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Sun 5 Oct 2008 04:00 AM

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Holding back the tide

Nakheel's CEO faces his toughest challenge yet in protecting the firm from cooling global real estate demand.

Holding back the tide
Holding back the tide
Holding back the tide
The Palm Jumeirah project stunned the world when it was first announced back in 2001.
Holding back the tide
The Palm Monorail aims to transport thousands of visitors expected to flock to the Palm Jumeirah.
Holding back the tide
The $400m Palm Trump International Hotel and Tower will soon rise at the Palm Jumeirah.
Holding back the tide

Chris O'Donnell left Sydney in the Spring of 2006 to become CEO of Nakheel, the government-owned developer of some of Dubai's most ostentatious projects. Two and a half years later, he faces his toughest challenge yet in protecting the company's $30bn development pipeline from cooling global real estate demand.

He is the man in charge of the world's biggest real estate developments. As CEO of Dubai government-controlled Nakheel, he oversees the construction of vast islands built from sand dredged from the seabed - projects of unprecedented scale that have kept most of the world's big dredging fleets busy for the last seven years.

The Palm, World and the planned Universe islands are transforming the relatively straight and featureless coast of the emirate into huge and intricately interconnecting fronds and breakwaters designed to add 500 km of coastline while holding back the tides of the Arabian Gulf.

My view is if you understand how scenarios might play out before they're played out, then you are in a lot better shape to deal with that situation than others.

But Nakheel CEO Chris O'Donnell will now be focusing his efforts on holding back the even more formidable tide of real estate investor sentiment. The slowdown in the global real estate industry and the tightening credit situation is now being felt in Dubai and other emerging real estate hot spots around the Gulf as the pool of overseas buyers shrinks and banks rein in their lending books - threatening the development plans of developers such as Nakheel and publicly-traded rival Emaar Properties, the company building the world's tallest tower in the heart of downtown Dubai.

"We have definitely seen global markets move in a negative direction, significantly and quickly," says O'Donnell, who nevertheless insists that Dubai will not suffer to the same extent as other markets.

Nakheel is a unit of Dubai World and despite only being in existence for about eight years, has become the region's largest privately-owned real estate developer. Its original Palm Island development made headlines around the world when it was launched in 2001. But it soon turned into a logistical and engineering nightmare as contractors struggled to meet deadlines and costs soared.

More and bigger projects were announced in rapid succession including a much larger version of the original palm island called Palm Deira, launched in 2004 at a cost then estimated at $3bn, and the Manhattan-sized Dubai Waterfront project revealed in 2005 and intended to be home to some 1.5 million people.

As the larger-than-life plans piled up, so did scepticism in the market over Nakheel's ability to deliver the projects.

O'Donnell was hired in June 2006 to take control of the situation and manage what was a daunting portfolio of projects. He came from Investa Property Group where as managing director he was able to quadruple profits between 2000 and his departure six years later.

His arrival at Nakheel heralded in a more pragmatic approach to property development and within months the plan to build the 18 km long Palm Deira was slashed back to a smaller and simpler project.

His arrival also ushered in a more transparent environment at the company and a project-specific management structure which means all of Nakheel's principal units and projects, have their own managing directors.

But it's clear the plain-talking Australian isn't fully comfortable with talking about his own achievements at Nakheel as much as those of the company itself.

"What I've been able to do with my background from a listed environment is apply simple management processes and organisation that allows each of the managing directors to freely do their jobs but within the bounds of a good corporate governance structure," he says.It sounds almost easy, although it seems more likely that O'Donnell has one of the toughest jobs in the industry.

The Nakheel island projects have been perhaps the most logistically challenging of any of the emirate's increasingly ambitious schemes. Because projects of this magnitude had never been attempted before, engineers, builders and architects have had to learn by their mistakes. At the same time, construction costs have soared since the first Palm Jumeirah project was unveiled while a series of labour disputes last year brought some of the developer's sites to a standstill.

Even more significantly, a decision by the UAE government to introduce an amnesty which allowed overstaying foreign nationals to leave without the risk of being fined or jailed, led to a mass exodus of illegal aliens, most of them construction workers and many of these, employed on Nakheel projects.

The credit squeeze has also not helped Nakheel's capital raising plans for 2008. Having sold about $2bn in Islamic bonds last year, it announced a second bond sale totaling about $980m in May and last month said it aimed to raise a further $1.2bn. O'Donnell says there are no more bond sales planned for the remainder of the year but acknowledges that it is a time for financial prudence as global markets continue to suffer from the fallout of the subprime crisis.

"There are good times and bad. We've been watching the events of the last year since subprime has been on the agenda and we've been taking note of that and managing the business in a way that will allow us to cope with the way the market might end up," he says.

"My view is if you understand how scenarios might play out before they're played out, then you are in a lot better shape to deal with that situation than others in the market. We are aware of the potential downsides and we're watching things closely."

The slump in global real estate markets has already hit Nakheel's overseas investments. It acquired a 5 percent stake in Australian real estate trust Mirvac in December 2007, but since then the company has lost more than half of its value as investors dumped property assets.

O'Donnell acknowledges that the global credit crunch is likely to impact on the Dubai residential property market, although he avoids using words such as ‘crash' or ‘correction'. With so much invested in the market, he needs to choose his words carefully.

