Business | Investment
Investment bank acting as a master developer
The success of Dubai's various free zones has not passed unnoticed in the wider region - Tunisia is the latest country to decide to create an offshore financial centre, the $3 billion Tunis Financial Harbour.
- By Robin Wigglesworth, Financial Times
- Published: 00:01 August 9, 2008
The success of Dubai's various free zones has not passed unnoticed in the wider region - Tunisia is the latest country to decide to create an offshore financial centre, the $3 billion Tunis Financial Harbour.
The company behind the deal, Gulf Finance House, has already notched up a record in infrastructure, having developed the $1.3 billion Bahrain Financial Harbour and $1.6 billion Energy City Qatar, among others.
Nominally an Islamic investment bank, GFH mostly eschews the bread and butter business of its peers, acting as a master developer. In addition to the Tunisian centre, it is developing the $10 billion GFH Mumbai Economic Development Zone in India, and large residential and commercial projects in Bahrain, Dubai, Jordan and Morocco.
Typically, the bank obtains cheap land from the government in question, and after developing a concept, it presents the project to its pool of 3,000 high net worth clients and shareholders, who finance the development.
While the projects often take 10 years to complete, GFH's clients pay a fee to the bank for sourcing and arranging the deal, and for selling parcels of the land to developers and companies. The equity risk is spread over the bank's clients and GFH generates fees as soon as the investors subscribe to the project, which is "the beauty of our business model", says Peter Panayiotou, acting chief executive of the bank.
Smart strategy
It is a strategy that has served GFH, its shareholders and clients well so far - although it stretches the definition of what a bank is. It reported $104 million net profit in the second quarter, a year on year increase of 41 per cent, and its stock is up 25 per cent this year on the Bahraini stock exchange. It is also listed in Kuwait, Dubai and unusually for an Islamic bank, London.
GFH is rated investment grade 'BBB-' by Standard & Poor's, as risks of "a limited customer franchise, low business diversification... and potential for earnings volatility" are mitigated by strong financial performance and limited credit risk.
GFH trades at a modest single digit price to earnings ratio, in part due to the risks involved in its unusual business model.
GFH's business is based on cheap, government-granted land, which can be a sizeable buffer against losses, but the bank's reliance on the investment appetite of its small client pool is a concern. "It is a risky business, there's no two ways around it, and that is reflected in the market evaluations," says Karthik Sankaran, an analyst at Merrill Lynch.
Asset management
The bank has a lucrative sideline in private equity and venture capital, and is building up an asset management division to manage its real estate funds, but GFH is dependent on its ability to execute a few large projects, says Sankaran.
Over the next 12 months, the bank is due to be reorganised into five separate companies under a holding company to be called Gulf Finance House Group. The subsidiaries will be: private equity and venture capital; asset management; economic infrastructure; development; and the bank itself - which will handle treasury and the client base.
Economic infrastructure will continue to be the main revenue driver, followed by venture capital, asset management and development, says Panayiotou. "The time has come to slice the business up into more manageable pieces," he says.
GFH might bring in outside shareholders in any of the new companies, with asset management and development the most likely candidates.
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