Abubaker Seddiq Al Khoori says he is sleeping much better than he was a year ago.
“It was very hectic,” the Aldar chairman says of the megamerger between Abu Dhabi’s two biggest developers, which dominated the headlines 12 months ago. “Everyone worked day and night and we were pleased to finish it.”
It certainly appears that the new Aldar picked the right man for the job of not only masterminding the merger with Sorouh (where Al Khoori had previously been managing director), but also keeping the developer’s project pipeline on track, as well as completely revamping Aldar’s bottom line.
By any assessment, the turnaround in Aldar’s fortunes has been remarkable. Back in 2011, beset by a growing pile of debt, a $3.44bn loss in the previous year and a 50 percent drop in property values in the UAE capital, the developer was forced to accept two government bailout packages worth almost $10bn. As part of those deals, Aldar issued bonds and sold assets — including housing and retail space, as well as the Ferrari World theme park and the Formula One circuit on Yas Island — to the Abu Dhabi government. In addition, state investment vehicle Mubadala raised its stake in Aldar from 19 percent in 2009 to 54 percent in 2011 — although that has since tracked back down to 39 percent by the end of 2013.
Since the dark days of 2011, the outlook has improved considerably. Along with the Abu Dhabi property market’s return to growth, Aldar has also benefitted from healthy cashflow from government transactions, which will amount to $1.24bn in 2014. But the biggest contribution has come from the merger with fellow developer Sorouh, which has created the third-largest listed developer in the Gulf, and allowed Aldar to refinance “most if not all” of the $3.96bn worth of debt it had accrued as a result of the financial crisis. It has also ensured that the new company now has the largest land bank in the UAE, with 77 million sq m of mostly infrastructure-enabled land.
“By the time we announced the merger, we knew we would have to refinance about $3bn within 18 months, and that, by itself, was not a small challenge,” says Al Khoori, with impressive understatement. “That’s why we started talking to the banks and convinced them to start reducing their fees on existing loans before we even went and started refinancing.”
The merger between Abu Dhabi’s two largest developers took six months, considerably less time than the consultants the companies had hired to advise on the deal had estimated. Al Khoori says that the process was helped by setting up 17 separate workshops between the two entities even before the merger talks had been fully concluded, allowing the teams to get a headstart.
“I think the best thing we did was to structure the merger with our consultants, but when the time came to execute, we asked the consultants to step aside, and we decided to do it ourselves,” he says. “It was quite risky — the consultants were quite shocked. They said ‘with us, the minimum time will be 18 months’. We said ‘fine, but we think we know the business well, and we think we can do it better than anyone else’.”
As well as making the process quicker, the move to conduct the merger in-house also resulted in higher than expected savings, Al Khoori says. The company had planned to save between $25m and $30m on an annual basis three years after the merger had been completed. Instead, it achieved cost savings of up to $41m on an annual basis within just six months.
The numbers today look like they’re in pretty good shape. Since the date of the merger, Aldar has managed to raise $2.26bn through bonds and other loan issuances, bringing down the average cost of their loans from 5.8 percent to 2.8 percent. Those new bonds have an interest rate from 4.3 percent, significantly less than the 10.7 percent coupon attached to a previous $1.25bn bond that was paid off in May. In addition, the interest the company pays on its loans on an annual basis has fallen from $272m to $82m, a drop of 70 percent.
“We’ve reduced our debt by about 35 percent, so we’ve passed that challenge successfully,” Al Khoori says. “And we have a much stronger balance sheet today than what we had before.”
Further evidence that the merger is working well came in the form of Aldar’s first-quarter results, which showed profits tripling to $123m, with revenues rising by 4 percent to $463m.
The chairman says that the end of 2015 should see the developer in an even stronger position.
“By the end of next year, we will be in a much better position on the debt side,” Al Khoori continues. “Our target is to reduce the debt substantially to $1.36bn. We will have a stronger and more diversified portfolio of investments. Our target is to increase the portfolio from where we started at $191m of gross revenue to $436m-$463m.
“We will have a few projects that will be very close to delivery. And we will have achieved, I would say, most of our strategy, which will allow us to start thinking about the next step.”
Right now, however, Al Khoori has his hands full dealing with the company’s main role — building houses and infrastructure. So far this year, Aldar has announced three projects, and has said that there are 20 more developments in the pipeline. In May, the developer sold all 233 apartments available for off-plan sale at its Al Hadeel project in Al Raha Beach, a move that was followed by a similar successful launch of its 540-apartment Ansam development on Yas Island. In July, Aldar will also release 140 plots of land for villa development on Nareel Island. Those three projects are together valued at $1.36bn.
“We’re almost sold out — I think we’re left with 13 units in Al Hadeel and we finished our sale of Ansam,” says Al Khoori. “We were planning to sell 50 percent but we sold 85-90 percent of the project. It’s part of our strategy to keep some of these units for our investment portfolio, or to sell at a higher value at the end when we deliver the project.”
