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Sun 28 Dec 2008 04:00 AM

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Financing a city

Brian Meilleur reviews the challenges of securing $ 1.3bn in financing for Qatar's Al Wa'ab City.

Brian Meilleur reviews the challenges of securing US$ 1.3bn in financing for Qatar's Al Wa'ab City.

Al Wa'ab City is one of the largest privately-held real estate projects in the State of Qatar. It consists of approximately 600 villas, over 1,450 apartments, 100,000m2 of retail, 200,000m2 of offices and a 200-room, 5-star hotel.

Only 277 of the most luxurious villas are for sale, with the balance being held by the company for rental and long-term capital appreciation.

The project is centred on Barahat Al Wa'ab®, a 44,000m2 piazza which is designed to be a unique central gathering space for residents and tourists; with over 20% of the project area dedicated to public and green space, resulting in an FAR (Floor-Area Ratio) of approximately 1.0, this is one of the lowest density projects in Doha and the region.

The development, as a whole, is aimed at the upper-end of the market and is representative of the new wave of complexes that target a prestigious and relaxed lifestyle. Substantially completed in late 2010, Al Wa'ab City will be home to approximately 8,000 people.

By international standards, this is a large project, yet by local and regional standards it is of moderate size. Furthermore, while the unique design and model for residential and commercial integration present a few engineering challenges, on the whole, it is a relatively simple construction project. With the strong underlying Qatar economy, this should have been a straight-forward project to finance.

The financing programme began in late 2006, resulting in the first bridge loan in mid-2007, and work began immediately on the permanent financing. By June 2007, it became evident that there were difficulties in the financial markets and that these difficulties would definitely get worse.

Banks and other institutions were beginning to speak quietly about liquidity and other issues; if there is one absolute truth in financing, it is that if the financial institutions and investors believe that there are problems, there are indeed problems. We took it very seriously.

There are a number of difficulties in financing large projects in Qatar and the region and two in particular stand out. The first is a reluctance to attribute much equity value to land.

While financiers will recognise the value for security purposes, they like to see a healthy amount of cash equity in the deal. Accordingly, equity and ‘equity-like' funding are important components in getting senior funders to commit.

The second is the balance sheet and connection limits for the banks. They are restricted in the amount that they can lend to any one borrower or connection and the result is that, for large deals, it is essential to have a significant number of financiers in the deal.

This, inevitably, complicates matters for the borrower. The key was to find a financial structure that was attractive to financiers in the evolving climate - from both a risk and reward standpoint - and one that also cast as wide a net as possible in order to access all available pools of liquidity.

After much discussion, we settled on a three-part financial structure: approximately US$ 1 billion in senior debt, US$ 200 million in an innovative Islamic mezzanine finance structure (never tried before in the region) and US$ 100 million in equity. This was in addition to a substantial underlying raw land value.

Hard times

We began meeting with banks and other financial institutions and the Islamic Mezzanine Fund was designed and launched. Over the course of almost a year, the financing consortium took shape with participating banks and investors identified.

Tremendous numbers of meetings and phone calls took place and supplementary information was added on an almost daily basis. Due diligence was intense. This led up to the closing, which effectively began at the beginning of September 2008 and was extremely difficult.

In order to meet bridge loan deadlines, we had to finalise the deal over Ramadan and Eid, with funding to occur shortly thereafter. During this period, we were dealing with between 50 and 75 people on an active basis - there were seven banks on the senior side, while the Mezzanine Fund and the equity participants added another 15 parties.

Every day, the public news got worse. Lehman Brothers, Merrill Lynch, AIG...all of these reports were coming through while we were negotiating the closing documents. The climate was tense and getting worse.

However, thanks to a great deal of effort, the deal got done. Why? Firstly, solid and well-known principals and sponsors who were actively involved. Financiers and investors knew and had confidence in the people they were dealing with.

Secondly, good information. We used conservative assumptions from the beginning of the transaction and submitted them to extensive independent due diligence.With the strength of the underlying Qatar market, there was no question that the project as presented was viable, and we were already under construction, which gave confidence that the project was moving forward as planned.

Thirdly and fourthly, adherence to international standards and transparency, and developed relationships. Investors globally could look at the project and understand what they were seeing.

They knew that there would not be any last-minute surprises, while we had spent a great deal of time getting to know our bankers and investors, so when problems came up, we were comfortable with each other and could get to the root of them quickly.

Responsiveness was the next major factor. We dealt with each problem that came up in a timely manner. I cannot emphasise enough how imperative it is to deal with each and every issue that is raised, whether by an individual entity or by the consortium, and to do so thoroughly. In this climate, no issue is small - anything can break a deal.

Finally, we were extremely fortunate in the people we surrounded ourselves with. On the advisory front, we received extremely good counsel. In respect to financiers, we dealt with institutions and people who were actively trying to make the deal happen.

While still very cautious, the banks and investors proceeded with a tremendous amount of diligence and integrity. This goes back to the depth of the relationship; they never gave up and that was extremely important.

Bankers lend and investors invest

So where does the financing market stand today? Clearly, things are not much better globally, although, in Qatar, we are fortunate as the banking sector remains healthy and well-supported. Plus, the underlying real estate market is a catch-up industry in Qatar, primarily building to meet existing demand.

While certain sectors may slow, the overall forecast is for continued growth due to a strong underlying economy and, for projects that can be financed locally - and to some extent regionally - the prospects are still good.

It will take more time than usual but good deals can still be done. For projects that require significant investment from the international markets, it will be a lot more difficult.

Many institutions have stopped investing in real estate because construction projects are seen as complicated, illiquid and long-term. In this environment, financiers like to be able to get their money back quickly if necessary.

However, there is a silver lining to this economic cloud. With a global, and regional, slowdown in construction, materials and labour can be expected to decrease in price.

This makes projects that are already financed and underway even more economically viable. With other projects cancelled or delayed, developments built today will have the market to themselves once completed, boding very well for future increases in capital value.

Ultimately, we are currently in a global crisis of confidence; that confidence will return. Bankers lend and investors invest - that is simply what they do. We will see a return to normal, although the question of when is still very much an issue.

If you need to finance during this period, my advice is to allow a lot of time and be very well prepared. And it's a great time to treat your banker to lunch.

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