Abu Dhabi may rescue more developers after $9.8bn bailout

Oil-rich emirate spent $9.8bn to rescue Aldar and is likely to reach for its chequebook again
The value of stalled construction projects in the UAE hit $958bn last month
By Bloomberg
Tue 10 Jan 2012 07:55 AM

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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Emaar Properties, Dubai’s biggest developer, reported a 34 percent decline in third-quarter net income as apartment sales dropped by 86 percent. Nakheel reported first-half profit of AED526m in December without giving comparative figures. The company, which received $8.6bn after Abu Dhabi bailed out Dubai, wrote down the value of properties by AED78.6bn since 2008.

Abu Dhabi isn’t only helping developers. Investment arm Mubadala Development agreed in March to provide AED3.1bn to National Central Cooling Co., an air conditioning company known as Tabreed, as part of a recapitalization.

Abu Dhabi, the richest and largest of the seven emirates that make up the UAE, plans to invest $500bn in industry, tourism and culture to increase non-oil revenue to 64 percent of the economy from an average of 41 percent from 2005 to 2007. In 2005, the sheikhdom opened its property market to foreign buyers and began building homes, offices, malls, hotels and tourist attractions on Saadiyat Island, Yas Island, Al Reem Island, Al Raha Beach and the city center.

Since the global credit crunch, UAE developers suspended or canceled around $500bn worth of projects, twice as much as in the other five Gulf Cooperation Council countries, Arqaam’s Kamal estimates.

In Abu Dhabi, developments valued at about $30bn have been put on hold, including branches of the Louvre and Guggenheim museums, the MGM Grand Abu Dhabi hotel and the zero-carbon headquarters of renewable energy company Masdar.

“The emphasis right now seems to be on addressing financial problems at entities and nursing them back to health,” said Giyas Gokkent, group chief economist at National Bank of Abu Dhabi.

Kamal said residential values are likely to drop another 10 percent to 15 percent as 20,000 homes are completed in Abu Dhabi and another 25,000 in Dubai. He said a similar number of properties is scheduled for completion in both markets in 2013.

Although Abu Dhabi’s government hasn’t announced any changes to its development blueprint, called Vision 2030, since it was first published in 2008, a substantial proportion of the projects expected under the plan are now on hold while a review of their economic viability is underway, Kamal said.

“The 2030 plan will go ahead by and large, but within that there will be a refocus,” Gokkent said. “The fundamental question is the profitability of various entities and whether it makes sense to go into a particular activity.”

The plan foresees the population growing to as much as 5 million by 2030 from an estimated 1.6 million in 2008. The government may revive some of the suspended projects if it considers them essential in the long term. Profitability may not be the only factor in deciding whether to restart work.

“Some projects will probably never make any money but are deemed important for Abu Dhabi to attract investment or to diversify the economy,” Zayed said. “In Dubai, building the palm was never going to be economically viable, but it did put Dubai on the map and helped it attract investments.”

Abu Dhabi’s Urban Planning Council didn’t respond to questions on whether the 2030 plan is on track when contacted by Bloomberg. Calls and emails to Abu Dhabi’s Department of Finance weren’t returned.

“Projects that are real estate related or those deemed not an immediate priority may be phased in over time, given that this is a long-term plan,” Gokkent said.

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