Debt stalls hopes of recovery in the Emirates

27 January 2010

UAE real estate projects will remain on hold in 2010 as developers struggle financially, but state-backed infrastructure schemes are progressing well

Construction schemes worth $575bn have been put on hold across the GCC in the wake of the -global financial crisis that gripped the region in late 2008, according to projects tracker MEED Projects.

Not surprisingly, given the fall in property prices, 82 per cent of these stalled projects, worth $470bn, are in the real estate sector. A massive 92 per cent, or $433bn worth, of all stalled GCC projects are in Dubai, where real estate firms are struggling to repay their debts and to complete projects under construction.

Key facts

  • $250m - Debts owed to UK companies by Dubai developers
  • $433bn - Value of real estate projects on hold in Dubai

Sources: MEED Projects; Association of Consultancy & Engineering

Dubai Holding, for instance, owner of developer Dubai Properties, holds about $15bn of debt and restructuring advisers were asked in December 2009 to reorganise the firm following concerns about its ability to repay its debt.

The scale of debt among Dubai’s developers leaves the prospects for completion of these stalled projects uncertain. Already there are signs that 2010 is the year that these stalled projects may hit hopes of any Dubai recovery.

Challenging year

As developers struggle to repay their debts, contractors working for them complain of outstanding fees. In the case of projects that have not yet started on site, the consultants who worked up the plans are feeling the effects most severely. “Unlike what many [people] think – that 2010 will be the year in which businesses get off the hook – it will be a challenging year,” says Bashar Ayyash, associate and resident manager and engineering consultant at local architect Khatib & Alami’s Abu Dhabi office.

One of the highest profile schemes to be put on hold is Nakheel’s multi-billion-dollar -Harbour & Tower project. Its plans to build an inner-city harbour with a 1.2-kilometre-high tower as its centrepiece, surrounded by 250,000 square metres (sq m) of hotels and restaurants and 100,000 sq m of retail space, were unveiled to enormous acclaim at Cityscape, Dubai’s real estate investment event, in October 2008. But, in the same month, MEED broke the news that construction had stopped on the developer’s nearby Palm Deira artificial island project and, in November 2008, Nakheel announced it was making 500 people redundant and postponing a raft of major projects.

UK consultant WSP, a designer on the -Harbour & Tower project with exposure to a number of other Dubai real estate projects, was one of the firms to be hit by the abrupt downturn in business. “The group [WSP] has £15m of trade receivables and unbilled amounts due on contracts with clients in Dubai, after reflecting £8m of provisions made in 2008. These are being reassessed and any further provisions considered necessary will be charged against 2009 profits,” it revealed in December 2009 in its end-of-year trading statement.

But WSP’s troubles are just the tip of the iceberg. Many other UK consultants have been badly burned in the downturn. The UK’s Association of Consultancy & Engineering (ACE) estimates that UK firms are owed about $250m by Dubai’s struggling developers. The situation is so severe some have pulled out of the emirate entirely.

UK-based management consultant Mouchel has told its shareholders it has negotiated payments for amounts significantly less than the total owed, but that even some of these negotiated fees are no longer being paid, leaving the firm with £10m outstanding.

“The position in Dubai has clearly deteriorated. As a result, we will be closing our remaining operations in Dubai”

Statement by Mouchel to Lond0n Stock Exchange

“Recently, payments have ceased and, given the current financial position in Dubai generally, and that of our main clients, there is now greater uncertainty around recovery of the remaining £10m due,” it said in a report to the London Stock Exchange in December 2009. “The general position in Dubai has clearly deteriorated. As a result, we will now be closing our remaining operations in Dubai, save for the efforts we will continue to make to seek the recovery of money that is owed to us, although we recognise that this could take some time.”

As firms continue to fight for payment, and some quit the emirate entirely, the prospect of huge artificial island projects, such as The World and the Palm Deira and the 75-km-long Arabian Canal waterway, getting restarted in the near future looks slim.

To add to developers’ woes, the market shows no sign that it is ready to absorb any new schemes. According to international real estate consultants such as Colliers International and DTZ, supply of accommodation for both residential and commercial space continues to outstrip demand. In its latest Middle East property report in January 2010, Colliers says that by 2011, Dubai will have doubled the 3 million sq m of leasable office space it already has.

