Abu Dhabi, the oil-rich sheikhdomthat spent 36 billion dirhams ($9.8 billion) bailing out itsbiggest developer in 2011, will probably reach for its checkbookagain as property companies in the United Arab Emirates face astalled market and deadlines to repay debt.
��It��s fair to think of Abu Dhabi as a backstop in a worst-case scenario, because a big default would be too tough of anoption now and would damage confidence,�� said Saud Masud, ananalyst at Dubai-based Rasmala Investment Bank Ltd. ��A real-estate recovery could take a long time, even if the bottom washit in the next 12 months.��
Abu Dhabi, holder of 7 percent of the world��s proven oilreserves, contributed to a $20 billion financial rescue ofneighboring Dubai in 2009 and bailed out developer Aldar PJSCtwice last year. While the sheikhdom��s cash will help propertycompanies stay solvent, many will struggle to revive profit asDubai��s real-estate slump stretches into its fourth year and AbuDhabi puts large parts of its redevelopment plan on hold.
The companies most likely to need state help will bedevelopers that relied on selling properties before they werebuilt to fund construction, which is most of them, according toArqaam Capital analyst Mohammad Kamal. Businesses with the bestprospects are those with contracts in Saudi Arabia, Qatar andKuwait, he said.
Real-estate values have fallen more than 60 percent inDubai and 45 percent in Abu Dhabi from 2008 peaks after theglobal credit crisis caused banks to curtail lending andspeculators left the market. Developers completing contracts aresupplying thousands of homes and offices at a time when demandis dropping.
No Improvement Seen
��The trump card over the next 12 months will be theincoming supply in both Dubai and Abu Dhabi,�� Kamal said in aninterview. ��If that gets delivered, we see no improvement forthe price or rental scenarios in either market without aresumption of macroeconomic growth, job creation and mortgagelending.��
Both Dubai and! Abu Dha bi have been striving to become lessdependent on oil revenue by developing homes, hotels, officesand tourist attractions through a combination of state-owned andpublicly traded companies that raised funds from investors,international debt markets and buyers prepaying for homes. AbuDhabi and the U.A.E. federal government increased theirfinancing role after the credit crisis caused lending in theregion to dry up.
Abu Dhabi has a track record of keeping companies afloatand a big default would be ��difficult to show the world,�� saidHans Zayed, head of research at Rasmala. ��Anything that hingeson real estate faces difficulty at the moment.��
Past Support
Moody��s Investors Service highlighted Abu Dhabi��s record ofsupport in Dubai and said the emirate is likely to continuebacking its neighbor by rolling over the Dubai Financial SupportFund due to mature in 2014, according to a Dec. 5 note. Moody��sexpressed concern about the timeliness of further aid after aNakheel Islamic bond was repaid at the last minute following the2009 bailout.
U.A.E. developers face debt-repayment deadlines this year.Aldar has 2.2 billion dirhams due and Nakheel PJSC, builder ofDubai��s palm-shaped islands, needs to repay 5.8 billion dirhams.Union Properties PJSC (UPP) has 429 million dirhams maturing thisyear, according to data compiled by Bloomberg. Abu Dhabi��s $4.6billion bailout of Aldar on Dec. 29, the second of the year,helped ease concerns about the company��s borrowings, Moody��ssaid in a note that day.
Debt Deadlines
Dubai Holding Commercial Operations Group LLC has $500million of debt maturing in 2012, Moody��s said. The company��sDubai Properties Group unit suspended construction on a Tiger Woods-designed golf resort last year, citing a unfavorableluxury property market.
For Aldar, a return to profit wasn��t enough to avert abailout as a debt deadline loomed. The company in Novemberreported third-quarter profit of 144 million dirhams comparedwith a year-earlier loss of ! 731 mill ion dirhams.
��In Aldar��s case, there was a clear need for debt reliefand a liquidity injection,�� Kamal said. ��In other cases, thegovernment backing has been less direct but equallysupportive.��
One example is a decision by Abu Dhabi��s Urban PlanningCouncil to award contracts for 7,500 homes, he said. Sorouh RealEstate (SOROUH), the emirate��s second-largest developer, along withsmaller private builders such as Tamouh Investments, RoyalDevelopment Co. and Al Qudra Real Estate received contractstotaling 13.5 billion dirhams.
