Following our special report on Iran before Eid, we follow up on the impact of the Iran agreement with the P5+1 on providers of export finance to the companies that will resume trading with the Islamic Republic and a look at growth in real estate investment by Iranians in the UAE (and Dubai specifically which could absorb some of the excess capacity slated to come online during 2016.
In other news, the Saudi Arabian government’s shift to using SAR-denominated bonds—it is not clear whether they are bonds or sukuk—could help to deepen the local capital markets which have seen local currency sukuk issuance drop this year compared with last year. Saudi Arabia’s Ministry of Finance guaranteed two SR15 billion ($4 billion) sukuk issued by the General Authority on Civil Aviation (GACA) in 2012 and 2013.
Global trade with Iran could net the banks offering export finance $100M annually in new trade finance revenue through 2018
The agreement between Iran and the P5+1 negotiators means that many sanctions that limited trade with Iran will be removed. One area where there remains a question is about how much involvement international banks will have with Iran. Many are wary since the US Congress is unlikely to entirely remove nuclear-related sanctions although the US government will no longer enforce them. The wariness is rational considering the sizeable fines levied by the US Justice Department’s ($9 billion on BNP Paribas), the US pressure on Noor Bank to stop clearing transactions from Iran’s oil exports in 2011 and brief sanctions against Iraqi-based Elaf Islamic Bank for doing business with an Iranian government-owned bank.
However, with sanctions being lifted, companies in countries that have traditionally been exporters to Iran will look to get into Iran and will be interested in trade financing which will eventually draw banks into the business provided the sanctions removal process is continuing. Of all the areas of traditional bank financing related to Iran, import finance is likely to be the first to be restored because while the credit exposure includes exposure to Iranian importers, the direct credit exposure is to companies outside of Iran. Furthermore, since funds are being provided to non-Iranian companies, there is more limited exposure for banks to fall afoul of the remaining sanctions against direct business with some Iranian companies.
An estimate for potential imports takes assumes growth over the 2014 actual import levels sufficient to return to projected 2018 import level if sanctions had not been imposed. This forecast is compared to the growth from 2014 levels at the average forecast rate for global merchandise trade with constant growth in 2016-2018 at 4.5% annually, the midpoint of WTO projections for global and developing countries’ import growth.
This estimate by Finance Forward puts the cumulative additional imports at a total of approximately $42 billion between 2015 and 2018. If the cost of trade credit amounts to 1% of the shipment value, that represents on average $105 million per year in new revenue to the banks providing credit (and perhaps more if fees charged are higher to reflect the country’s higher risk). Using ITC TradeMap data on Iran imports by source country in 2010 (data from before the lifted sanctions were implemented), the opportunities would be greatest in the UAE (29% of Iran’s imports), China (10%), South Korea (7%), Germany (8%) and Turkey (4%).
New Iranian real estate investors could absorb some of Dubai’s residential overcapacity
The nuclear deal between Iran and the world powers will not only boost and revive the Iranian economic landscape but would be a boon for business and investments in some GCC countries, but particularly the UAE. Dubai is expected to act as a base for foreign companies wishing to setup and run businesses to serve or enter the Iranian market. These investors will boost the UAE’s commercial real estate markets as they work to tap a new market of 80 million and a relatively diverse economy for the region. In addition to the investors interested in Iran, the economic reconnection of Iran with the outside world is expected to draw a lot of Iranian investors back into the UAE property market.
Prior to the imposed sanctions, Iranians were amongst the top investors in the UAE’s real estate market. A survey conducted in 2012 by the Reidin, a real estate information company focusing on emerging markets, found that nearly 62% of the Iranian investors’ preferred choice of foreign investment is the UAE. This news fares well for the residential property market in Dubai since the investors preferred real estate in Dubai and most commonly invested in residential real estate.
Dubai’s residential market has slowed down in the past 12 months and prices are expected to remain flat-to-down as a result of oversupply after a large number of residential projects come online in 2016. Traditionally, Dubai’s property market has significantly benefited from the presence of a large Iranian community (an estimated 600,000 Iranian residents live in the UAE) and last year, despite the sanctions, Iranians invested AED 4.5 billion (according to Dubai Land department’s figures) in Dubai’s property market.
Due to the proximity of the Emirates to Iran and healthy business ties (including the UAE representing almost one-third of imports to Iran prior to the latest round of sanctions), the removal of sanctions by 2016 will make it easier for investors in Iran to invest in residential as well as commercial office spaces. The return of the Iranian investors into the Dubai property market will fill the gap of the fleeing Russian investors and absorb some of the overcapacity that has left Dubai’s property market sentiment sluggish.