Investors Focus on ESG and Diversity – UAE Investment Insights admin 08.09.2022

Investors Focus on ESG and Diversity – UAE Investment Insights

Dubai has always capitalized on its diversity, contrasts, and geographical position. The Emirate has undergone a remarkable transformation over the years and is now considered an international corporate hub as well as a cosmopolitan, retail, and leisure destination. Foreign investors are drawn to Dubai because of its outstanding connections to important global commercial hubs in America and Europe as well as its good access to important markets in Asia, Africa, and the Middle East.

With its lucrative tax-free structures and zero restrictions on the repatriation of profits, Dubai has always had a proven track record for securing foreign direct investment. According to Dubai FDI, more than 70% of Fortune 500 companies and new economy entrepreneurs alike view the emirate as their top choice and preferred global FDI destination.

As the world emerges from the lockdowns of the pandemic, Dubai’s economy started 2022 on a strong note, posting an annual gross domestic product growth of 5.9%, according to preliminary data by the Dubai Statistics Centre. With key initiatives aimed at boosting the private sector and encouraging foreign investment, the UAE seems set for a period of strong economic growth.

Growth in MENA Regions

According to an edition of the EY Global Capital Confidence Barometer (CCB), 81% of business executives surveyed in the MENA region expect the Middle East to be a preferred investment destination, which will likely generate the most growth and opportunities for their companies in the next three years.

Even though the COVID-19 pandemic had hit the region hard, with 90% of companies in the MENA region experiencing a decline in revenue during the global crisis, most companies have expressed satisfaction with their performance during the pandemic times. In addition to this, 71% of surveyed respondents in the region had expected to see revenues return to pre-pandemic levels by 2022 or earlier, while 69% expected a return to normalized profitability within this duration as well.

The global health crisis has also pushed almost all (98%) of the executives to carry out a comprehensive review of their strategy and portfolio, with many now shifting their focus towards investing in customer-centric digital and technology capabilities.

To accelerate growth after a period of economic lockdown, mergers and acquisitions (M&A) are being viewed as a favorable strategic option, with 37% of companies in the MENA region planning to actively acquire in the coming times.

Focus on Digital Transformation

According to the CCB survey, 87% of MENA companies are undergoing significant business and technological transitions in order to remain competitive and spur development. The implementation of technology as a result of COVID-19’s impact on workplace protocols has increased productivity among MENA corporations, heralding the start of a sweeping digital transformation across various industries.

The respondents from the MENA region have identified increased digitization of customer journeys and corporate operations as their most crucial strategic action for growth. Additionally, they are searching for technology and automation that can lower labor costs and boost scalability to support higher profit margins, as well as digital solutions that can help them increase consumer engagement.

To aid this digital transformation, 76% of MENA companies intend to increase investments in technology and the digital sector, while 64% will focus on innovation.

Attracting Foreign Direct Investment (FDI)

To stimulate economic activity, governments in the region are implementing more FDI-friendly regulations, both on a corporate level (e.g. foreign ownership of assets, easing of capital market norms, and making it easier to invest in local capital markets) and a citizen level (e.g. elongation of visa periods, citizenship, as well as other incentives). Governments are simultaneously working to increase liquidity in the capital markets through secondary markets for medium-cap enterprises and mandatory listings for specific types of organizations.

Growth Strategy Focused on Bolt-on Acquisitions and Domestic Assets

According to the CCB report, 84% of MENA respondents have stated that they intend to invest in bolt-on acquisitions. These smaller acquisitions in the same sector will increase market share. Additionally, 55% of the respondents who are planning to acquire are looking for assets locally rather than internationally. The report also suggests that 94% of executives are expecting greater competition for assets, with much of it expected from private capital in the MENA region.

The leading five investment countries in the MENA region, which includes both domestic and cross-border M&A activities, are the Kingdom of Saudi Arabia, the United Arab Emirates, Kuwait, Oman, and Egypt.