Stocks Slide
Aldar was the third-worst performing stock in the 65-memberBloomberg EMEA Real Estate Index over the last 12 months with a65 percent drop. Sorouh was seventh from the bottom afterfalling 54 percent.
Aldar, 18.9 percent owned by Abu Dhabi before the bailouts,is a special case because the company carried out much of thegovernment��s infrastructure work and built tourist attractions,Rasmala��s Zayed said. ��If there are other bailouts, I don��t seeanything on the scale of Aldar,�� he said.
Emaar Properties PJSC (EMAAR), Dubai��s biggest developer, reporteda 34 percent decline in third-quarter net income as apartmentsales dropped by 86 percent. Nakheel reported first-half profitof 526 million dirhams in December without giving comparativefigures. The company, which received $8.6 billion after AbuDhabi bailed out Dubai, wrote down the value of properties by78.6 billion dirhams since 2008.
Abu Dhabi isn��t only helping developers. Investment armMubadala Development Co. agreed in March to provide 3.1 billiondirhams to National Central Cooling Co., an air conditioningcompany known as Tabreed, as part of a recapitalization.
Master Plan
Abu Dhabi, the richest and largest of the seven emiratesthat make up the U.A.E., plans to invest $500 billion inindustry, tourism and culture to increase non-oil revenue to 64percent of the economy from an average of 41 percent from 2005to 2007. In 2005, the sheikhdom opened its ! property market toforeign buyers and began building homes, offices, malls, hotelsand tourist attractions on Saadiyat Island, Yas Island, Al ReemIsland, Al Raha Beach and the city center.
Since the global credit crunch, U.A.E. developers suspendedor canceled around $500 billion worth of projects, twice as muchas in the other five Gulf Cooperation Council countries,Arqaam��s Kamal estimates. In Abu Dhabi, developments valued atabout $30 billion have been put on hold, including branches ofthe Louvre and Guggenheim museums, the MGM Grand Abu Dhabi hoteland the zero-carbon headquarters of renewable energy companyMasdar.
��Back to Health��
��The emphasis right now seems to be on addressing financialproblems at entities and nursing them back to health,�� saidGiyas Gokkent, group chief economist at National Bank of AbuDhabi PJSC.
Kamal said residential values are likely to drop another 10percent to 15 percent as 20,000 homes are completed in Abu Dhabiand another 25,000 in Dubai. He said a similar number ofproperties is scheduled for completion in both markets in 2013.
Although Abu Dhabi��s government hasn��t announced anychanges to its development blueprint, called Vision 2030, sinceit was first published in 2008, a substantial proportion of theprojects expected under the plan are now on hold while a reviewof their economic viability is underway, Kamal said.
��The 2030 plan will go ahead by and large, but within thatthere will be a refocus,�� Gokkent said. ��The fundamentalquestion is the profitability of various entities and whether itmakes sense to go into a particular activity.��
Reviving the Plan
The plan foresees the population growing to as much as 5million by 2030 from an estimated 1.6 million in 2008. Thegovernment may revive some of the suspended projects if itconsiders them essential in the long term. Profitability may notbe the only factor in deciding whether to restart work.
��Some projects will probably never make any money but aredeemed imp! ortant f or Abu Dhabi to attract investment or todiversify the economy,�� Zayed said. ��In Dubai, building thepalm was never going to be economically viable, but it did putDubai on the map and helped it attract investments.��
Abu Dhabi��s Urban Planning Council didn��t respond toquestions on whether the 2030 plan is on track when contacted byBloomberg. Calls and e-mails to Abu Dhabi��s Department ofFinance weren��t returned.
��Projects that are real estate related or those deemed notan immediate priority may be phased in over time, given thatthis is a long-term plan,�� Gokkent said.
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Abu Dhabi, the richest and largest of the seven emirates that make up the U.A.E.It recognize as well known in the world.
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