Financing still scarce for Dubai’s stalled projects

State-backed investment schemes doing little to open up credit lines to developers, say analysts
More than half of developments in Dubai were scrapped or halted during the financial crisis
By Elizabeth Broomhall
Mon 03 Oct 2011 10:03 AM

Developers seeking finance to kickstart stalled real estate projects in Dubai are still struggling to obtain funding, despite a state-run scheme aimed at opening up credit lines, industry experts said.

Just two projects have secured funding under Dubai Land Department’s (DLD) Tayseer scheme, which aims to offer low-interest bank loans to developers with partially-constructed projects.

“It all sounds very good in theory, but banks don’t lend unless they can get their hands on something,” said Jesdev Saggar, managing director of Deloitte Middle East’s capital projects advisory department. “I think little consideration was given to the complexities of these half-built buildings. For example, a lot of the due diligence required before you lend needs to be funded... [but] the developer doesn’t have any money left.

“Also, the complexity of a lot of the buildings in Dubai means that there is often very little equity left in the building. So the banks have nothing to have lend against; there is no security.”

DLD said in a statement to Arabian Business that 215 end-users had obtained finance through Tayseer and a further 25 developments were under consideration for funding.

The agency said in March that seven banks and Islamic finance houses had signed up to the scheme and 114 suspended projects had registered for consideration.

The government’s role is to select developments deemed viable for funding, and to ensure they meet certain requirements such as having an escrow account for buyer payments and construction that is 60 percent complete.

“We have been working behind the scenes,” said Mohamad Al Dah, head of Taqyeem at the department. Even projects that met the criteria for financing were not “guaranteed” a loan, he said.

Developers said the state-backed scheme has done little to bolster access to project finance, but has proved useful for securing meetings with banks.

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“It gives more confidence to banks when you’re approaching them for finance... and it will help in the initial meetings with the banks, but it still does not override the banks position on real estate finance,” said Kareem Derbas, CEO of Cayan, the developer of Dubai’s Infinity tower. 

“A lot of them are still extremely conservative about lending. Although it removes one hurdle, there are still so many other hurdles on the way to getting finance.”

Dubai’s backlog of unfinished projects is a legacy to the Gulf emirate’s rapid rise and fall. The city had the world’s fastest- growing property market from 2006 to mid-2008 because of rising demand from a growing expatriate workforce and speculation fuelled by borrowing.

Prices quadrupled in the six years following the 2002 decision to allow foreign ownership of property in designated areas.

With the onset of the global financial crisis, more than half of developments in the city were scrapped or halted as project finance dried up and developers ran out of cash.

Dubai has launched a series of initiatives aimed at resuscitating its real estate market. Alongside Tayseer, the city’s Land Department last month signed a deal to identify suspended or offplan residential developments and offer them for sale or long-term lease to investors.

Experts say state-supported schemes may go some way to improving investor sentiment, but warn both banks and end-users remain unlikely to risk funds in a still-falling property market.

 “It is important that an initiative like that is taken,” said Nick MacLean, the managing director of property broker CB Richard Ellis. “But I don’t think it’s had an immediate impact. “Subconsciously it has improved sentiment because it shows that the government is seeking to take an interest in stabilising the marketplace.”

In March, DLD said Al Manal Development in Dubai’s Jumeirah Lake Towers had received an AED65m ($17.6m) loan from Mashreq Bank to complete the stalled 35-storey tower. The announcement marked the first loan issued under the Tayseer scheme.

Executives at Mashreq Bank said the lender was in talks with other developers to thrash out financing agreements.

“We are [also] working with some [other] developers and there are projects in the pipeline that will be announced soon,” said Abbas Hasan, executive vice president of products and investment banking. “We have noticed increasing activity as banks work closely with developers to increase business and to finalise projects on time. We hope it will encourage other banks to participate.”

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