Abu Dhabi may rescue more developers after $9.8bn bailout

Abu Dhabi, the oil-rich sheikhdom that spent AED36bn ($9.8bn) bailing out its biggest developer in 2011, will probably reach for its checkbook again as property companies in the UAE face a stalled 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 an option now and would damage confidence,” said Saud Masud, an analyst at Dubai-based Rasmala Investment Bank. “A real estate recovery could take a long time, even if the bottom was hit in the next 12 months.”

Abu Dhabi, holder of 7 percent of the world’s proven oil reserves, contributed to a $20bn financial rescue of neighboring Dubai in 2009 and bailed out developer Aldar twice last year. While the sheikhdom’s cash will help property companies stay solvent, many will struggle to revive profit as Dubai’s real-estate slump stretches into its fourth year and Abu Dhabi puts large parts of its redevelopment plan on hold.

The companies most likely to need state help will be developers that relied on selling properties before they were built to fund construction, which is most of them, according to Arqaam Capital analyst Mohammad Kamal. Businesses with the best prospects are those with contracts in Saudi Arabia, Qatar and Kuwait, he said.

Real-estate values have fallen more than 60 percent in Dubai and 45 percent in Abu Dhabi from 2008 peaks after the global credit crisis caused banks to curtail lending and speculators left the market. Developers completing contracts are supplying thousands of homes and offices at a time when demand is dropping.

“The trump card over the next 12 months will be the incoming supply in both Dubai and Abu Dhabi,” Kamal said in an interview. “If that gets delivered, we see no improvement for the price or rental scenarios in either market without a resumption of macroeconomic growth, job creation and mortgage lending.”

Both Dubai and Abu Dhabi have been striving to become less dependent on oil revenue by developing homes, hotels, offices and tourist attractions through a combination of state-owned and publicly traded companies that raised funds from investors, international debt markets and buyers prepaying for homes. Abu Dhabi and the UAE federal government increased their financing role after the credit crisis caused lending in the region to dry up.

Abu Dhabi has a track record of keeping companies afloat and a big default would be “difficult to show the world,” said Hans Zayed, head of research at Rasmala. “Anything that hinges on real estate faces difficulty at the moment.”

Moody’s Investors Service highlighted Abu Dhabi’s record of support in Dubai and said the emirate is likely to continue backing its neighbour by rolling over the Dubai Financial Support Fund due to mature in 2014, according to a Dec 5 note. Moody’s expressed concern about the timeliness of further aid after a Nakheel Islamic bond was repaid at the last minute following the 2009 bailout.

UAE developers face debt-repayment deadlines this year. Aldar has AED2.2bn due and Nakheel, builder of Dubai’s palm-shaped islands, needs to repay AED5.8bn. Union Properties has AED429m maturing this year, according to data compiled by Bloomberg. Abu Dhabi’s $4.6bn bailout of Aldar on Dec 29, the second of the year, helped ease concerns about the company’s borrowings, Moody’s said in a note that day.

Dubai Holding Commercial Operations Group has $500m of debt maturing in 2012, Moody’s said. The company’s Dubai Properties Group unit suspended construction on a Tiger Woods-designed golf resort last year, citing a unfavorable luxury property market.

For Aldar, a return to profit wasn’t enough to avert a bailout as a debt deadline loomed. The company in November reported third-quarter profit of AED144m compared with a year-earlier loss of AED731m.

“In Aldar’s case, there was a clear need for debt relief and a liquidity injection,” Kamal said. “In other cases, the government backing has been less direct but equally supportive.”

One example is a decision by Abu Dhabi’s Urban Planning Council to award contracts for 7,500 homes, he said. Sorouh Real Estate, the emirate’s second-largest developer, along with smaller private builders such as Tamouh Investments, Royal Development and Al Qudra Real Estate received contracts totaling AED13.5bn.

Aldar, 18.9 percent owned by Abu Dhabi before the bailouts, is a special case because the company carried out much of the government’s infrastructure work and built tourist attractions, Rasmala’s Zayed said. “If there are other bailouts, I don’t see anything on the scale of Aldar,” he said.

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