Core Sectors of Investment

UAE has been on the lookout for a while now for potential industries in terms of investing in order to diversify its economy since petroleum is the primary revenue generator. Almost 85% of UAE’s economy runs on income from oil exports. With various incentives being offered to foreign investors by the government, various sectors have seen remarkable growth in the past few years. These include:

Construction and Infrastructure

Dubai has made significant investments in its construction and infrastructure sector in the last few years to enhance development and attract global businesses. According to experts, the construction industry in the UAE is expected to make a strong recovery, with the value rising between 3.7 and 4.7% during the next five years. The country’s development program, which focuses on growing the infrastructure for industry, transportation, and energy, will be the main driver of growth. The UAE government has announced its plan to implement several projects as part of the Projects of the 50 initiative, with the goal of attracting $149.8 billion in foreign direct investment (FDI) over the following nine years and advancing the UAE’s economic development.

The government also wants to focus on decarbonization, renewable and nuclear energy generation, and resolving ongoing water scarcity. This focus of the government is leading to many investment opportunities for construction and engineering companies. Some of the recent major projects announced include the Abu Dhabi National Oil Company’s (ADNOC) Al-Nouf seawater treatment plant, Dubai Municipality’s plan to build a strategic sewerage tunnel, and other construction projects like the redevelopment of Mina Rashid in Dubai, and the Dubai International Financial Centre Expansion 2.0.

Real Estate

According to a report by the International Trade Association, the UAE’s real estate market saw an escalation in prices in the first quarter of 2022. This has been linked to the government’s easing of COVID restrictions on travel, tourism, and other economic activities, the significantly positive impact of the Expo Dubai World’s Fair on the real estate and tourism sectors, and the return of international travel to normal levels. The real estate market in Dubai has seen price growth of up to 56% in some areas during the past 12 months, which has stoked interest in new developments and construction. Within the past few months, new construction projects have been introduced by Dubai’s top real estate developers, all of which apparently sold out immediately. The months of March, April, and May 2022 saw the highest levels of real estate transactions for those months in more than a decade.

With Western restrictions in place due to the ongoing Ukraine crisis, Russians were among the top five buyers. Other countries include India, the UK, Italy, and France, followed by Canada, the UAE, Pakistan, Egypt, Lebanon, and China.  The recent 10-year residency program, Golden Visa, is also being seen as a major reason for the strong interest among foreign investors in buying property in Dubai.

Environmental, Social, and Governance (ESG) Investment

According to a study by PwC and strategic consultancy subsidiary Strategy&, 60% of companies across the Middle East now have an ESG strategy in place. 16% said they had no formal strategy, while 37% had an informal strategy in place. The ESG principles are at the core of UAE and Dubai’s investment strategy for its funds.

The Abu Dhabi Securities Exchange (ADX) reaffirmed its commitment to promoting sustainability in the financial markets by joining the project, The Sustainable Stock Exchanges initiative, coordinated by the United Nations (SSE). The ADX has also established ESG disclosure guidance to assist listed firms and issuers with their sustainability reporting in acknowledgment of the breadth and depth of sustainability and in alignment with the UAE’s national Strategy 2021 and Abu Dhabi’s economic vision. Dubai Investment Fund (DIF) will also be keeping an eye on both local and international ESG markets to identify lucrative investment possibilities and stay abreast of this new development.

Emerging Technologies

Private sector investments are looking at fresh approaches to diversify the UAE’s economy in line with the government’s objective of a “Beyond Oil” economy. After COVID, technology continues to be a popular focus for new investments in this sector in Dubai. Through 100% foreign ownership, no corporate tax, simple exit strategies for businesses, robust commercial laws, and alternative funding sources, the government is actively encouraging private investments in technology. With 30 free trade zones, the emirate offers plenty of incentives to foreign investment funds and tech businesses.

