Barely a week goes by without a major new property development being unveiled in Dubai and investor enthusiasm for the emirate has been reignited. “Dubai is back,” says Maarten Wolfs, UK-based PwC’s Middle East project and infrastructure leader.

The emirate’s success in winning the rights to host the 2020 World Expo has provided a major injection of confidence as well as a huge boost to its image, but, in reality, its recovery started two years earlier, with business activity growing on a wave of new schemes. 

However, amid the hype surrounding Dubai’s resurgence, concerns remain about its ability to finance its new projects boom, especially given its high levels of unpaid debt held from the 2004-08 real estate boom.

Debt mountain

Managing its debt mountain is Dubai’s biggest challenge. Its debt stands at close to $142bn, about 102 per cent of the emirate’s GDP, according to the Washington-based IMF. Dubai’s government-related entities (GREs), which include government-controlled companies and investment vehicles such as Dubai Holding and Dubai World, owe more than $80bn. Earlier this year, the emirate made significant progress on refinancing its debt, when the UAE central bank confirmed in March that it would extend the repayment deadline on the $20bn loan given to Dubai at the height of the 2009 financial crisis. 

Banks won’t provide all the debt and they will look at [initial public offerings] and bonds

Shahid Baloch, United Arab Bank

Even though the debt rollover was widely expected, it nonetheless provided a huge boost to confidence in the outlook for Dubai’s economy. Despite this, Dubai’s GREs still face huge debt obligations that will mature in the coming years. Dubai World, which has stakes in key firms such as port operator DP World and Jafza Economic Zone, has a $4.4bn debt maturing in 2015, followed by $10bn in 2018. There are continued complaints from the market about the lack of transparency on how the repayments will be made.

Against this backdrop, Dubai needs to raise yet more debt to fund its new boom. The key will be its ability to persuade private companies to take on a large portion of the required funding.

Improving the emirate’s transport systems is a priority. Dubai’s Roads & Transport Authority (RTA) plans to extend both the Red and Green lines of the Dubai Metro. PwC is advising the RTA on financing the proposed extensions and says options under consideration include some form of public-private partnership (PPP) model.

“The real question is how can entities such as the RTA and other state-related enterprises leverage off increases in the value of land to raise the necessary capital to help fund the big-ticket investments needed,” says Wolfs. He says developers are assessing plans for schemes on land near proposed new metro routes and are using the rail link to stimulate investor interest.

“It may not be strictly a PPP-based model, but it is a certainly a partnership in that the private sector is coming together with the government to achieve a common goal,” he says.

In this scenario, a key challenge for Dubai is understanding how it can work with the private sector and convince companies and investors of the financial viability of its projects. The RTA faced financing problems in the aftermath of the financial crisis, with construction work on the metro lines and the Al-Sufouh tram being disrupted in 2010 by payment issues.

Financing issues

Other transport projects potentially seeking private finance include the double-decking of Sheikh Zayed Road, Dubai’s primary road artery, which could cost more than AED10bn ($2.7bn) to build. Private financing for the highway will be attractive if tolls are introduced for road usage, ensuring the scheme becomes a revenue-generating asset, a scenario banks would be happier to lend against.

One project that already has private funding is the $185m scheme to build the first phase of the Dubai Water Canal, also known as the Dubai Creek extension. Turkey’s Gunal won the contract to build the road bridge and canal in late 2013. The scheme is financed using bank debt lent on deferred terms.

On the utilities side, Dubai Electricity & Water Authority (Dewa) has launched two new independent power projects (IPPs), including the first phase of the 1,200MW Hassyan clean coal-fired IPP and the second phase of the 100MW Mohammed bin Rashid al-Maktoum Solar Park.

If completed, the IPPs will be the first time Dubai has used such a financing structure. Dewa invited interest in the project in early April and is planning to sign the power purchase agreements by the end of 2014.

But there is some scepticism about Dewa’s ability to get these projects off the ground. While some are doubtful of the viability of the proposed coal plant due to logistics concerns, others question Dewa’s ability to deliver an IPP.

“There are serious concerns among developers and the international community about Dewa’s ability to match levels of governance and sensible risk allocation that we see in [places] such as Oman and Abu Dhabi,” says one banker.

Lender concerns will have eased following 15 April, when the US’ Moody’s Investors’ Service upgraded Dewa’s issuer rating to Baa2 from Baa3, based on improvements in the company’s financial profile. Saeed al-Tayer, CEO of Dewa, told MEED in March that in the absence of sufficient interest from private investors and banks, Dewa would be able to fund the projects itself.

“Dewa has a funding strategy,” he said. “It has [access to] export credit agencies, syndications and it is investment-grade, so at any time it can go to market to get finance. But we are going to open the door for the private sector – that’s why we are doing this.”

As before, the main driver of the Dubai boom is real estate. According to the Land Department, the emirate’s property deals increased by 38 per cent to reach more than AED61bn in the first quarter of this year. Yet, the pace of recovery, coupled with the size of Dubai’s planned infrastructure projects, has raised concerns about the sustainability of the sector.

“The total cost, pace of execution and financing of the new megaprojects remain uncertain,” the IMF warned in January. “If not implemented prudently, the projects could exacerbate the risk of a bubble.”

A related risk for the hotel sector is a price collapse triggered by an oversupply of property. “The hospitality sector might have overcapacity, perhaps right after the Expo,” says Rehan Akbar, Europe, Middle East and Africa corporate finance at Moody’s. “So, how are they going to manage all this?”

Real estate developers are seeking to mitigate the risk by varying their sources of funding. Emaar Properties, for example, reported strong earnings due to pre-selling of new high-margin developments in Dubai, a move that led to an upgrade in its credit rating. 

Capital markets

Developers are also looking to capital markets to raise funds. Damac Properties issued a $650m five-year sukuk (Islamic bond) in early April to fund the acquisition of land plots. The firm also listed on the London Stock Exchange last year, with the aim of raising $500m. 

“Pre-crisis, banks were providing all the debt and equity would come from off-plan sales,” says Shahid Baloch, executive vice-president of corporate banking at the local United Arab Bank. “That has changed. Banks won’t provide all the debt and they will look at IPOs [initial public offerings] and bonds or sukuk.”

News in April that local retailer Marka will offer up to 55 per cent of its capital on the Dubai Stock Exchange could set a further precedent for developers looking for new funding. The company is listing as a greenfield firm, meaning it does not have to provide any recent financial records to list. This is because the firm has no current operations, although it does plan to open shops and restaurants across the UAE. The listing is the first of its type since 2008.

“If it pans out well, it will give people confidence to look outside the bank market to do things,” says Baloch.

Akbar sees attempts by companies to diversify their funding pools as a positive development. “Some entities have not been very prudent in managing their liquidity, so they have long-term assets financed by short-term liabilities,” he says. “This means that if firms continue to rely on cheaper but short-term liquidity, they could be hit by problems during an economic crisis when banks might stop rolling over their debt.” 

Dubai is being forced by its debts to seek alternative methods of financing. While this might mean a loss of control for the government, in the long run it will create a more diversified market with greater private engagement. 

But, if its dream is to work, the emirate must close some landmark transactions to convince investors and lenders that Dubai is not only back, but this time it is in it for the long term.