Successful purchase of Azerbaijan's Oil Fund
No sooner said than done. That is how you can describe the first deal of the State Oil Fund of Azerbaijan (SOFAZ) on buying property abroad.
According to a statement released by the fund on Monday, SOFAZ purchased real estate in London in the amount of 177.35 million pounds. This is an office complex in London's West End at St James, 78.
Let me say at once that this property meets the conditions under which the SOFAZ may invest in foreign assets in frames of the investment policy. As it has often been noted by the fund, the liquidity of the acquired property must be high, the price and yield - stable. The basis was set by a long-term lease, the location in downtown, excellent conditions, provision with modern equipment and other conditions.
Thus, the building constructed in 1845, was renovated in 2003 and fully aligned with the office buildings of type "A" with preservation of the historic facade. The total area of the building is 11,018 square meters. The building is leased to HSBC Bank until 2023, with an annual rental oof 9.65 million pounds at 4.5 percent annual return. Currently the building is in use by bank as the headquarters of HSBC in the UK.
2011 Forbes magazine rated HSBC Bank as the largest company in Europe (by market capitalization) and the second in the world. Emplacement of the world's largest financial conglomerate in the building acquired by SOFAZ adds competence to the purchase.
The seller was no less competent RREEF Real Estate company engaged in property investment in the sector of management of Deutsche Bank funds. Legal adviser Clifford Chance and broker Jones Lang LaSalle selected by SOFAZ also inspire confidence. According to the ratings of international law firms the British Clifford Chance has the third highest income (2340.5 million dollars), and is second in the world for number of lawyers (2837). With regard to the latter, this company is one of the market leaders in the field of management of corporate real estate and has a portfolio of 130 square meters around the world.
This purchase can also be called successful considering the fact that according to a recent study by the oldest real estate company in the world market, British Savills, property prices in London will rise by more than 25 percent in the next five years. The largest price increase (25.6 percent) will be observed in the prestigious central regions of London, such as Westminster, Kensington and Chelsea, largely thanks to interest from buyers from abroad. It is expected that the cost of renting in London will also grow by 26.4 percent in the next five years. London will be far ahead of other regions in regards to increases in property prices. In general, the cost of property in the UK will increase by about 14.7 per cent.
Thus, taking the first successful step in the purchase of real estate in Europe, the State Oil Fund will continue real estate investment in other countries. Russia and Turkey may become the next countries for investment, because of their large capital markets and developed trade and economic relations with Azerbaijan. SOFAZ has already purchased currency from these countries. The fund is also considering property investments in Paris and Rome, as well as in Singapore, Malaysia and Indonesia. The global economic crisis has significantly 'discounted' real estate in New York, making it attractive for purchase.
The main criterion for SOFAZ in making investments of this type is obtaining a high and stable income in the coming years. It should be noted that during the 12 years of the fund's activity, SOFAZ's profitability level never exceeded 4%. Moreover, a decline in this level was observed after 2009. This is because at the time of establishment of the fund, 90% of its investment portfolio was in bonds. Growth was also stunted by the fact that the corporate securities that made up the majority of the portfolio were not equal to state bonds from leading countries in terms of reliability; also their profitability is inferior to real estate investments. According to the Oil Fund report, the profitability of real estate in London is 4.5% per annum.
Since SOFAZ increased its assets more than 120 times in its beginning years, the further diversification of its investment portfolio will likely lead to the multi-fold increase of this figure. This year, the maximum amount of the portfolio was determined in stocks for the first time, while real estate and gold will be the future direction of the fund's investments.
"The Great Surgery" of Iran's economy
A memorable event took place in Iran's economy in December of 2010. Iran's President Mahmoud Ahmadinejad announced the launch of a project on subsidy reform (elimination of targeted subsidies), and called it a 'great surgery' on the weakened Iranian economy.
In his TV speech, Ahmadinejad said that the elimination of subsidies in Iran will contribute to the provision of social justice in the country, the strength of the economy and the fight against corruption. This project has been being implemented for two years, and many events have happened since then.
