The house that Sorouh built

Sorouh Real Estate is shifting its focus to Emirati housing but what does this mean for Abu Dhabi’s housing market?
The house that Sorouh built
Hindrance: High interest rates are the biggest obstacle to the UAE’s real estate recovery, says Al Khouri.
By Claire Ferris-Lay
Thu 06 May 2010 04:00 AM

Sorouh Real Estate is shifting its focus to Emirati housing but what does this mean for Abu Dhabi’s housing market?

Abubaker Seddiq Al Khouri doesn’t like to make predictions. “It was only eight months ago when more experienced people than me, in very high-profile firms around the world, were expecting oil prices to drop to $14. Two months later they jumped and everyone tried to be the first to say it’s going to reach $200,” laughs the managing director of Sorouh Real Estate.

Al Khouri might not be willing to speculate on the price of oil but it doesn’t really matter to him, Sorouh will continue to add to its portfolio whatever the price. Three years ago the firm went public. Now Abu Dhabi’s second largest real estate developer has $19bn worth of projects under development including Golf Garden, Shams Abu Dhabi and Towers on Reem Island, Alghadeer, Saraya and Lulu Island.

But the former assistant director of the Abu Dhabi Investment Authority also knows the market has changed in those three years and tough times have set in: Sorouh saw its Q4 profits in 2009 slump nearly 35 percent to $7.65m, as the global recession took its toll.

UAE mortgage rates remain the industry’s biggest concern. When the UK’s housing market started to show cracks last year banks slashed their rates to 1.9 percent while lenders in the US last month were offering mortgages with rates of around 4.13 percent. In stark contrast is the UAE where last year homeowners were paying as much as ten percent. These have since been lowered to around seven percent.

These high interest rates are the biggest obstacle to the country’s real estate recovery, says Al Khouri. “If interest rates dropped to 3.5 percent everyone in Abu Dhabi who doesn’t have a house should seriously think about buying one or if not should get a finance advisor to help him do that,” he smiles. “[Reducing rates] would help a lot. Two very good examples are Singapore and Malaysia. The interest rates in Singapore were at one stage 1.6 percent and in Malaysia it was 3.1 percent and the real estate market was picking up very fast,” he continues.

He points to mortgage broker Abu Dhabi Finance’s recent reduction in its rates from 8.5 percent to 5.75 percent, as an example of how it could spark renewed interest in the sector. Sorouh, who is one of five Abu Dhabi companies with a stake in the lender, received 500 inquiries about apartment purchases in its Sun Tower project (which are due for completion this year) in the two weeks after it offered lower-than-average rates to buyers. “It’s not quite the 3.5 percent but its subsidised by the two parties, ourselves and the banks. We received 500 leads and quite a few are now picking up [as a result],” he says.

While the country’s high interest rates will continue to hamper the developer’s sales in the short term, Sorouh is looking to an entirely different market to fund its growth — middle income Emirati housing. At last month’s Abu Dhabi Cityscape, the developer announced its first tie-up with the capital’s Urban Planning Council (UPC) to develop Watani, a $1.47bn Emirati community in the capital.

The project, which includes 1,370 villas and 1,500 unit apartments, and is already under construction. It is the first of two projects to be announced in the next six months, says Al Khouri. The second is Shamkha, which will include 5,000 residential units in the north east of Abu Dhabi. The two projects, both of which will be funded by UPC, will see Sorouh build nearly 9,000 of the 60,000 homes required over the next five years for Emirati families.

“It’s a self financing project for us as a developer but we act as a development manager for the government,” he says, adding that it’s a myth that all Emiratis are wealthy and can afford expensive housing. “The myth is good if it’s true but it’s not. In the past the government used to grant every national — after he gets married — a plot of land and give them up to AED2m as subsidised loan. An inexperienced person would have to go through all the hassles such as delays and budgets [but this way] helps every national to effectively get a house, which is built to the best standards within a very good and high standard community,” he explains.

Sorouh isn’t the only UAE developer to shift its focus from high-end to middle income housing. In February, the UAE’s largest developer, Emaar Properties announced its plans to focus on mid-income housing in the emerging markets to boost its revenues during 2010. Abu Dhabi-based Aldar Properties also confirmed last year that it would concentrate on developing affordable housing going forward.

Al Khouri, however, insists that this new direction is not as a result of the downturn but something that has always been planned. “We’ve always wanted to focus on Abu Dhabi and we have always been very close to the government,” he says.

But that’s not to say that the company hasn’t reacted to the downturn. It laid off around 30 percent of its staff and shifted its focus from announcing new projects to completing existing ones.

But no amount of cushioning could prepare any real estate company for the nearly 50 percent declines in property in the UAE. Sorouh’s net profits for 2009 declined to $134.7m (AED495m) from $490m the previous year.

It will hand over around 1,350 apartment units in its Sun and Sky projects in the second half of this year, fortifying its revenues for 2010. It will also hand over another 400 apartments from its Tala Tower project starting in July.

The property developer also hopes to generate more revenue from leasing and plans to increase the proportion of income it gets from rentals from its current twelve percent to 25-30 percent in the next five years. “We are a new company and it takes time for any development company to become mature [enough] to be able make a percentage of our income [from something other than] continuously selling projects. You also have to prepare for any downturn in the future,” Al Khouri explains.

It’s a shrewd move. Although Abu Dhabi’s rents have dropped around five-ten percent, they have continued to remain high due to lack of supply in the capital.

He remains unconcerned that prices in Abu Dhabi will drop further or that people will continue to look to Dubai for cheaper accommodation. “Dubai has definitely helped in reducing the crisis, there is huge supply in Dubai but there is also a limit on how much of the population from Abu Dhabi is going to move to Dubai,” he explains. “There always a limit to how many people would go there [to Dubai] and most of the available units that are close to Abu Dhabi have been snapped up.”

What about Abu Dhabi rents declining as supply increases? Around 15,000 new units are expected to be completed in the emirate this year, which is expected to see a 20 percent decline in rental rates, according to the consultancy firm, Landmark Advisory. “Not on all of them will drop, [the declines will] mostly affect the older properties. It’s not a concern.”

He remains just as optimistic about the capital’s secondary real estate market.

“Compared to any place in the world we certainly have stronger fundamentals when it comes to real estate. For the last 40 years we’ve never had the chance to own. The market in which people can own has only just started.”

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