Demand has been driven by a strong recovery in the Abu Dhabi property market over the last year or so. According to real estate consultant JLL, prices for “prime, high quality units” in the UAE capital rose by 25 percent in 2013, and by a further 9 percent in the first quarter alone. Rents for the same segment rose by 17 percent over the year, and by 4 percent over the first quarter.
The growth in Abu Dhabi has been matched with even quicker price hikes in Dubai, leading the UAE Central Bank to warn earlier this month that “a major market correction... could harm lenders to the real estate sector, as falling prices would reduce the repayment capacity of developers”. But the chairman says he is not concerned, at this stage, about rising values in the capital, adding that the growth is “definitely sustainable in the mid-term”.
“The demand is not driven today by the fact that there is very cheap and plentiful financing available from banks,” he says. “The demand is not driven by the fact that the price of these real estate developments increases by 5 percent every week. The demand is not driven by very limited knowledge of the market, and what happens to the market.
“This is true demand, and is coming only a few years after a big global crisis that affected the UAE, where people got their fingers burnt. This demand is coming after the government brought in very solid regulations to the whole framework. And this demand is coming despite the fact that the financing available today, despite the fact that we’re not just selling in bulk to everyone and allowing resale immediately.”
Abu Dhabi’s property market has been helped by a ruling last year that forced public sector employees to live in the city, rather than commuting from nearby Dubai. In addition, a government decision to remove a cap that limited annual rent increases to 5 percent has made real estate more attractive to investors. Despite reports that have suggested that some landlords have boosted rents by as much as 50 percent since the cap was removed, Al Khoori agrees with the move, saying it is “a pure sign of maturity in the market”.
When questioned as to whether demand is such that Aldar will need to speed up its project releases, the chairman hints that that would be “normal” although he doesn’t give too much away about what those 20 new projects will be.
“We have to be innovative to come up with as diversified a mix of products as possible,” he says. “These products will target the low and mid range, up to the luxury [in terms of] residential, [but there will also be] commercial, retail, and many others. But when it comes to retail, it’s going to be mainly community retail.”
Al Khoori also says that “most” of the new projects will be offplan, part of the developer’s ongoing strategy to clean up its balance sheet. Aldar is also focusing heavily on recurring revenues, like those accrued from its office, retail, hotel and residential investment portfolios. That portfolio will increase further as new developments at Al Rayyana, The Gate and Yas Mall open up for business. In tandem with residential property, Aldar will continue to build schools (it already operates seven Aldar Academies), healthcare facilities, tourism projects and hotels.
The chairman highlights Yas Mall — which will become the UAE’s second-largest shopping centre with 235,000 sq m of floor space when it opens in November — as being of particular importance to the company. The site features two department stores, new brands not seen elsewhere in the region, a 20-screen cinema, and will be connected to the Ferrari World theme park.
“We are 90 percent plus leased, and the construction work is done,” he says. “It’s going to provide a very unique destination experience in Abu Dhabi, and it’s the biggest entertainment centre in the world, if you think about it.”
Al Khoori is also open to the idea of adding to the seven-strong list of hotels it has built on Yas Island, as the capital’s hospitality sector recovers from a lengthy period in the doldrums, although he says no decision has been taken yet.
“If you had asked me a year ago, I would have said maybe not,” he says. “But given what we have seen, the room rates picked up by 18 percent last year, while the occupancy rates went up from 68 percent to 75 percent, and we always read and hear more about more and more visitors coming to Yas.
“The moment we reach a stage where we feel there is more demand for hospitality products, we will definitely consider it. It could be a hotel, it could be furnished apartments, it could even be some of the serviced apartments for sale as a product.”
The next three years will see Aldar focus entirely on the UAE (including in Dubai and the northern emirates), as the developer seeks to make the most of its land bank. But after that period, Al Khoori says it may well consider expansion overseas, although the chairman hints that any projects abroad might be conducted in association with the government.
“Going outside your country for development is not that simple,” he says. “It might have potential, but we also see potential here… but we would definitely consider opportunities like Kazakhstan where we go with the government and help the government. That by itself could open new doors by itself, in terms of going there, not fully taking the risk but providing that service to control and deliver a project for the government.”
The future will also include a new chief executive, a regulatory requirement. Al Khoori says the company is “very close to finalising that” and hopes to make an announcement before the end of the year, if not before. And what is the longer-term outlook for the company over the next ten years?
“I think I will have more grey hair,” the chairman jokes. “But what I would like to see is Aldar turning into more of an asset management firm, as well as being a developer. I would like Aldar to have more exposure outside the UAE. And I’d like Aldar to have very strong and stable recurring income.”
If Aldar’s next three years meet the high standards the company has achieved in the 12 months since its merger with Sorouh, then Al Khoori looks set for a few more nights of well-earned sleep. Whether that will be enough to keep the grey hairs away is, of course, another matter.
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