In 2008, just months before Lehman Brothers filed for chapter 11 signifying the start of the global economic crisis, Khalid Bin Kalban was given an unenviable task.
He was enjoying a successful stint at the head of Dubai Investments when he was tapped on the shoulder to join the board of rapidly growing developer Union Properties and told to review the company's performance.
“[Emirates Bank International, one of Union Properties’ biggest shareholders], sent me to be part of the board because they wanted to know what was happening in the company, as it had grown very fast and was highly leveraged,” says the now chairman of UP, highlighting the warning flag that something could be dangerously wrong.
“Market rumours [said] that three or four projects in Motor City were not profitable,” he adds, referring to Union Properties' motorsport-themed master development in Dubailand.
It soon became apparent that Union Properties was facing a number of serious business issues, not least of which was the $2.04bn of loans secured against just $1.36bn in capital. At one point, the developer was paying nearly $110m in annual interest on its raft of loans.
“Banks demanded payments be paid, suppliers were winning court cases all over and a lot of investors had refused to pay or left the country,” Bin Kalban recalls during an interview with Arabian Business.
“The company was on shaky ground because there was not enough income to support debt repayment.
"In 2009, we took a fresh look at everything and worked on restructuring our debt, paying off liabilities and selling some of our assets.”
According to Bin Kalban, between 2010 and 2012 Union Properties was engaged in an almost continuous cycle of negotiation with its creditors as it sought a secure financial footing.
“2010-11 and part of 2012 were the toughest, the most difficult, as the whole day we were trying to settle with other people… some [of the lenders] had moved to court, while some were putting pressure from different sources,” he adds.
Eight years on, Union Properties is again facing challenging market conditions, as demand in the Dubai real estate market softens in the face of low oil prices, high inventory and slowing growth. But this time the developer is better prepared, with a solid set of foundations that Bin Kalban says will enable it to survive any challenge.
“Today we are on solid ground,” he says.
At first glance Union Properties’ third quarter results do not make for great reading. The Dubai Financial Market-listed company reported $8.79m profits for the third quarter of 2016, a 71 percent year-on-year decline from $30.14m in 2015.
Profit in the first nine months of 2016 also declined compared to the same period in 2015, to $39.75m from $43.07m. However, Bin Kalban is at pains to highlight the vastly improved financial position compared with 2008.
“We have projects worth $435.6m under construction and we are an operationally profitable company. Our borrowing has come down to almost $381.14m from $2.04bn,” he explains.
The firm’s route back to financial stability began with one meeting between Bin Kalban and his key advisor. Between them, they drafted a 12-page document that outlined key recommendations that were critical to the developer's revival. The overall objective was simple; to build a stable company cable of surviving the “worst crisis in the world”, Bin Kalban says.
“My intention is to make the company [strong enough to] survive the worst possible scenario. We are going to ensure no matter what happens, this company will never have the history that it had when the global financial crisis hit. That is the promise from me to my shareholders and my staff,” he says.
Work to cross off the points on the original ‘to do’ list is still ongoing. The document remains in Bin Kalban’s office drawer and he often uses it to remind himself of the outstanding objectives. But Bin Kalban says 80 percent already has been achieved and when the remaining 20 percent is also completed, the company will have transformed into one of the “strongest real estate companies in the UAE”.
“I always look at the list to check what I have achieved so far. A couple of those proposals are left and if I can solve them, then this company will do much better than the rest,” he says, without revealing what the sticking points are.
Having achieved a greater degree of operating stability, Bin Kalban has switched focus to winning additional investment to fuel growth. In October 2015, Union Properties raised $136m to finance the $204m Green Community West Extension Phase 3 in Dubai Investments Park (DPI). In June, the developer signed a $79m project finance facility for construction of the $122m Oia Residence, a mid-to-upscale gated community, in Motor City.
“We had a big success [securing] funding with two of our projects,” he says. "We are building a new relationship with banks. But we don’t want to stretch ourselves beyond our means and resources."
Union Properties’ more cautious approach has led to an expansion of its rental portfolio in Dubai. The developer is aiming for 60 percent growth in its rental portfolio by 2018 — growing from $16.33m to $27.22m.
