The finance doctor

Chief executive of Hydra Properties, Dr. Sulaiman Al Fahim, shares his knowledge of raising money in a downturn.

"Ah yes, but you were born rich. Or if you weren't, well, somebody just gave you all that money. You were lucky. You woke up one day and found a pile of cash."

These are just some of the many theories I still hear today from people trying to figure out how it is that a man like me, 31 years old, can put together a billion-dollar deal to launch a new project. It is generally assumed that those of us in the property game have some secret code, or some secret access to money. It is our own little secret that people like you will never find out, and never be allowed to find out.

I wish that was true. It would certainly make my life a lot easier and, believe me, I would be the world's biggest property developer by now. The biggest Arab company in property by market value wouldn't be Emaar, it would be Al Fahim.

But life isn't like that. When it comes to financing a project, everyone - even though they probably don't realise it - has the same access to money that I do. There are, in fact, only a limited number of options. It is a case of knowing what they are, which are best for your project, and then using your knowledge and skills to make them happen. Unless you were born with a billion dollars set aside for you, then there are really just five main options to finance a development.

The first is the most obvious and oldest type - you go to the bank and get a loan. Some have already done it for a car, to pay the rent, maybe even to take a nice holiday or to get married. Well, you can do the same for a US$ 200 million project.

The second option, which is becoming the latest trend in the market, is equity finance, whereby you raise funds from retailers and institutions, and give them a share in the project in return. A third option is raising funds through a sukuk or bond sale (usually for projects of US$ 500 million or more).

Fourth is pre-sale; you can sell most of your project to buyers before one brick has been laid, using that money to actually build the project. Fifth, is the yielding business whereby you can rent out part of your building for one year in advance. This will give you good mezzanine finance to start the project and then the banks can finance you later.

Finally, there is what I call the exit strategy, but some people are now using it at the beginning, and that is an initial public offering (IPO). So, where do you go from here and why? It really depends on the type of project and your own situation...and how much risk you want to take. First, let's look at these in some more detail, beginning with equity finance. Exactly what is it?

Fantastic finance

There are a lot of smaller companies that actually use equity finance - not necessarily in the property business - and they don't even realise they are doing so. I mentioned earlier that it is the latest trend, but that is just in the Middle East.

In the UK, nearly two-thirds of all new businesses are launched with either personal capital or it has come from friends who take a stake in the business in return for equity. It is popular because, in theory, it never has to be repaid and there is no interest to pay back on the money.

Those who give you the cash are obviously raising their own money because there is no guarantee of the investor getting their money back. If everything fell apart and was a disaster, then those who put up the equity finance are usually at the back of the queue when it comes to repayment.

So why do they bother? Because it can be very lucrative. The return from an equity investment comes either by a sale of the shares once the company has grown or through dividends. But, for the most part, people will give you the cash so they can take a share of the business in return. Formal equity finance is available through a number of different sources and, on property developments, usually comes from institutions and retailers.

What they all want to see is a business that grows - a development that works. If you cannot show growth rates of 20% for a business, or similar returns on a property development, there are not likely to be many takers in any equity finance deal you put together.

Right now, equity finance seems to be the way forward for all kinds of projects. I am sure you have heard of the ‘Green City' being built just outside Abu Dhabi. Abu Dhabi Future Energy (MASDAR) said it would cost US$ 22 billion to build the ‘no carbon' green city on the edge of Abu Dhabi. It will be home to 50,000 people and 1,500 businesses, according to CEO Sultan Al-Jaber; no cars will be allowed.

A fantastic idea and a fantastic project, but it also requires a fantastic amount of cash.

Where is it all coming from? Altogether, Abu Dhabi is putting around US$ 4 billion into the project and will borrow the rest. According to Al Jaber, financing of this type has never been applied to a project on the scale of an entire city.

Personally, I am a huge fan of raising equity finance. I find it is the best way because you are diversifying your risk. What you are doing is putting together equity funds - you structure a product so you are selling units as shares.

For example, I can put seed capital of US$ 10 million into a project and go to end-users to raise US$ 40 million. I show them how they can make money from the success of the project. The good thing is you are not paying interest and it is generally a four to eight year deal.

Fund managers get to make their 0.5% placement fee on money brought in from institutional investors and you are giving them shares in the project. This is one of those deals in which ‘everyone is happy' if it works.

The Pre-sale smile

Equity finance is not your only option. I talked a bit about pre-sale finance and, if you can do this, if you can pull it off - which I have a few times - I guarantee you will have a huge grin on your face. The theory and practice are actually very simple. I want to build a US$ 100 million residential development.

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