Back in 2008, Iranian President Mahmoud Ahmadinejad presented a plan for the elimination of subsidies for the energy sector and the provision of social aid of $50-70 dollars per capita (the amount was then reduced to $37) for the 70 million people of Iran, but the parliament did not adopt this plan with the possibility of inflation on its mind.
In addition, in his speeches to parliament, Economy Minister Shamsaddin Husseini noted the importance of elimination of the then 50-billion-dollar subsidies for the energy sector.
Through the elimination of subsidies, Ahmadinejad's government hopes to reduce government spending. However, it can be said that government spending has not only not diminished, but rather rose during this period.
According to the Iranian agency İLNA, in its latest October report, the Research Center of Iranian parliament stated that the potential production capacity of the country decreased by 50.2% compared to 2011, while the number of companies operating in the manufacturing sector fell by 40.3%.
According to information, despite the fact that Iranian Central Bank announced inflation of 26%, experts believe that inflation in the country currently stands at 30%. In 2011, liquidity levels rose from $253 billion to $326 billion. The unemployment rate in the agricultural sector increased to 20.3%, in manufacturing, up to 32.4%, and in service, up to 47.3%. All this, as well as a budget deficit of $ 23 billion, the direction of oil revenues to cover budget expenditures, the elimination subsidies for the industrial sector can be considered a 'gift' to the Iranian economy.
Perhaps, the Parliament's decision to halt the second phase of the subsidy reform plan was due to these reasons. However, Iranian Energy Minister Majid Namdz recently said that the state is implementing the second phase of subsidy reform. Namdz called this decision of the parliament unlawful.
Past experience shows that the new government usually forgets about ongoing projects of the former government, and gives preference to its own projects. Given that presidential elections will take place in Iran in June 2013, it can be said that the implementation of the subsidy reform's second phase of is under scrutiny.
Iran's lost oil incomes equal expenses for building 70 nuclear PPs
Iran's Minister of Economic Affairs and Finance Shamseddin Hosseini finally revealed that Iran's oil export revenues have halted and customs taxes incomes decreased.
Hosseini said government income for the current solar year was expected to reach $117 billion (based on the official USD rate in Iran), but mostly because of halting oil exports the figure may stand at $77 billion, giving a $40 billion deficit.
The price of a barrel crude oil was considered at $85 in the current year's budget law and it's predicted that Iran would export 2.2mbpd crude oil, but the IEA says Iran's oil export volume decreased by one million barrels. The oil price was averaging about $110 per barrel during current year meaning Iran should have made $88 billion crude oil and about $20 condensate exports in 2012.
Hosseini's statement shows that Iran's oil export volume has dropped even further than the IEA forecast which predicted a 40 per cent drop in Iran's oil export.
According to OPEC's annual report, Iran earned $114.75 billion from petroleum exports in 2011. Iran's solar year starts on Mart 20. With regard to a drop in Iran's petroleum revenues by 50 per cent, the lost value is not just the direct oil export incomes, but impacts on customs revenues.
About 60 per cent of the oil revenue counts as government income, while 23 per cent was allocated to the National Development Fund (NDF), 14.5 per cent to the National Oil Company and about two per cent to undeveloped regions.
The huge drop in Iran's direct oil export revenues also have other indirect consequences, for instance thanking to oil dollars, Iran had 68.32 billion worth of imports in 2011. Customs taxes revenues would fall because of decreasing oil dollars, a 50 per cent drop in Iran's national currency during current year and the ration of the USD offering plan and limits to achieve it during last months.
According to the current yearly budget, taxed income shares seven per cent of Iran's GDP worth $27.7 billion.
The Washington-based Institute for International Finance said last week that Iran's GDP in 2012 is expected to shrink by 3.5 per cent, from 1.2 per cent positive growth in 2011. With regard to the contraction in Iran's economy, direct taxation incomes would decrease as well.
In total, resuming just oil and taxes revenues, Iran is likely to lost above $60 billion during the current year, a figure that meets construction of over 70 nuclear power plants (NPP) such as the 1000-megaw Bushehr NPP as well as the cost of required yearly nuclear fuel supplies for all of them.
Iran has enriched above six tons of low-refined uranium during last eight years that meets just three weeks of a 1000mw NPP.