Sand Storm: UAE real estate

Estates Gazette

After a rocky four years, property developers in the once-booming desert cities of Dubai and Abu Dhabi are facing increased pressure to merge. Paul Cochrane reports

It has been a tough few years for property developers in the once-booming desert paradises of Abu Dhabi and Dubai. Having expanded rapidly in the boom years, prices in some areas crashed by 60% since 2008, and projects have been cancelled or delayed.

In some cases, partially constructed developments have been torn down. The government-backed developers that dominate the market have been left struggling to refinance debts. State-backed Emaar, Dubai Holding, Aldar and Sorouh have so far managed to ride out the storm, alongside private developer Damac. Conglomerate Dubai World last summer transferred ownership of developers Nakheel and Limitless to a new Dubai government entity.

But the repercussions are still playing out. Last week, state-owned investment vehicle and sovereign wealth fund, Mubadala Development Company, which was left owning 49% of struggling Aldar Properties after a recent government bailout, said it would transfer a 14% stake in the developer, worth around AED700m (£100.2m), to Abu Dhabi Commercial Bank in return for a loan facility.

Mubadala said the 579.1m shares will revert to it in April 2013 when the facility matures, or earlier if repaid ahead of schedule – although it refused to say how much the loan would be for. It was the latest in a long line of financial measures aimed at refinancing the developer behind some of the emirate’s biggest schemes, such as Abu Dhabi’s partially completed Central Market and the luxury Al Raha beach resort.

The property company has been bailed out by the Abu Dhabi state twice in two years for a total package worth almost AED36bn (£6.1bn). In March, it announced it was considering a merger with fellow state-backed developer Sorouh Real Estate, the developer behind the 23-storey Al Murjan Tower in Abu Dhabi and the 5.5m m2 Lulu Island mixed-use resort But agents in the emirate remain sceptical about whether the merger will go ahead because of the political nature of the deal and the prestige attached to these prominent state-backed developers.

“There has definitely been a consolidation of real estate players in line with government policy to cut back supply,” says Craig Plumb, head of research Middle East-North Africa at Jones Lang LaSalle in Dubai. “They’ve realised there are too many developments, so are trying to improve the financial viability of developers.”

The staff of developer Limitless, for instance, are now working under Nakheel on its infamous artificial archipelago, Palm Jumeirah. He adds: “Sorouh and Aldar are talking about merging, but it may not go ahead. There was the same discussion in Dubai (in 2009) to merge Dubai Holdings and Emaar, although it didn’t go ahead at the end of the day. But consolidation is going on, and there will be fewer but bigger players that are largely state controlled, either 100% owned or with a degree of government control.” 

Ben Waddilove, a chartered surveyor who works closely with real estate companies in the Gulf through his role as director of recruitment consultancy Macdonald & Company Overseas in Dubai, agrees: “They will probably review it for three months and then review again. I wouldn’t put money on it happening. From a business view it makes sense, but from a political view it could be more difficult to implement as there is pride and influential owners to consider. However, I suspect there might be more [merger] moves on the cards.”

“The survivors are the big giants, but in a sense they are becoming bigger, and more and more powerful,” says the infamous Porush Jhunjhunwala, head of Better Commercial, the commercial arm of property research company Better Homes. And Jhunjhunwala points out that tough times are set to continue for the remaining big developers in the region, perhaps increasing the appeal of further consolidation.

According to Better Homes, 2.3m m2 of office space has come onto the Dubai market since 2009, and by the end of 2011 there was a total office stock of 5.9m m2. At the same time, occupancy stands at 3.1m sq m2. The majority, at 57%, is located in onshore locations, and is available only to companies licensed by the emirate’s department of economic development, while the remainder is in Dubai’s special tax status free zones. Within the next two years, a further 1.4m m2 is expected to enter the market, while in neighbouring Abu Dhabi, the 1m m2 slated to be handed over in 2012 and 2012 will result in “excess supply”, says Jhunjhunwala. “I assume this will add to the current vacancies in the market, and might double pressure on rent, with the prices coming down in the short term.”

However, Mat Green, head of research and consultancy at CBRE in Dubai, says that, if developers can just hold on that little bit longer, he sees signs of the market stabilising.

“This year has mostly been about stability,” says Green. “We have not seen much growth and it is pretty flat for the whole Gulf market. It is down to individual products, even in a specific location, and it is very fragmented. One property may be empty, while next door there’s demand.”

And while institutional investors remain wary about investing in the GCC region, Dubai has benefited from the instability elsewhere in the Middle East and North Africa over the past year. Agents speculate that the trend may well benefit the recovery in the UAE property market – and its struggling property developers.

“There has been more regional money coming in with people looking for a more calm place,” adds CBRE’s Green, “and that is definitely Dubai at the moment.”

BOX: Desert Space

In Abu Dhabi, Doha and Qatar, the oversupply of commercial space has resulted in government departments renting offices in prime locations – as much as 25% of office space in Doha’s West Bay – to help bolster the market, as well as to appease local developers and prop up state-owned developers.

According to CBRE data, the average rent per m2 in Abu Dhabi has fallen from AED3,500 (£55.46 per sq ft) in 2008 to AED1,400 (£22.11 per sq ft) at the end of 2011. In Dubai, while there has been an uptick in demand for office space in the central business district leading to a stabilisation in rents over the past six months at around AED150 (£25.58) per sq ft, the oversupply in secondary areas has led to rents lower than the city average of AED90 (£15.35) per sq ft.

The outlook for the Dubai residential sector is equally mixed, with prime real estate in well-established locations seeing improved performance in 2011. In the majority of locations, however, rents and prices have declined.

“We are starting to see that, within each sector, some prices are increasing and others unchanged, and others are falling, which will continue to be the case over the next 18 months,” says Craig Plumb, head of research Middle East-North Africa at Jones Lang LaSalle in Dubai.

According to JLL, around 13,000 homes – 90% flats – were completed in 2011, a rise of less than 4%, bringing residential stock to 336,000 homes in Dubai. Some 38,000 homes are due for completion this year – an increase in stock of 11% – but JLL forecasts only 60% of scheduled stock, or 23,000 homes, will be completed in 2012.

With so many flats available, and few projects under way, there is an increasing focus on property management. “The big trend is away from asset creation to asset management, as there still needs to be more emphasis on maintenance and property management,” says Plumb.

“There is going to be big growth in such services in a market where there is too much supply.” Improving maintenance is not only a rental issue but one that has plagued investors, with owners hit with unexpectedly high service fees by developers, as occurred on the Nakheel- developed Palm Jumeirah, where charges were raised by 50% last year. The lack of transparency in what is included in property prices is considered a potential impediment for investors and has been a cause for legal battles in Dubai courts.

Meanwhile, Strata laws that pass responsibility for building maintenance from developers to tenants’ associations, introduced last May, have still not come into full force.

“I hear from legal acquaintances that, at the courts, there is a backlog of potential cases to be resolved,” says Mat Green, head of research and consultancy at CBRE in Dubai. “Investors want as much information as possible about what they will actually pay. There is not yet full disclosure on how money is spent and that really needs to change. Unless these problems are ironed out, the market will be constrained.”