“The already oversupplied office market, which currently constitutes 3 million sq m of net leasable area, is expected to increase by 100 per cent between 2009 and 2011,” says Colliers.

Residential supply also exceeds demand and Colliers records a rental rate decline of 49 per cent in 2009. This leaves developers focusing on projects that are already under way, for which, in many cases, buyers are waiting.

“The immediate priority for Nakheel is to ensure the completion of projects under construction and the fulfilment of the company’s commitment to customers of delivering high-quality finished products,” said Nakheel in an interim report, released in November 2009.

The report also revealed that the firm had written down AED13.21bn ($3.6bn) in declining land value, or on properties under construction but delayed or scaled back. According to MEED Projects, the value of Nakheel contracts on hold is $107.7bn. This compares with $16.8bn at Dubai Properties, $22bn at Emaar Properties and $20bn at Sama Dubai.

Transport projects

Given the weakness of Dubai’s real estate market, the biggest construction deals in the UAE in 2010 are expected to be state-funded infrastructure projects in Abu Dhabi. “Ambitious transportation projects will commence, reflecting the implementation of the [UAE’s] transport masterplan,” says Ayyash. “The Abu Dhabi metro and Union Railway are good examples.”

Another example is the $2.6bn, 327km Mafraq-Ghuweifat highway, the region’s first public-private partnership road scheme. The tender deadline has been delayed by three months as the Department for Transport responded to requests from contractors for more time to prepare their bids.

Three bidding groups from an original prequalification list of five are competing for the contract. They are the Irtibaat consortium, led by Australia’s Macquarie; the Mafraq Motorway Group, led by Austria’s Strabag; and the CCCC‑MTD consortium, a joint venture of China Communications Construction Company and Malaysia’s MTD Capital. An award is expected by March.

In Saudi Arabia, the long-awaited 980km Landbridge, connecting Jeddah with the east coast via Riyadh, is also likely to get under way in 2010. Previously a build-own-transfer project, the scheme was restructured in 2009 as a public procurement project on the same lines as the 450km Haramain high speed railway, linking the holy cities of Mecca and Medina, which is now under construction.

The Landbridge scheme will be one of the region’s largest awards and is expected to be retendered in the first quarter of the year. Originally, the frontrunner for the scheme was a local consortium led by Acwa Power but, since the restructuring, it has joined forces with rival bidder Saudi Binladin Group. It is hoped that this will put it in a strong position to fight off rival bids from consortiums, such as the local Al‑Rajhi Alliance, which in February 2009 was awarded the SR6.8bn ($1.8bn) civil works contract for the Haramain railway. The alliance includes the Al-Rajhi Investment Group, the Mada Company for Industrial & Commercial Investment, both local, the China Railway Construction Company and France’s Alstom.

Abdulaziz al-Hokail, president of the project’s client, the Saudi Railways Organisation (SRO), says the Haramain scheme is progressing well and tender documents for the second package of works will be released in February. “The wosrk by Al-Rajhi Alliance is well under way for the construction of phase 1, package 1,” he says.

Five groups are bidding for the second contract, package 2. They are the Saudi Binladin consortium, Korea’s Badr Group, China’s CSR consortium, Spain’s Al-Shoula consortium and the Al-Rajhi Alliance. “Phase 1, package 2, which includes the design and construction of four stations, is in progress, with Fosters and Buro Happold -carrying out the detailed design of the -stations,” says Al-Hokail. “By February 2010, SRO aims to release tender documents for the construction of the stations.”

The progress in the Saudi rail sector is not matched in neighbouring Kuwait, but there are signs that a major award will be made on the $3.7bn Subiya causeway in 2010. At the beginning of January the Public Works Ministry retendered the delayed crossing, which will link Kuwait City with the Subiya. The 37.5km link was originally launched in 2006 and the eight original bidders are expected to bid for the scheme after restating their intention to do so in November 2008.

In the region as a whole, progress on infrastructure schemes is expected to be good in 2010, as contractors and clients take advantage of the lower costs and availability of resources, but real estate projects remain in limbo. However, improving transport links will facilitate the smoother flow of goods, services and people. Delivery of projects such as the Landbridge and the Abu Dhabi metro could provide a much needed boost to other sectors.

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