Respite after the property storm in the GCC

12 July 2011

The dark cloud hanging over real-estate in the GCC may be lifting, as developers across the region look to increasing profits and more projects reaching completion

Key fact

In Qatar, it is estimated that $12bn-worth of projects are under way, with a further $70bn under development

Source: MEED Projects

The region’s property developers have taken a huge battering in recent years, as a result of the global recession and a subsequent fall in land values, but there are now signs that the worst is behind them.

Abu Dhabi’s flagship developer Aldar Properties, had a market capitalisation of $1bn at the end of last year, placing it ninth in MEED’s analysis of listed developers, but in terms of profitability it lost more than any other property firm, recording a loss of $3.4bn. This is the result of Aldar revaluing its assets in response to market conditions, which the developer described in its 2010 financial results as “tough, challenging and volatile”. It found that impairments and fair value losses in its assets totalled $3.08bn.

As if this was not bad enough, it also reported that before any of this was taken into account the net loss for the year was $369m, compared with a loss of $96m in 2009. Revenues were also down 9.5 per cent to $488m.

Sustainable platform

Aldar was in a dire financial position, but help was on its way. In December 2010, the developer announced it would sell $1.5bn of land and property to the government of Abu Dhabi and also transfer assets worth $3bn, including Ferrari World on Yas Island, to the government in exchange for debt repayment. In addition, Aldar said it would place a $762m convertible bond with state-owned investment vehicle Mubadala. “These actions have strengthened our capital structure and provided the group with a solid sustainable platform,” Aldar said in its annual report.

Many projects have stalled due to a lack of land control and, in many instances, financing

David Le Bail, DTZ

Mid-way through 2011, this seems to be the case, as the group has finally started making money again. Aldar reported a net profit of $51.4m for the first quarter, with revenues three times higher than those reported in the same period in 2010. This was mainly due to the completion of the Al-Gurm and Al-Bandar residential projects.

According to regional projects tracker MEED Projects, the firm has contracts worth $8.3bn under way, making it more active in construction terms than any other developer in the region. Planned projects awaiting award are valued by MEED Projects – and Aldar – at more than $60bn.

That Aldar and other real-estate companies, such as Dubai-based Union Properties and Nakheel, have had to revalue their assets is no surprise, considering residential sales prices are about half the value of the 2008 peak. Projects that were feasible based on 2008 price estimates are being delivered into a market worth half of their expected value.

Despite these challenging market conditions, there have been some successes. Kuwait-based Global Investment House is currently recommending a strong buy on Dubai developer Emaar Properties’ shares thanks to the strong performance of its investment portfolio.

“[Emaar’s] retail segment realises high margins hovering around 80 per cent with revenues growing from AED499m [$136m] in 2008 to AED1.9bn in 2010, a level we see sustainable in the future, given low maintenance capex requirements and operational expenses,” says Global Investment House in its UAE Real Estate Sector report published in June.

Future incomes

The bank also highlights the company’s international developments as a strong source of future income. “International operations will pick up pace and contribute an expected AED11.1bn to revenues between 2011-14, mitigating phase out from Dubai sales,” it says.

The unrest has had a massive impact. A lot of projects have slowed down because of the instability

David Le Bail, DTZ

In the first quarter of 2011, Emaar’s international revenues accounted for 21 per cent of all income and international assets accounted for 36 per cent of its $17.2bn asset base. Through Emaar Misr, the company is developing three major projects in Egypt, while in Syria it has the 450,000-square-metre Eighth Gate commercial development project. In two letters to the Dubai Financial Market at the start of July, Emaar reiterated its commitment to these countries, confirming the award of a $36.8m contract to Dubai-based Arabtec Construction to build 170 villas in Egypt.

Model failure

Emaar’s success internationally stands in contrast to the unsuccessful attempts by other developers to transport the Dubai model overseas. “There was a sudden appetite to export the new development model, but that was on the back of specific market conditions: apartments were selling like hot cakes, finance was not an issue, oversupply was not an issue, land was very cheap as it was often granted to master developers,” says David Le Bail, director of consulting for property consultant DTZ.

