Real value?

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Emaar chairman Mohammed Alabbar said last November that he would be open to a merger with Nakheel.

Emaar, the Middle East's largest property developer, plans to merge with three government-owned developers in Dubai. How will the move affect Emaar's investors and the emirate's property market?

When Emaar last week announced plans to merge with three developers at government-owned Dubai Holding, the market's reaction spoke for itself.

Spooked investors embarked in a heavy sell-off of Emaar shares, worried their stake in the combined entity would be diluted, despite an assurance from the real estate developer's chairman Mohammed Alabbar that a deal will be hammered out swiftly to ensure "value accretion to our existing shareholders".

The stock plunged nearly 10 percent on June 28, the first day of trading after the announcement. Analysts questioned the motives for the move - and its timing, as Dubai's real estate market reels from the cancellation and delay of projects worth billions of dollars, as well as plummeting prices and cashflow concerns.

"What are the motives for this merger, especially when real estate conditions are not that favourable?" says Fadi Al Said, head of equities at ING Investment Management Middle East.

"Usually when you announce a merger, you reveal the terms and the valuations. The problem here is that they announce that the merger is going to happen and the details come in September.

"This lack of transparency will increase uncertainty. When you have a lot of questions that are unanswered, investors will usually sell."

As the markets digested the news, Emaar announced that the entity resulting from the proposed merger with three units of Dubai Holding - developers Sama Dubai, Dubai Properties and Tatweer - will have combined assets worth AED194bn ($52.85bn).

Again the market was left scratching its head, this time over what these assets were and what their true market value was. Indeed, Emaar gave a strong indication that most of the assets it was acquiring from the three Dubai Holding developers consisted of land, saying that "based on a preliminary review Dubai Properties, Sama and Tatweer have a robust and strategic asset base (attractive land bank) which will contribute positively to consolidation.''

"Land bank valuation can exhibit high volatility in stress markets and therefore true value of land as an asset is tough to gauge," says Saud Masud, a Dubai-based analyst at UBS.

"Will property be built upon it in the near term, what is the potential sale value per square foot and to whom may the land be sold to? How marketable is the land?"

Robert McKinnon, head of research at Dubai-based investment bank Al Mal Capital, warns some of Dubai Holding's land could be problematic from a development perspective.

"Some of it is land in the middle of nowhere with no roads and electricity.

In any environment it's not profitable for a developer to come in and buy a piece of land that they couldn't develop even if they wanted to for another five years," he continues. "It's locked up capital and it's land they can't monetise. That's the problem."

Talk of real estate consolidation is nothing new in Dubai, with Emaar's Alabbar last November saying he would be open to a merger with Nakheel, the developer of Dubai's distinctive palm-shaped islands.

Two weeks ago conglomerate Dubai World said Nakheel would be taking over the property divisions of Leisurecorp, Dubai Maritime City and Dubai Multi Commodities Centre, all of which it owns.

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