Nakheel chairman Ali Rashid Lootah has made some big calls over the past five years. In late 2011, the Dubai developer appeared to be overwhelmed with debt and unlikely to develop any new projects ever again. But Lootah decided that Dubais property market had bottomed out and launched new development schemes.
This decision facilitated what is arguably the greatest corporate turnaround the region has ever seen. The new projects, together with the handover of existing schemes, allowed Nakheel to announce just three years later that it had freed itself of $2.15bn of bank debt. Five years later, in August this year, the firm will be completely debt-free when it repays the last instalment of its $1.2bn trade investor sukuk (Islamic bond).
In early 2014, another important call was made when Nakheel turned to strengthening its recurring revenues and began to make the business better-placed to weather any potential downturn in Dubais property market.
This was done by focusing on building revenue-generating assets such as hotels, shopping malls and residential units for leasing instead of development projects for sale. As the company appeared to be effectively turning its back on off-plan sales during an uptick in property prices, the move left many in the market somewhat perplexed.
In the two years that followed, low oil prices and concerns about oversupply have dampened investor sentiment and other developers, keen to make their own cash flows more robust, have followed Nakheels lead and have focused on building out their own assets rather than launching new schemes.
In mid-2016, Nakheel is making another big call as Lootah decides to launch new development projects later this year.
We will be launching more development projects in the second half of this year, says Lootah. They will be in well-developed areas for the middle class. We see opportunities and we have land. We will halt the sales of land in all these areas and start development ourselves.
Nakheel has decided to move ahead with new schemes despite short-term forecasts of softening prices in Dubai. Analysts have been expecting further declines for prices and rentals throughout 2016 as the emirates economy continues to adjust to softening global conditions.
The right choices
Although it may initially appear that this move is ignoring the prevailing market conditions, it should be remembered that Lootah has been able to call the market right over the past five years.
Property prices over the past year have fallen by more than 10 per cent, and if an investor thinks the market is turning, it may now be the right time to buy just before a wholesale recovery starts.
We had a correction for sure, but nothing drastic, says Lootah. It was a healthy correction. We expect things to pick up in the second half. We see enquiries increasing, we see more building permits in different areas such as JVC [Jumeirah Village Circle], Al-Furjan, IC3 [International City 3], and a lot of people are submitting designs and starting construction.
During the correction, Nakheel has focused on building assets for itself that will generate recurring revenues. For the past one and a half years we have been focusing on building our own portfolio, says Lootah. We took the opportunity and used our resources to enlarge our residential leasing and retail portfolio.
Nakheel will also continue to develop its own assets and is preparing to start construction work on large schemes for its own leasing portfolio.
The largest is the Jebel Ali Gardens development in the Dubai Waterfront area close to the Jebel Ali port. The basic infrastructure design is progressing, we completed the basic concept, we are appointing a consultant to do the design [for the buildings] and then we will tender it, says Lootah.
Nakheels Jebel Ali Gardens development
Once complete, the community will provide accommodation for more than 40,000 people in 10,000 apartments spread across 42 buildings.
Deira Islands Mall by Nakheel
Nakheel is also tendering contractors for its Deira Islands Mall, which is expected to be the largest construction contract to be awarded in Dubai this year. Deira Islands [Mall] is a big project. That is going to be more than $1bn for sure, says Lootah.
Enlarging the portfolio has meant significant capital spending. Over the past two years, Nakheel spent nearly AED6bn ($1.6bn) on construction projects in Dubai. From May 2014 to April 2016, the firm says it spent about AED5.9bn, meaning an average monthly spend of AED234m. We spend a lot of money every year on construction, says Lootah.
No financial worries
So far this spending has not required external funding and Nakheel does not expect to borrow in the near future. If that changes, Lootah says the companys financial performance in recent years means it will be able to raise funds. It is normal to borrow, we will borrow when we need, he says. For the time being we dont, but we have a very light balance sheet, we dont have much borrowing and I am very sure if we approach banks they will lend to us. Our balance sheet is very healthy.
Lootah says the large volume of work Nakheel is undertaking, combined with good payment terms, means many construction companies want to work on its projects. When it comes to payment we have no issue, he says. Contractors keep working with us because we are a good paymaster. We see interest [from contractors] when collecting new tenders.
For the future Lootah will keep watching the market and adjust his strategy based on the market conditions. You have to be dynamic, you have to see how the market moves and follow the trends, he says.
Moving quickly has given Nakheel the edge over the past five years, but its behaviour has been far from reckless. Although the company is now almost completely debt-free, the memories of the past means it now proceeds with a degree of caution when it comes to launching new schemes. We will not move into any project unless funding is there, says Lootah.