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Fri 29 Feb 2008 04:00 AM

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Aldar looks west

Abu Dhabi's largest developer Aldar has set its eyes on the real estate markets of Europe.

Aldar is on the acquisition trail and the distressed real estate markets of Europe may be where Abu Dhabi's largest developer has set its sights. We speak to CEO Ron Barrott, and find out why greedy builders and banks are getting him down.

Ron Barrott says builders are getting greedy. It may be one reason why the CEO of Abu Dhabi's largest real estate developer is seeking to expand the Aldar empire overseas with possible acquisitions in play in Europe.

A lot of contractors are getting greedy at the moment. It’s not just because costs are going up. What I’d say to them is that people have long memories.

"There are a lot of contractors who are getting greedy at the moment and it's not just because costs are going up. What I'd say to them is that people have long memories,'' he says.

Barrott should know. His memory of the building game goes back 37 years. A building engineer by profession, the Englishman was running his own job as a project manager by the age of 20, and went on to found three development companies under the Stannifer name in the UK and the Czech Republic, before arriving in Abu Dhabi to steer the fledgling Aldar Properties.

Now as CEO of the real estate group, Barrott is planning the next chapter in Aldar's phenomenal growth story, that is likely to include an acquisition in Europe and could even involve an overseas stock exchange listing.

Aldar is the second largest developer in the UAE, behind Emaar Properties and like its larger rival, is now seeking to replicate the success of the residential-led master-planned mega project in developing markets overseas.

While Emaar has tended to form joint venture companies in the new markets it enters, Aldar is working with some of its domestic rivals in its foreign forays.

In Abu Dhabi, Aldar is building a theme park, hotels, cinemas and studios with Time Warner Inc. It is also the largest builder of residential units in the UAE capital, across its developments that include the Central Market and the US$18bn Al Raha Beach project, which is intended to house around 120,000 residents.

Abu Dhabi, home to more than 90% of the UAE's oil and gas reserves, is aiming to replicate the success of Dubai in becoming a tourism and entertainment hub for the region by adding hotels, theme parks and museums.

Aldar's overseas push is being spearheaded by ‘Al Maabar', a partnership formed a year ago that also includes Sorouh Real Estate, the second largest publicly traded developer in Abu Dhabi and Reem Investments.

Al Maabar plans to develop projects in Morocco, Libya, Belarus, Tunisia and Kazakhstan, where Aldar is building the US$2bn Norman Foster-designed Abu Dhabi Plaza project, which is similar in scope to the Central Market scheme in Abu Dhabi.

Inmobiliaria Colonial SA, the Spanish developer that was approached by Investment Corporation of Dubai in January, is a company that may fit the profile as a possible acquisition target for Aldar although Barrott says there are no active discussions taking place.

"It could fit the bill but we haven't looked at it. The Spanish market is interesting and the British market is interesting because of the way company values have moved. There is good value,'' he says.

Colonial's market value dropped 56% in six months to about US$4bn, as it incurred more costs servicing debt. Colonial would give its buyer about US$18bn of real estate in Madrid, Barcelona and Paris. Colonial also owns a 15% stake in Fomento de Construcciones & Contratas, the third largest builder in Spain.

We are looking at companies with a good profile and investment and a good development pipeline going forward, as well as fundamentally sound management,'' says Barrott.
Aldar was one of the biggest buyers of debt among UAE real estate developers in 2007, and raised about US$9.2bn from the market to fund its ambitious construction project in Abu Dhabi and overseas.

Despite ongoing turmoil in global credit markets, Barrott does not expect tightening credit conditions to impact adversely on its development pipeline, although he confirms that Aldar's 2008 debt requirement is likely to be less than last year, although its construction schedule is unlikely to slow.

Obviously I’m well aware of the opportunities and of what a dual listing could mean.

"We will be looking to utilise the markets again. The good news is that since the market caught a bit of a cold last year, it hasn't affected the appetite of our bankers and investors - in fact it generated a proactive response from them,'' he says.

That confidence may be bolstered by the developer's extensive land bank and the fact that it still trades at a significant discount to its net asset value, a key measure for any real estate company. Aldar has a land bank that extends across 34 million sq m (366 million sq ft) and is valued at about US$10.33bn. It saw net profit surge 55% in 2007 to US$529m as it sold more homes in Abu Dhabi.

While Barrott plots Aldar's expansion abroad, at home he has had to deal with spiralling construction costs which have hit the price of diesel, cement and steel and given contractors in the capital an excuse to ramp up tender prices.

Rising labour costs have also been passed on as contractors are forced to pay their workers more.

But Barrott is not convinced that material and labour price inflation in the construction industry excuses contractors for the prices currently being quoted.

"The same thing happened in the UK some years ago when the market went through a rapid growth period and they were marking everything up," he says.

As a result Aldar has formed two joint ventures with construction companies in a bid to gain more control over its supply chain, cost base and build quality.

Aldar Laing O'Rourke, a joint venture with Britain's biggest privately-owned builder, was formed in November 2006 to carry out contracts on Aldar projects in Abu Dhabi, including the US$18bn Al Raha Beach project.