"What this will accelerate is the maturing of real estate markets, therefore purchasers will become a lot more discerning when it comes to what they buy and what they don't buy," he says. "There's nothing new in real estate. It is always location, location, location. When I arrived two and a half years ago, the location was Dubai and if you bought in Dubai you would do well.

"Now we are seeing the maturing of the markets, so if you buy around water or around transport hubs, you'll see a greater return than elsewhere. If you don't buy with some sort of anchor like this, your returns will be lower."

Dubai Waterfront

Dubai Waterfront is Nakheel's most ambitious project to date and covering twice the land area of Hong Kong, is the largest planned coastal development in the world. It aims to add 70 km of new coastline and provide living space for some 1.5 million people.

Land reclamation has started on the mega-project with more than 60 percent of the first island already completed.

Construction work is expected to take at least another five years and the project will link into the planned Arabian Canal, the planned waterway that will rival the Suez Canal in size and surround the city of Dubai.

The slowdown will also impact on Nakheel's plans to develop the real estate investment side of the business since its merger with Istithmar, another Dubai government-owned private equity firm with about $10bn in assets under management.

Nakheel had planned to sell as much as $1.5bn in real estate investment trusts during 2008 and was considering listing them in Dubai and Singapore.

However that plan has been delayed until market sentiment improves.

"Given where the market is currently, it is unlikely we will get REITS established in this market. We are still working our way through the REIT projects and obviously they can only be launched when the markets are in a better state.

"I think by the first quarter of next year the markets may have stabilised and we'll be back in business," says O'Donnell.

Between now and then O'Donnell and the rest of the regional real estate industry will be trying to gauge the likely impact and extent of the global slowdown in property development and investment on local markets.

"We don't have to rush into secure an opportunity these days because it's quite likely to be there tomorrow - and probably at a lower price."

It's a view that cuts both ways. He will be hoping that investors deciding on whether to buy a Nakheel apartment or villa in the weeks ahead do not think in quite the same terms.

Nakheel timeline

Jan 2008

Nakheel unveils concept plans for ‘The Universe', its latest planned offshore island project modelled on the solar system. It also reveals its intention to redevelop Dubai's Port Rashid docks district.

June 2007

Nakheel pays $100m to Cunard Line to buy the QE2. From 2009, the famous vessel will be berthed at the Palm Jumeirah. The 40 year-old QE2 was the longest-serving ship in Cunard's 168-year history.

Dec 2006

Nakheel lists the world's largest Islamic bond on the Dubai International Financial Exchange (DIFX). The $3.52bn sale comes with rights to invest in any future share sale by Nakheel.

June 2006

Chris O'Donnell joins as CEO from Australia's Investa Property Group where he has worked since December 2000 - helping the company become the largest listed owner of property.

Oct 2005

Donald Trump unveils plans to develop the $400m Palm Trump International Hotel and Tower. The tower is to be the first development in an exclusive joint venture between the developer and property tycoon and includes exclusive rights for 19 countries in the Middle East region.

Dec 2004

Nakheel develops Dragon Mart in Dubai, the largest trading hub of products from China outside the Chinese mainland. The 1.2km building quickly becomes a cathedral of bargain-hunters.

June 2002

When the England football squad arrived in Dubai in the run up to the 2002 World Cup, some of the players, including David Beckham and Michael Owen left with their very own villas on Nakheel's debut Palm-Jumeirah. How much did they pay? The price was never disclosed, but whatever it was (or wasn't) it achieved its purpose in generating the hype needed to ensure the project was completely sold off-plan.

April 2001

Nakheel awards contracts to build the first Palm island in Dubai using reclaimed sand dredged from the seabed off the coast of the emirate. The project makes headlines around the world.

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Paul 11 years ago

HSBC has reduced the loans to value it will lend to 60%. Amlak and Tamweel to 80%. The credit crunch has arrived in Dubai. Just like the US and Europe, the bubble that was fuelled by ever increasing amounts of cheap and easy borrowing is already doomed. Bubbles cannot continue to expand as credit contracts as we have seen in the US and Europe. But do not expect the CEO of a large developer to publicly state anything other that robust confidence that falls won't be as big here. Rewind a year to the UK and the CEOs of all the major builders such as Wimpey, Taylow Woodrow and Barratt were all saying the same thing. House sales and prices promptly fell off a cliff.

saloni 11 years ago


Simon 11 years ago

Time for Dubai and its 'investors' to open their eyes... Also time for the 'Sellers' to get real with their prices. A down turn is on the way and Dubai will become a 'buyers' market. Cash is King for the next 6-12mths. The tell tail signs are appearing everywhere: 1. Banks tightening their lending to buyers 2. The UAE Central Bank pumping 50bln into the financial markets two weeks ago to add liquidity 3. Foreign buyers feeling the pinch in their own economies and mkts 4. People owning too much property and trying to achieve top dollar on every sale - PRICES ARE TOO HIGH 5. The US$ becoming 10-15% stronger in the last 10wks - making property prices 10-15% higher without a Dirham increase 6. Media/Bank & Industry analysts coming out openly and talking about the property issues in Dubai 7. All the above and much more...all of which happened in the US & Europe in the last 12mths and look what happened. Dubai is not insulated anymore... There is so much more to add...but the writing is clearly on the wall!

C Xavier 11 years ago

Chris O'Donnell better have his CV updated and with the Head Hunters soon. As with all those people with jobs created in the last 5 years. Best of Luck folks!