By Shane McGinley
In a stressed property market Gulf developers may need to get out of contracts and agreements.
In a stressed property market Gulf developers may need to get out of contracts and agreements they made during the boom years, which is where law firms like Holman Fenwick Willan come to the fore, reports Shane McGinley.
Being a litigation lawyer is a bit like being a fire-fighter who is waiting for the fire to break out," says Michael Pilkington, a partner at law firm Holman Fenwick Willan, who specialises in commercial litigation and arbitration in the property, insurance, banking, construction, energy and logistics sectors.
Pilkington further describes himself as a ‘dispute resolution lawyer' where it is his job to keep his clients out of the courts and to resolve their difficulties before they reach the public legal arena.
There are quite a lot of issues that are going to arise. Being a litigation lawyer is a bit like being a fire-fighter. - Michael Pilkington, Partner at Holman Fenwick Willan
In the current market such disputes arise when developers find themselves locked into contracts with buyers, investors or contractors which they can no longer deliver on and may need to get out of.
"There are quite a lot issues that are going to arise," believes Pilkington, mainly due to the sudden lack of liquidity, a retracted market, prices dropping and developers and agents now having to look for flexibility on projects' timelines and make up.
Mergers and acquisitions
During times of market stress it is often common to see mergers but Christian Taylor, another Holman Fenwick Willan partner, who has experience in acting for developers on residential, commercial and mixed-use schemes in the hotel and leisure sector, believes this is unlikely to be seen in the Dubai market, but he does believe that what we may see is a move towards opportunistic acquisitions.
"The issue is when that will start to happen," says Taylor, however yet again he points out that the issue of liquidity will determine whether companies have the ability and available finance to swallow up their smaller competitors. In such moves the legal hurdles would be substantial.
Holman Fenwick Willan has offices in London, Paris, Rouen, Brussels, Piraeus, Hong Kong, Shanghai, Singapore and Melbourne and across the world they believe that confidence is the key factor, even within the Gulf region itself. "We do some work in Abu Dhabi and the confidence issue there is less of an issue because of the oil wealth there," says Pilkington.
"I think the expectation and hope had been that things wouldn't change," says Taylor, who believes that many companies in the sector realise that the boom wouldn't continue at the rate it was but were only anticipating a softening rather than a downturn.
"I don't see it as a complete crash, from a personal point of view. You have to distinguish between projects that have started and are out of the ground and those that haven't broken ground yet," adds Taylor.
Projects in Dubai that have broken ground have obviously already been sold a few months, if not years, ago but Taylor points out that the issues that arise are very much dependent on how heavily invested their buyers are, how many buyers there are and the likelihood of them completing on their deposit or investment. Insurance and banking
As property is a major industry in Dubai it impacts and influences all other business sectors, take the insurance sector for example. Pilkington, a specialist in insurance, reports that UAE insurance firms tend to reinsure 95% of their risk, therefore not much risk is retained by the local market. In the past, insurance firms often offset any losses or claims they ensue with the profit they make from investing the capital generated from policies in stocks and property.
With problems currently being experienced in both the stock markets and the global property market these losses are harder to offset and therefore Pilkington believes it is very likely that global insurance rates will rise, which could very well affect large property developers.
When property markets abroad have gotten into difficulty the banking sector is also affected as many banks freely lent large sums of capital to property developers who subsequently struggle to meet repayments, which then threatens the stability of the entire system.
Holman Fenwick Willan believes this is unlikely to be a scenario that will materialise in the UAE as most projects do not generally require massive financing from local banks and are built on the back of staged payments from buyers and investors. "This is a big factor that differentiates the Dubai market from others," says Pilkington.
"Each project of course is different", say the legal eagles, and the payment history of the project is a good litmus test for the project's likelihood to be realised.
In projects where only 5-10% has been paid upfront by buyers the risk is that buyers may choose to sacrifice their small investment and walk away from the project, however if they have put down a higher percentage already then the likelihood is they will complete on the contract and will be reluctant to walk away.