Now the developer has extended the model with a similar tie-up with the Besix construction group, to carry out work on its 2500-hectare Yas Island development that will be home to a Ferrari theme park, a world-class motor sports racetrack as well as golf courses, a polo club and about 300,000 sq m of retail space.

Although Aldar's share price has soared over the last year thanks to an influx of foreign institutional investment and a rising international profile, Barrott believes the company still trades at a "very heavy discount" to its net asset value.

Until now investors have been attracted by the company's large gifted land bank and its preferential position among property companies in Abu Dhabi. Now they will also be looking at its overseas project pipeline.

That will also be of interest to the increasing number of overseas analysts that have started to monitor Aldar in recent months in response to a growing appetite for its stock among outside investors.
Barrott does not rule out the possibility of a future overseas listing in a similar move to Emaar, which is mulling a secondary overseas listing as exclusively reported by Arabian Business in November.

He adds that the company has already listed a sukuk, or Islamic bond, on the London stock exchange.

"Obviously I'm well aware of the opportunities and of what a dual listing could mean.

If you look at any city in the world the most valuable real estate is located in the capital city. Abu Dhabi is no different.

"If it makes sense for shareholders and is in their best interests at the right time, then we will do it. I look after my shareholders best interests and to minimise their risks and maximise their returns. If that fits the bill at the right time, then maybe," he says.

In the meantime Aldar is focusing on adding to its Abu Dhabi operations in the expectation that house prices will eventually rise higher than Dubai where most foreign investor interest is still concentrated.

Barrott believes that could happen as quickly as five years as the emirates adds infrastructure, boosts tourism numbers and attracts the sort of key corporate occupiers who currently have their headquarters in Dubai but may move when enough quality office space becomes available.

While the capital does not yet rival Dubai as a tourism destination, the growth of the hotel sector and the expansion of its airport will bring more visitors to the emirate, he believes.

From luxury to low costAldar has entered the low-cost housing market in Abu Dhabi and is in discussions with Etihad Airways to provide more employee accommodation after being awarded its first project for the airline to provide homes for about 1000 staff members.

The airline is recruiting extra staff to accommodate surging visitor numbers that is increasing demand for employee accommodation in sectors such as hospitality, aviation and construction.

Abu Dhabi, which owns around 8% of the world's oil reserves, will more than double the number of hotels, adding a further 60 by 2015, the government said in its Abu Dhabi Policy Agenda 2007-2008.

"Tourism is a critical element in the overall development of Abu Dhabi," the government said in the Policy Agenda. "It will stimulate and diversify the economy, generate new private sector opportunities and elevate the emirate's international standing," it said.

Aldar's Abraj Towers housing development, opposite the airline's new headquarters building, is close to completion and will open in phases.

The first phase consists of nearly 200 one-bedroom apartments.

The new project has been developed as part of a joint venture between Etihad Airways and Aldar.

The community around Abraj Towers will eventually house more than 1000 staff in one, two, and three-bedroom furnished and unfurnished apartments.

Etihad currently employs 5700 staff worldwide, including more than 4850 based in the UAE.

Abu Dhabi is seriously aiming to draw 1.2 million tourists a year by 2015, 1.55 million business visitors, and 240,000 exhibition visitors.

"If you look at any city in the world the most valuable real estate is located in the capital city. Abu Dhabi is no different," he says with some conviction.

"You can't get a hotel room in Abu Dhabi at the moment. Come 2009 and onwards you will see a significant difference in tourism numbers," he says.

The developer also plans to start a second mortgage unit offering conventional home loans to tap demand for new houses in Abu Dhabi and ensure competition for home loans for potential investors.

"We've set up an Islamic mortgage company and we are now looking at a conventional mortgage company," says Barrott.

"Mortgage customers are not getting a fair crack of the whip at the moment. There is no reason why our mortgages should be out of line with Europe.

"There is no reason why there should not be the same suite of mortgages on offer here.

Barrott formed his own contractor when he felt that builders were getting greedy. He did the same when he felt mortgage customers were not getting a fair deal. ‘If you can't beat them, join them' would seem to sum up his approach to doing business in the sometimes greedy world of real estate and construction.

House prices still risingUAE real estate developers will benefit from rising property prices in 2008 and strong margins despite absorbing higher construction costs, according to EFG-Hermes.

More construction delays will also curb the supply of new units to the market keeping demand high.

"Taking both cost and demand pressures together, we now believe that both off-plan and secondary market prices will rise significantly higher in 2008 than our previous expectation of 5-10%," the Egyptian investment bank said in a report. Developers including Aldar, Emaar and Nakheel have been hurt by soaring construction material and labour costs over the last year. A continuing shortage of construction workers and the mandatory adoption of new building codes and insurance schemes has impacted profits in the real estate sector, stoking fears of a slowdown.

But EFG believes that buoyant market demand is allowing developers to pass on costs to off-plan buyers in the UAE.

"With our expectation of further cost inflation, we believe that the likelihood of pending property supply being delayed is even greater than before.

"We believe strong sales activity and price increases will be a strong value driver over the next 12 to 18 months for both stocks," the report said.

Falling interest rates will also make mortgages more affordable for UAE investors, EFG predicts.

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