GCC's real estate sector revamp has started - AT Kearney

A consolidation wave in the real estate industry in the UAE and GCC has started, according to a global strategic consulting firm.

Real estate consolidations through mergers are happening in the region and developers learn lessons from previous real estate cycles, a recent study by AT Kearney has revealed.

In a media statement, the consultant firm said that developers demonstrate that they are mindful of lessons learnt from past real estate cycles in other markets, where companies that survived have built strong differentiated capabilities and diversified across the value chain to stabilise sources of revenues.

In similar markets such as Singapore and Hong-Kong, which were hit strongly by real estate cycle bursts in past decades, only two to three major developers survived and reinforced themselves, AT Kearney pointed out.

Most regional markets have been confronted with strong oversupply - which peaked last year at over 100 percent in the high-end residential and commercial segments in some GCC countries, it said.

"With most property developers being cash-strapped, with banks restricting lending and homebuyers defaulting on payments, the primary aim of consolidation is to pool resources to enable firms survive the downturn", said Dr. Dirk Buchta, Partner and Managing Director, AT Kearney Middle East.

Announced merger plans for Emaar and Dubai Holding within Dubai Holding for Dubai Properties, Sama Dubai, Remraam and the Tiger Woods golf course; Barwa and Qatar Real Estate Investment Co and consolidation of land from distressed developers into companies like Dubai Real Estate Corporation has come as no surprise to Dr Buchta.

However, planning for a merger is paramount to its success, the firm warned. It added that almost 70 percent of mergers fail, often due to such basics as lack of preparation, communication, unclear strategies or poor execution. If developers are to merge, they need to ensure their company is on sound ground and research their prospective partner carefully before deciding this is the best solution, it added.

“The main objective for a merger should not be size, which makes little sense in a quality-driven business like real estate development. The merged entities will have reinforced position on different parts of the value chain, but risks will also increase. This can be linked to a stronger focus on a risky market like Dubai, in addition to liquidity issues or “doubling” activities, which will have to be rationalised. It is therefore the perfect time to review the corporate strategy of the new entities, enlightened by the new market conditions and the analysis of the growth path of most successful real estate developers worldwide. The time of endless growth for opportunistic projects driven solely by land and cash availability is over. Developers will compete for buyers, and they need to define a convincing strategy why buyers should buy from them and not from the other developer." said Olivier Laroche, Senior Manager of A.T. Kearney Middle East.

The other option for companies is to use diversification along the value chain, AT Kearney added. Mergers between complementary players aiming to integrate the chain both up and downstream have occurred in the region. Emaar has started following this path with the acquisition of Singapore-based Raffles for its education business and joint ventures in the construction, brokerage and facilities management segments for instance, the firm noted.

The firm believes that successful mergers can give leading Middle East players the critical mass and a competitive edge on the international scene, based on the regional market long-term potential and easier access to liquidity than most competitors worldwide. “Defining a rigorous growth strategy for the merged entity will be key to ensure shareholder and customer buy-in, but this needs to happen before the merger is actually announced,” Dr. Buchta said.

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