If units have very often been resold several times to subsequent buyers, usually for a premium, then the current contract holders are generally reluctant to walk away from their commitment to the project and these projects have a high probability of being completed believe Pilkington and Taylor.Where developers encounter problems, says Pilkington, is on projects where there is a small level of buyers who have only invested a very small percentage of the necessary money upfront.
"I was speaking to a developer and I was asking him how they stand and he said they had sold 70% of two projects under construction, but because they had been sold on two or three times he was pretty confident that buyers would stay with their stake in the project and would continue to the end," Pilkington reports, "but they then had one project in the very early stage in which, if they are financially secure enough, they might negotiate with buyers to delay the project."
Projects that are only just off the design phase and haven't been released to the market Taylor believes that, in the short term, they are unlikely to advance further as there isn't any movement in the off-plan sales market.
It is common to see mergers, but this is unlikely to be seen in the dubai market, what we may see is a move towards opportunistic acquisitions. - Christian Taylor, Partner at Holman Fenwick Willan
Attending large property exhibition shows where such ambitions projects are unveiled is often like going to a motor show and seeing the new concept cars, adds Pilkington.
Confidence is everything in the property market and Holman Fenwick Willan report that some of their property clients are confident the market will pick up but many are looking to downscale or re-evaluate their plans, which can lead to more potential fire points for litigation lawyers to try and extinguish.
"If not that much has been sold then there are fewer buyers to go and sit down with," says Taylor, especially as the foreign buyers market dried up months ago.
Another major determinant is whether projects are being developed by government backed developers or private companies. "If they are Dubai government backed then everyone is confident these projects will go ahead but maybe the pace of development may be altered," says Pilkington.
Private developers are a whole other ball game, Pilkington believes, but some may take the gamble and begin construction at the moment, capitalize on decreasing steel and cement prices and the increased availability of staff and make a push on sales when the market improves down the line.
Once again however this depends on the solvency of the shareholders, the makeup of the rest of company's portfolio and how willing the company's management team are to take a high risk approach in the current market.
Phasing and timescales
Re-evaluation is the buzz word and phasing is another area that is also coming under increasing scrutiny. Many developers are looking at moving ahead 20% at a time. While this may seem like baby steps, and in Dubai terms they may be small phases, in global terms, Taylor says, they are major projects to undertake in their own right and therefore no minor construction feats. "What has to happen is to have a more realistic approach to time scales," he reiterates.
Holman Fenwick Willan is often involved in the advisory process and is privy to the regulatory planning and development process in the UAE, however these regulations were implemented and designed during the boom years so as time progresses additional amendments and developments will be called for to deal with changing conditions.
"People who are involved in the legislation are happy to have involvement from lawyers and developers. That is built on the strength of the firm as we have been here 12 years. We have grown with Dubai and that is why we can get involved," says Taylor.
The regulatory and legal system in the UAE is based on the Australian system, or more precisely Queensland and Taylor also worked in Australia for four years. The new regulations that have been introduced are making the market more transparent, especially in the area of escrow accounts.
However Taylor says that the regulations, which were formulated during the boom, also place an extra layer of strain on companies that are already struggling with the bottom line. Therefore in the current market the role of legal and regulatory experts is coming more to the fore and lawyers will be in more demand than ever before.
What is happening now, believe Pilkington and Taylor, is that a new mindset is being required and developers now have to re-evaluate their plans and structures in line with current challenges, something they didn't have to do previously.
"This property monster is bigger than anything they have done before," says Pilkington of the predicament Dubai developers currently find themselves in. "The bottom line is funding and how much has been sold," says Taylor.
"The firm is playing the long game," they reiterate and are confident about the resilience and determination of the Dubai market. "People said they were mad to build the Palm but it has been very successful," points out Pilkington.
It will be interesting to see whether developers will be able to rise out of the legal challenges they may face.
As litigation lawyers it will be their job to keep them out of court and be on the watch "for the fire to break out."