“We have gone for expansion of our mall in Uptown Mirdiff and have fully leased The Ribbon project in Motor City,” he says. “Our other projects will also have retail components, while we will hold units in Oia Residence to add to our rental portfolio.”
Work to broaden the Union Properties’ revenue stream has been accompanied by implementation of a lean company structure that focuses more on outsourcing, rather than employing direct headcount. Consequently, even in a tough local market environment Bin Kalban is confident the group can avoid redundancies.
“We are a very lean company, and we will hire only what we need,” he says. “We cannot have people [come] on board and ask them to leave when the market gets tough, as they become a family. So, what we do is outsource as much as we can. This is the best strategy going forward,” Bin Kalban says.
Bin Kalban describes as “ridiculous” some developers' decisions to offer risky payment terms for investors, such as zero down payments and 10-year post-completion payment plans, in response to the softening market conditions and intensifying competition in the market.
“Some are offering a 10-year payment plan to rent and pay after three years. Such schemes are ridiculous. It is suicide as far as I am concerned,” Bin Kalban says. “Tomorrow he [the investor] comes and says ‘thank you I am leaving the country’. Then what happens?”
Union Properties’ Motor City development features prominently in the developer’s future plans, in part fuelled by an expectation of exponential growth in the area due to its proximity to Al Maktoum International Airport and Expo 2020.
The developer also intends to relaunch its retail project — The Link — in Motor City. The $81.67m project will have a retail component and a 3-star hotel.
“We are executing the Motor City masterplan, but with slight changes because market dynamics have changed,” he says. “It is the most prosperous community in Dubailand. We want to capitalise on it.”
The original Motor City masterplan included seven hotels, but Bin Kalban has stripped back ambitious hospitality development plans to only three properties, and limited the firm’s exposure.
“We have changed our earlier plan, as no feasibility study approved it. We don’t want the risk of owning seven hotels in one neighbourhood. It does not make sense,” he says.
Union Properties has looked to third party firms to enhance the entertainment component at Motor City. Work is due to commence shortly on Jump Boxx, an indoor trampoline park, while the company is studying plans to build movie theatres, bowling alleys and an ice rink.
Plans for F1-X Dubai — a theme park dedicated to Formula One — also were cut in October 2013. The land is now slated for a $163.35m mixed-use project that will include a theme park element.
“The land was allotted to a theme park development, but the feasibility study conducted [said the cost would overrun to as much as] $544.49m. We have now redesigned the land usage plan, with 50 percent of the land allotted to a theme park and the remaining 50 percent to a mixed-use development,” he says.
The revised masterplan has been approved by Dubai Municipality, but is awaiting clearance from Dubailand, the master developer.
“The master developer [is] insisting on the theme park as it used to be. That is not possible,” Bin Kalban says.
“We did ask them if they would come as a partner, but they were a bit hesitant. So, hopefully they will agree with our new concept.”
Although he says there is currently “anxiety” in the market, Bin Kalban is confident it will calm down as major infrastructure projects go ahead. “When the market settles down, a lot of people will invest in Dubai,” he says.
In particular, the chairman believes the stretch extending from Dubai Hills to Dubai South is ripe for development, due to the rapidly expanding Al Maktoum International Airport and Expo 2020 site.
“The focus is really between those areas. All major developments are happening there. Look what happened to Dubai International Airport 20 years ago and how the area has developed. Many think the same will happen near Al Maktoum International Airport in the next 10 to 15 years,” he says.
With a steady hand at the helm and a stronger financial footing, Union Properties is poised to play a key role in that development.
Union Properties chairman Khalid bin Kalban is also strengthening the group’s subsidiaries, such as Emirates District Cooling (Emicool). The joint venture between Union Properties and Dubai Investments is embarking on an acquisition drive.
“We have grown organically until now, but if we want to grow fast we need to acquire companies. We are looking for them,” he says.
Though talk of a public listing has been ongoing for a long time, it is unlikely to happen in the near future. Kalban says the market does not support its current valuation. Similar to other companies, plans to list during the good times have been put on hold.
“In 2014, the market picked up and we jumped on it. We appointed a consultant to work on the initial public offering (IPO), who asked us to fix a couple of things from the corporate governance side, such as setting up of an audit committee and compensation/remuneration committee. It took us almost a year to complete the process, but by then the market had moved,” he says.For all the latest real estate news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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