By Sean Cronin
Nakheel's CEO faces his toughest challenge yet in protecting the firm from cooling global real estate demand.
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."
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.
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.
WHY DOES NAKHEEL NEVER TALK ABOUT ITS UNSUCCESSFUL PROJECTS LIKEWISE THE LAKE DISTRICT AT INTERNATIONAL CITY. AS A DEVELOPER I THINK IT SHOULD GIVE FULL RESPECT TO ONESELF AND RESPECT COMMON MAN'S SENTIMENTS AS WELL. NAKHEEL CANNOT JUST GO INTO LARGER THAN LIFE PROJECTS..IT SHOULD PAY ATTENTION EQUALLY TO ALL ITS PROJECTS.
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!
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!