-case basis, depending on the investor’s risk appetite and current market conditions. So, when asking a simple question of: “Which strategy is better?” The answer is also simple, both.

Cumulative fund flows

This article is published in "Engage Q4, 2016" - click to view the publication


Tags:  Business, Company Analysis

 Current rating: 5 (3 ratings)

VAT in the GCC - How should companies prepare?

Date : 28/07/2016
Author:  Marmore MENA

VAT in the GCC - How should companies prepare?

The approval of the introduction of the VAT by the GCC has meant that business enterprises in the region have to prepare for the first phase of the implementation, which is expected by January 1, 2018. Finance ministers from the GCC formally agreed on June 16 (2016) to introduce tax across the bloc from 2018 (Zawya). The complete details of the process are not yet public, and it is not fully clear whether all the nations will introduce the tax on January 2018.

Preliminary details reveal that the United Arab Emirates (UAE) and Qatar will be the first states in the GCC to adopt the new tax regime in January 2018. But, all members of the GCC are anticipated to implement VAT by the close of 2018. It is notable that certain essential food items and socially-oriented sectors such as healthcare and education will be exempt from the VAT regime.

The approval of the GCC VAT means that the countries and the business enterprises operating in them will face a tight timeline of 18 months to prepare for the opening phase of VAT implementation by January 1, 2018. It is expected that the rate will be low, likely around the 5% mark (Ministry of Finance of the UAE). As a general consumption tax, VAT will apply to the majority of commercial transactions in goods and services.

When VAT goes into effect, it will mean that businesses will be responsible for diligently documenting their business revenue and costs and related VAT charges. Registered businesses and traders will apply VAT to all of their clients or customers at the prevailing rate and incur VAT on goods / services that they purchase from suppliers. There are indications that the GCC is taking the implementation of the VAT very diligently, since it will help in diversifying the income bases of the various countries. According to the UAE Ministry of Finance, rules that mandate businesses to be clear about how much VAT is being paid for each transaction will be included. This means that businesses will possess the required information to decide whether to purchase something or not.

Given the momentous development, business owners in the GCC will have to prepare at multiple levels. It should be noted that not all businesses will have to register for VAT. Businesses that meet a certain minimum annual turnover specification will have to register for VAT. This means that many small businesses will not have to register for VAT. Thus, small businesses will not have to face the rigorous documentation and reporting that a tax regime like VAT needs. Moreover, businesses will not have to register with the government if they only offer goods and services that are not subject to VAT.

Various GCC governments have not finalized and announced the specific conditions (such as minimum yearly turnover) that will aid in identifying businesses that do not have to register for VAT. For companies that will come under the VAT regime, the following responsibilities or actions will generally apply:
  • Charging VAT on taxable goods or services they sell;
  • Reclaiming, if eligible, any VAT they’ve paid on their goods or services sold;
  • Documenting and maintaining an array of business records that will allow responsible government agencies to verify the data and information with respect to the processes.
Preparing for VAT for businesses is a complex activity and should be addressed as early as possible in order to avoid last minute hassles. From the time of the official announcement of the VAT, businesses have 18 months of preparation time before the regime will come into effect. During the 18 months, businesses will have to address requirements to meet their tax obligations. To fully and successfully comply with VAT, businesses will have to make changes to their core operations (like supply chains), the financial management and book-keeping systems, the underlying technology for documenting and processing data and information, and may be even the human resource mix (e.g., bringing in more accountants and tax advisors).

Since the final responsibility and total accountability to comply with VAT is on the registered business, it is essential that enterprise financial records are accurate and fully updated. It may be prudent for businesses that are not VAT registered to maintain detailed financial records in any event, so that they can comply with the VAT regime if any change in policy suddenly brings them into the VAT bracket. Once the VAT is in place, VAT-registered business have to report the amount of VAT that they charge and the amount of VAT they pay to the government on a periodic basis.

The reporting or submissions will be a formal process; and probably, the submissions are likely to be made online (i.e., e-capable) in the case of many GCC countries. If a business is charged more VAT than they have paid, the difference will then have to be paid to the government. Conversely, if a business has paid more VAT than it has been charged, then the difference can be reclaimed. Thus, in light of the complexity and the detailed processes underpinning VAT, businesses will need to take the following steps to prepare to meet their VAT commitments (Deloitte Touche Tohmatsu Limited).
  • Studying and understanding VAT registration requirements and the process of making an application for a VAT registration number.
  • Ensuring that the pertinent books and records are maintained in the mandated manner.
  • If needed, negotiating and revising terms of business with customers for ensuring that VAT becomes a cost to purchasers; and not to suppliers.
  • Organize enterprise resource planning (ERP) systems for ensuring their operational preparedness to meet the charging and recovery processes of VAT.
  • Preparing the capability for manual VAT accounting processes, if no centralized ERP system is in place or cannot be afforded.
  • Structuring invoicing templates afresh to ensure that new fields needed for VAT accounting are included.
  • Due diligence of the entire finance and accounting function in order to maintain keener oversight of company cash-flows, particularly in relation with intercompany transactions.
  • Taking stock of whether skill sets needed in terms of tax expertise need to be brought in or contracted.
For businesses in the GCC, VAT will necessitate a range of continuous activities. Unlike the case of corporate income tax, wherein returns are filed on an annual basis, VAT mandates monthly or quarterly filing of returns and payments. Thus, GCC companies will have to prepare themselves across various areas in order to meet VAT requirements in a stress-free manner.

Tags:  Business, Economy, Reforms, Tax, VAT

 Current rating: 0 (3 ratings)

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