Baothman: Diversification vital for faster growth

The emergence of Saudi mortgage law is expected to see a big improvement in the sukuk market because banks and deposits cannot finance the mortgage market, according to Hani O. Baothman, managing director and CEO of Sidra Capital. "There has to be a sukuk market. I have never seen a mortgage market in the world that doesn't operate with secondary bonds or sukuk market," Baothman told Khalil Hanware of Arab News in an exclusive interview. He said the current crisis in Europe is stopping Saudi investors from sending money to Europe, and Saudi Arabia is becoming one of their options for investing money inside the Kingdom.

Following are the excerpts:

What kind of services Sidra Capital provides in the Kingdom?
A. Sidra Capital is a CMA (Capital Market Authority) regulated company, which has been granted five licenses. We do all activities, from advisory and arranging to writing and managing, except dealing as an agent. In short, we don't manage securities for third parties. We are not into brokerage services, because we knew very well that it's a very competitive business and banks have an advantage over any starter.

What is Sidra Capital's future strategy in the Kingdom?
Sidra Capital is an investment company, which focuses on the so-called alternative assets - real estate and private equity. We are very much active in Saudi Arabia in developing real estate funds in addition to helping a lot of medium-size companies obtain expansion capital from investors. We're also helping investors find opportunities in buying medium-size companies in Saudi Arabia.

Sidra Capital plans to set up a housing mortgage firm with a capital of SR 1 billion to tap growth expected after the mortgage law comes into operation in the Kingdom. What is the progress of this new firm? How will this firm compete with well-established banks in the Kingdom?
Actually we started the process of setting up a SR 1 billion mortgage finance company. What stopped the process is the absence of regulations and keeping the mortgage finance rates at their lowest in Saudi Arabia. Now that the Cabinet has issued its approval for such laws we are just waiting for the final package to come out of SAMA (Saudi Arabian Monetary Agency), which we were told are going to take 90 days. Once we get that, we will reengage our shareholders and ask all of them to participate.

What will be the impact of the mortgage law approval on the Kingdom's real estate market?
My views are contrary to the general feeling that the mortgage law will inflate real estate prices. In Saudi Arabia, we will have a benchmark to value real estate properties. For example, if you want to buy a piece of land, you are asked to pay a 20 percent premium over the original price because you don't have any benchmark to know whether this price is acceptable or not. It is simply a question of supply and demand. Now with the mortgage law, a lot of developers will have to work to develop real estate units. With the mortgage law and with the establishment of the mortgage companies, we are well aware that mortgage cannot be extended to any one with an open ticket. There are segmentations in the market and certain household incomes that need to be addressed. On an average, I think, the mortgage companies will extend loans to families in the range of SR 800,000 to SR 1.2 million. Now a developer cannot invest in any unit which is way above this bracket. In turn that goes back to the price of the land so the developer will be looking for a land that satisfies the mortgage criteria, which is the price of the building. So what will happen is a lot of big lands in Jeddah will be abandoned for sometime because developers cannot produce the right product out of these lands with the current prices and so they will have to go outside Jeddah. Even lands outside Jeddah will have to be corrected for developers to take advantage of. So, as I said, my opinion is contrary to what a lot of people are saying that it may push the prices up in the beginning but once people start working, a lot of development companies will find it a big problem to deal with lands that are highly priced.

What is the future investment strategy of Sidra Capital?
Sidra Capital will remain specialized in alternative assets. We are growing our operations in Saudi Arabia. In addition we will be providing Saudi investors with some unique overseas investments. It is not a big part of our work, but it is supplementary. Investors do like to diversify their investment portfolio. That's why we established SURF (Saudi UK Real Estate Fund) and we are establishing Swiss Trade Finance Fund.

What are SURF and Sidra-Ancile funds?
(a) The SURF fund is a Shariah-compliant income-generating real estate investment fund focusing on core investment assets in the UK because UK is the most mature, transparent, well-regulated and liquid market in the world. The fund's sponsors are Sidra Capital and Gatehouse Bank plc. They are responsible for originating, arranging finance, placing funds and directly investing in real estate investments in the fund.
(b) The Sidra-Ancile fund invests in commodity and trade-based transactions by granting Shariah-compliant structured and secured funding to producers, consumers and other participants in the value chain. The fund diversifies across transactions of tradable commodities which have a liquid market such as agricultural, soft, metals and energies. The fund focuses on most commodities' origination and consumption markets: Africa, South America, Eastern Europe, and the Middle East and the rest of Asia.

The Saudi stock market did not perform well in 2011. The Tadawul All-Share Index (TASI) fell 3.07 percent. The Saudi stock market is up over 11 percent so far this year. What prospects you expect for the market in the rest of 2012?
The Saudi stock market is faced with a very interesting problem, in the sense that the index doesn't very much represent the actual performance of the whole liquidity in the market. If you find out where is this SR 5 billion or SR 16 billion of daily turnover goes, I believe it actually goes to speculative stocks. These speculative stocks have a minimal impact on the index. Some of these speculative stocks have actually tripled or quadrupled in the year. The big blue chips attract little or very low percentage of the liquidity in the market. If it had been price-based, you would have seen completely a different performance but because it is market-cap based, so you see this big variation of what is happening to the liquidity. If the geopolitical conditions around us remain as they are, the market might take a good rally approach. Because of the misrepresentation of the index to the market, a few investors just concentrate on the banking sector so that the stock market could go up.

