Real estate developers look beyond Dubai

01 February 2009
With the emirate’s real estate sector stalled, the private firms that have been at the heart of Dubai’s construction boom over the past five years are seeking to grow their operations in other markets.

Since the Dubai property market was opened up to foreign investors in 2002, the UAE’s private developers have enjoyed unabated year-on-year growth in asset values, property prices and investor demand.

But in September 2008, the situation changed dramatically. The lack of global liquidity began to have an effect on Dubai investors, not helped by a sense of false confidence that had pushed prices up to unsustainable levels. By October, real estate brokers were reporting an increase in distressed sales and purchase prices were falling.

Five months later, the effects of a tighter lending market are becoming increasingly clear. According to Gulf project tracker MEED Projects, more than $20bn worth of real estate developments in the UAE, mainly in Dubai, have been put on hold since September 2008. As a result, many developers are now refocusing on other Gulf and North African markets.

Work delays

The scale of the cancellations became clear when MEED broke the news in late October 2008 that local developer Nakheel was placing many of its developments on hold, including large sections of its third offshore island, Palm Deira. From Nakheel’s perspective, it was a sensible step. As a master developer gifted land by the government, it can afford to develop at a pace that suits market conditions. But the news still came as a shock to the rest of the industry.

Since then, billions of dollars worth of other schemes have joined the list. Most of these are residential towers or mixed-use complexes. Local private firms including Zabeel Investments, Muzoon Holdings, Tameer, Cirrus Developments, East & West Developments and Al-Faraa Properties have all been forced to put schemes on hold.

“Credit is a company’s lifeblood, and when you stop this it is just like cutting off their oxygen,” says one senior UAE-based property analyst. “How long can they keep breathing for? One minute or five minutes? Costs [of borrowing] are high, prices are falling and there is no demand. This combination of factors is killing firms and many will go bust as a result.”

Credit ratings agency Fitch Ratings agrees that pressure on liquidity is leading to higher funding costs. “Corporates with negative free cash flow and a reliance on short-term debt may have an imminent liquidity problem if their relationship banks are capital constrained,” it said in a note issued in late January on the outlook for construction and property firms.

Dubai-based developer Union Properties is one firm that is turning to the bond markets to raise capital. As MEED went to press, the firm was holding a general meeting to discuss raising additional finance. “The board of directors, in its meeting held on Monday 22 December 2008, decided to propose to the extraordinary general assembly the issuance of up to AED2.5bn in convertible bonds to be subscribed to by strategic investors,” it said in a statement to the Dubai Financial Market on 24 December.

The situation is likely to get worse before it gets better. Swiss bank UBS predicted in late January that the job losses associated with the project slowdown would lead to Dubai’s total population shrinking by up to 8 per cent in 2009 and 2 per cent in 2010, putting further downward pressure on demand and prices.

Falling prices

A decline of 30 per cent in purchase prices is expected, with falls of up to 50 per cent for some luxury accommodation. The bank says it is this sector of the market that is most saturated, and developers should be focusing on building cheaper properties.

“In our view, the true sweet spot in terms of volume is the middle market - we estimate roughly two-thirds of the population is under-served,” says the bank’s UAE property report for January 2009. “Hence, creating affordable housing units at AED1,000 per square foot or below would be mutually beneficial to both buyers and developers.”

Exacerbating falling demand is the fact that expatriates have only one month to find another job before being forced to leave the emirate. “Allowing expats to stay in the country for longer than one month in the event of termination of employment would enable them to explore opportunities elsewhere within the emirate or country,” advises the bank.

As demand continues to fall and private developers struggle to raise finance, projects continue to be placed on hold. Local private developer Tameer launched its 600-metre tall, $800m Anara Tower at the Cityscape exhibition in Dubai in October 2008. The project was the result of a design competition between three of UK consultant Atkins’ international offices. But less than three months after the high-profile launch, the scheme is on hold.

Last week, Atkins confirmed it was making 170 people redundant out of a workforce of 3,000 in the region, with a further 40 redundancies at its Manila office, which provides support to the region. Its exposure to projects such as Anara and Nakheel’s $790m Trump Tower, which is also on hold, leaves the firm with an excess of staff.

Other consultants are in a similar position and expect 2009 to be a tough year in Dubai. “We have moved 12 of our senior managers to Abu Dhabi and Doha,” says the director of one major international consultant.

Development plans

Consultants are not the only companies working hard to grow their operations in other local markets. Government-backed developer Limitless may be reviewing its real estate plans for Dubai’s 75km, $10bn Arabian Canal project, but it is moving ahead quickly with the development of its $12bn Al-Wasl residential property project in Saudi Arabia.

“It is the first project for Limitless in Saudi Arabia, where the country’s rapidly expanding population is creating a huge demand for new homes - 50,000 are needed each year in Riyadh alone,” says Abdul Salam al-Jassmi, regional director for the GCC at Limitless.

Saudi Arabia is seen as a key growth market by developers in the GCC. Unlike other states, its real estate market is mainly driven by domestic demand, and the imminent new mortgage law will open up property ownership to a much wider section of the population. International real estate adviser Jones Lang LaSalle estimates the residential shortfall will be as much as 500,000 properties, rising to 1 million by 2012.

As a result, developers, especially those from outside the kingdom, are keen to be involved in real estate schemes in Saudi Arabia, with Riyadh, Jeddah and the holy cities of Mecca and Medina benefiting most from investment. Schemes such as Riyadh-based developer Dar al-Arkan’s Shams al-Riyadh are continuing as planned, with the invitations to bid currently out for the $1.6bn project.

Jeddah Corniche is also the location for several new tower blocks including the $135m, 40-storey Al-Jawhara tower by UAE private developer Damac Properties, which is now out to tender. Damac says it is committed to its schemes in Dubai, Saudi Arabia, Egypt, Qatar, Iraq, Abu Dhabi and Jordan. “Plans for projects in India, Pakistan and Morocco will be revisited when market conditions have improved,” Peter Riddoch, chief executive officer of Damac Properties, tells MEED.

Qatar is another key growth market for firms as demand for residential and commercial property remains strong. Construction of developments such as the 35 sq km Lusail project located north of Doha, The Pearl offshore island site as well as Barwa’s Al-Khor City continue. “There has not been a notice-able drop-off here,” says one Doha-based company director.

But although developers remain committed to the schemes, some are delaying projects to secure better deals. “Developers are waiting to see what happens,” explains one company director based in Doha. “Projects that are ready to go out to tender are not being bid yet as developers look to secure maximum benefits from falling material and labour costs.”

As for the UAE, financial experts say lending will begin to creep back into the market in the medium to longer term, and those borrowing will be stronger companies whose projects have proven demand.

“Loan-to-value ratios will come up again as prices fall,” says the analyst. “Now that the bubble has burst, things will normalise. Market conditions are improving. Banks have cut their interest rates by 50 basis points. Now the initial damage is done, there is a more cautious approach.”

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