Healthcare

According to Deloitte, healthcare represented a small proportion of the UAE’s GDP in 2013 at 3.5%, but this has now grown exponentially. In a recent survey on the healthcare industry, PwC noted that new investors and market entrants are well-positioned to foster market growth by creating new products, services, and channels, particularly across the digital landscape. The UAE government’s intention to turn the nation into a center for medical tourism is clear from its expansive strategic plans, dedication to high standards, and significant expenditures.

Increase in Startup Investment

To strengthen the city’s position as a global center for financial technology, innovation, and venture capital, the Dubai government announced the creation of a $100.7 million fund to expedite growth financing for businesses. The fund, which came into effect in June, will give funding for small to medium startup projects, supporting their development in Dubai and assisting them in progressively expanding to other markets.

The fund is expected to provide about AED 3 billion to the emirate’s GDP throughout the implementation phase, which will run for eight years and is extendable for two more. It is managed and supervised by the Dubai International Financial Centre (DIFC), which is also a 15% contributor to the fund. Additionally, it will generate over 8,000 jobs for up-and-coming talent.

The fund will bolster Dubai’s booming startup scene, which already benefits from its alluring tax structure and economic free zones. As Dubai continues to draw cutting-edge businesses from across the world who are utilizing the emirate’s competitive advantages, digital economy sectors like edu-tech, health-tech, fintech, and artificial intelligence continue to flourish.

Investments in Alternative Asset Classes

In the Middle East, including the UAE, private investors and sovereign wealth funds (SWFs) are increasingly focusing on local and regional markets, boosting private capital deals and capital pouring into alternative asset classes. According to a report by alternative assets industry data and analytics specialist Preqin, there is renewed investor appetite.

The growth in investments in alternative assets has been driven by the two largest economies in the area, Saudi Arabia and the UAE. When it comes to luring new fund managers, the UAE has trounced regional rivals, as it presently hosts 46% of all investment managers in the region, with Saudi Arabia coming in second place with 24%. Additionally, with 40% of investors based there, the UAE is home to more investors than any other country in the area.

Alternative asset classes that are outside the public markets’ realm include private equity, private credit, venture capital, hedge funds, commodities, property, and infrastructure.

ESG and Diversification

UAE has made significant efforts in recent years to advance sustainability in the nation in accordance with the UAE Green Agenda 2015–2030, the Paris Agreement, and the UN Sustainable Development Goals (“SDGs”), as well as the UAE Vision 2021 and Dubai 2040 Urban Master Plan. The UAE government has been a regional leader in climate action over the past 10 years. The UAE government views climate change as a major problem and has expanded its efforts through global engagement and domestic policies.

The ESG agenda must be driven by finance leaders, who must also concentrate on changing the finance department through technology, data, and analytics, according to the EY MENA Financial Accounting Advisory Services CFO survey study. According to the report, investors, regulators, and other stakeholders are demanding enterprises to have a strong ESG strategy that generates value and manages risks, as well as to convey it through dependable and trusted reporting, as the relationship between ESG and enterprise value becomes more established.

Additionally, in terms of diversification, the UAE is pursuing several steps to entice greater FDI into the country. It has presented a new industrial strategy this year in order to increase the industrial sector’s contribution from Dh133 billion to Dh300 billion ($81.68 billion) over the course of the next ten years.

“As the UAE strives to push forward its economic diversification agenda, we are encouraging investments in scientific research, logistics, health care, food security, manufacturing, and advanced technologies, and renewable energy, among many other areas,” Dr Thani Al Zeyoudi, UAE’s Minister of State for Foreign Trade, told the World Investment Forum last year.

He also stated, “Additionally, we are focused on driving innovation and empowering small businesses and start-ups by improving access to finance and encouraging public-private collaboration.”

The UAE, and Dubai in particular, looks all set to boost global investments in the region, offering a wide variety of opportunities and incentives to global businesses. It is no wonder that experts are viewing the city as the economic and trade hub of the world in the coming years.

Write a comment
Your email address will not be published. Required fields are marked *