The sukuk market continues to grow globally due to an increasing interest in the Islamic modes of financing. What prospects do you see for sukuk in Saudi Arabia?
Sukuk has historically been issued by very big companies and banks in Saudi Arabia, mainly SABIC (Saudi Basic Industries Corp.) and SEC (Saudi Electricity Co.). Sukuk were marketed in Saudi Arabia in very bad times with very low rates yet they managed to attract huge demand from Saudi depositors. The reason is in Saudi Arabia the supply of sukuk is very limited. With the emergence of mortgage law, we will see a big improvement in the sukuk market because banks and deposits cannot finance the mortgage market. There has to be a sukuk market. I have never seen a mortgage market in the world that doesn't operate with secondary bonds or sukuk.

The IPO market is also not doing well in Saudi Arabia and elsewhere in the region. Do you expect the IPO market will pick up in the near future?
The IPO market in Saudi Arabia should have been more active. In my opinion the main problem with the IPO market comes from an emotional business press. The reason is that recently the market saw the listing of a lot of family businesses. For some reason or the other, I don't know why the Saudi press entertains writers who would like to please readers by attacking CMA on the valuation mechanism. They keep on reverting to completely unscientific and non-business reasons. Unfortunately this has a very bad impact on our economy because our economy is almost 90 percent family-owned. If we start this culture of attacking family businesses and accusing them of stealing investors' money, we will have a very bad impact on the IPO market in the future. The IPO market should have been more and more active because actually investors get rewarded from these IPOs very well.

How do you see the Arab Spring's impact on Gulf investments?
I think it is too early to assess. Saudi investors are going to Egypt. The dust is settling down and it is a good time now to enter Egypt. Others are yet to be seen. The main turning point for Saudi investors in and outside the Kingdom is going to be Syria. If the situation continues like this, it is going to put a lot of people on hold. If the regime collapses in Syria and the country stabilizes, the whole region will stabilize and that will trigger a major investment spree. Most of Saudi corporate and individual investors' assets are cash and cash is losing its value every year. Five percent inflation and 2.5 percent zakat on average, every riyal loses 7.5 percent of its value sitting in the bank. So people are looking for investment opportunities.

SMEs are considered as the backbone of an economy. What role do you see for them in the Kingdom's economic development?
SMEs have a very big role. SMEs' growth provides Saudi Arabia with political and social stability. The rationale behind this is that neither the government nor the private sector can create jobs for half of the population. Half of our population is under 30. The only way to create jobs in our economy is by reengaging SMEs again. We have to go back to pre-oil era. We have to go back to our culture of being entrepreneurs and create jobs out of small and medium enterprises.

Gold and silver prices reached all-time highs recently. Where do you think the prices of these precious metals will reach? Is gold still holding the safe-haven status?
The best way to forecast the price of precious metals is by having a very good crystal bowl. Gold is the only investment asset that I know is 100 percent price based on emotions. Gold doesn't yield any dividends. The lot of gold being bought has no industrial use. It is just an asset that people hold on to, as they are scared of their future financially speaking. Once they are convinced things are better for them, they tend to encash the precious metal and put it to work. If you buy a company you expect a dividend, if you buy real estate you expect a rent, you buy anything you expect to get returns. This does not hold good for gold. A lot of central banks in the world stopped holding gold in comparison to what they did earlier. Many central banks have been disposing of gold. A lot of people say we hold on to gold as an insurance against future currency collapses. You know how much amount of gold we need to cover the money supply that is currently in the world. If the dollar collapses, how many tons of gold you will need to provide the same value of dollars. What you need is the current price of gold to be multiplied by 10. So it can be converted into the equivalent dollar amount and people can say we are going to use as an alternative to currency. So lots of irrational thoughts come to your mind.

The world feels the heat of euro zone debt crisis. What impact of the debt crisis do you see on the Saudi economy?
I think the impact is positive because investors have stopped investing money abroad and they are looking for serious investment opportunities in Saudi Arabia. With the exception of the UK, maybe Saudi money is not a big attraction to Europe. We went with some investors to Greece during the crisis but we haven't found any attractive deals. The current crisis in Europe is stopping Saudi investors from sending money to Europe, and Saudi Arabia is becoming one of their options for investing money inside the Kingdom.

What role does Islamic finance plays in the modern global economy?
It is growing everyday. Most of the international banks nowadays are providing Shariah-compliant products. My dream is to see Saudi Arabia foster the growth of this industry. With the emergence of King Abdullah Financial Center, I would like to see Riyadh in addition to Kuala Lumpur and London as a base for the development of Islamic finance. Saudi investors and businessmen have been contributing a lot in promoting Islamic financial products all over the world. Because of their demand, a lot of companies or banks have changed their business models and adopted Shariah-compliant policies.

What economic development you have witnessed in the Kingdom in the past one year?
The Saudi economy has developed, but it is not sustainable development because it basically depends on oil prices. We are very much dependent on the price of oil. I would like to see this development continuing by diversifying the economy.