He says exporting the model proved very difficult for several reasons. “In North Africa, for example, by default the land was not controlled by the president or ruler, it belonged to the state. In Egypt, a lot of transactions are now being questioned,” he says.

Land that was made available had conditions attached, which usually required the developer to deliver a certain amount of infrastructure in exchange for the land provided. “Very often, meeting the development commitment became very difficult, so the land was not formally or legally transferred,” says Le Bail. “Many projects have stalled due to a lack of land control and, in many instances, financing.” One market without financing issues is Qatar.

Banks are liquid and state-backed developers are well resourced. The market has seen a drop in demand and a softening in prices, but renewed interest thanks to Qatar winning the right to host the 2022 World Cup is expected to reverse the trend. Between Qatar’s five main real-estate firms, MEED Projects estimates $12bn-worth of work is under way, with a further $70bn being planned.

Planning a real-estate legacy in Doha

One of the country’s most significant projects is the 31-hectare Msheireb project to regenerate the heart of Doha. “We spent two to three years masterplanning and creating the architectural language which is quite significant,” says Issa al-Mohannadi, chief executive officer of Msheireb Properties.

“Many developers won’t spend that much time doing the planning, but you have to spend your time on proper planning in order to achieve something that will last a long time and leave a legacy that people will enjoy.”

The legacy of the $5.5bn project is intended to be a sustainable mixed-use development that captures the architectural history of early Doha. “We suffer in the region from cities starting to look like each other. Developments in Doha, Dubai, Abu Dhabi, Riyadh are difficult to differentiate as they are all glossy buildings, but Msheireb is creating an identify that belongs to the city itself,” says Al-Mohannadi says.

Construction has been scheduled in five phases to overcome any logistical issues. The developer has a policy of awarding work to local and international joint ventures.

“We mandate a local joint venture to help the local economy and because we believe that international contractors need local knowledge,” says Al-Mohannadi. The next major construction package will be awarded before the end of 2011. Msheireb is financed by the developer’s shareholder the non-profit Qatar Foundation for Education, Science and Community Development, one of the most active organisations in the country.  

Another active entity in Qatar is the region’s largest listed real-estate company by market capitalisation: Ezdan Real Estate Company. The firm became the largest following its merger in January 2010 with Doha’s International Housing Group. Announcing its 2010 results, Ezdan revived plans to build 50,000 new homes as part of meeting the 2022 World Cup infrastructure requirements.

Meanwhile, developers in Bahrain are struggling – the cancellation of the Grand Prix and the ongoing instability is impacting demand for high-end property.

“The unrest has had a massive impact. A lot of projects have slowed down because of the instability, but it would have been surprising if this had not been the case,” says Le Bail. “A lot of developments have been stopped or stalled, and will restart when visibility is better.”

Gulf Finance House also reports a poor performance for Kuwaiti developers in the first quarter of 2011. “First quarter 2011 performance of listed Kuwaiti real-estate equities was the poorest among all market sectors, with 32 companies reporting an aggregate net profit of KD0.48m [$1.74m] compared with KD25.53m in the [first quarter] of 2010,” says the report.

As in Kuwait, much of the market activity in Saudi Arabia is in the housing sector, but the kingdom’s biggest housing developer, and sixth-largest developer by market capitalisation Dar al-Arkan Real Estate Development Company, only has $249m work under construction, according to MEED Projects.

The firm estimates that its projects are worth $4.7bn, but construction has yet to start on many of these. One of the challenges for developers in the kingdom is that despite Riyadh committing $67bn to the construction of affordable housing and creating a new Housing Ministry, it is yet to announce where the developments will be – and who will build them.

Real-estate developers, particularly those in the GCC have been forced to restructure to cope with the realities of today’s market conditions. Some have needed more help from their government shareholders than others. The developers have experienced a steep learning curve, but their actions will leave them better placed for the future.

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