Dubai Escrow Law: Exemptions Fueled Boom and Left Buyers High and Dry

 Credibility - Now You See It, Now You Don't

A very good piece of investigative reporting by Asa Fitch at The National.

In 2007 with great fanfare Dubai passed a law requiring that developers set up escrow accounts to ring fence buyers' funds so they would only be used for construction and related costs on the projects that the buyers invested in. 

Rather quietly and quickly the Dubai Land Department gutted the law by granting exemptions to certain master developers. Among this select group were Nakheel and Emaar as well as other Dubai World entities.  The latter two have recently (three years later!) disclosed this fact.  Apparently, neither they nor the DLD considered it material information an investor/buyer might be interested in knowing or have a right to know.

A couple of quotes:

The developers of multiple projects in Dubai that are stalled spent money in this way, and now homeowners find that their investments were spent but that the projects cannot continue without new funding.

But having to comply with escrow laws could be burdensome for developers such as Nakheel and Emaar because of their obligation to build expensive infrastructure in their master developments. Emaar said in its prospectus last week that if it had to comply with escrow laws, its "business model may be significantly impaired as it would only be able to finance the construction of projects with corresponding purchase price instalments once certain construction milestones are met".

Poof, there goes the last illusion of Dubai as a world class financial center.

And, no, it's not a matter of professionalism  as one "expert" has it.  It's much more basic.  It's a matter of running a fair, honest market.  When the games are rigged, one is well advised to go to another casino.  When one doesn't get a fair shake (or a fair Shaykh), it's time to look to another market.

To be very clear, the central issue here is not that an exemption was given.  It was that the granting of the exemption was not disclosed.  Neither by the Government or the companies.  There may have been what were considered at the time very good reasons to give an exemption.  The problem was that buyers had no way of knowing.  They should have.  

Dubai's Real Estate Woes Continue

A Not So "Unique" 50 Story Dream from 1997 

 

One of our regular readers/commentators, Laocowboy2, called this New York Times  article on the continuing woes in Dubai's real estate market to my attention.

Some quotes with captions.

"We're not in Kansas anymore, Toto"  The biggest mistake - mistaking a foreign country for your own - and assuming that legal systems, services, construction quality are just like "back home".

“It’s not like in Western countries. It’s very difficult to exit here if there’s a problem. And we’ll never get our money back, but now we’re stuck dealing with this hole.”

AA's Second Law of Lending and Investing: "Due Diligence Before the Deal Not After"

"At the time, few asked if there was a legal framework for resolving potential disputes. Now, with the glitter gone, interviews with investors, legal specialists and real estate analysts here show that many who bought in are finding it hard to get out."

“The rules of the game are definitely opaque here,” said an investor who has bought several properties in Dubai and who insisted on anonymity because of delicate talks with developers and regulators. “In the United States, I would know my legal position much more clearly and could take actions if necessary.“ 

Besides "location, location, location" supply and demand also impacts prices.

Although about 70 percent of empty lots from three years ago have been filled, real estate construction since then has far exceeded the purchases, more than doubling the amount of vacant space available, said Timothy Trask, the director of corporate ratings at Standard & Poor’s in Dubai.

No mention of quality of materials and construction.  Perhaps, that will become  more widely apparent in a few years time, though there's always the odd Discovery Gardens or Sky Gardens or The Villa to help discover flaws.

Presssure on Rent Levels in Bahrain -If You Build It, They Might Not Come

The Gulf Daily News reports that rentals have fallen across the board in the retail, residential, office and industrial sectors.

Martin Cooper of DTZ Middle East is quoted as saying:

"The region has woken up to the fact to only give the people what they can afford and not recklessly invest in projects they cannot afford or those which are of no use," he told the GDN.

Often one wakes from a nightmare only to fall back asleep again.

DEPA 1H10 Loss: The AED185 Million Burj Al Khalifah Claim

If you've seen DEPA's 1H10 financials, you know they declared a loss of some AED117.5 million of which AED103.7 million is attributable to the shareholders of DEPA.  The firm bills itself as the third largest interior contractor in the world.

You've also seen their earnings press release that this loss relates to expenses incurred on a contract at Burj al Khalifah (but not with Emaar the project developer).  Apparently, a large portion is for overhead expenses incurred over a couple of years.  As per the press release, were the claim paid, DEPA's 1H10 results would have been a net profit of AED81 million, making the size of the claim AED185 million.

That seems a rather large amount.  Unclear what this represents as a percentage of total project cost.  And what the likelihood of getting the full amount is.  As well as the identity of the project owner (obligor).

Perhaps, The Real Nick can weigh in with an observation.  And certainly anyone else out there with something to contribute is welcome as well.

Oqyana Group - KD72.6 Million Loss for Fiscal 2009

AlQabas reported on Oqyana's annual general shareholders meeting which was held at the Ministry of Commerce and Industry.  As you might guess from the latter statement, that's not a particularly favorable development.  The MOCI doesn't rent out space for meetings.  When a company has a shareholders meeting there, it's because the Ministry has instructed the company to hold one so that it can convey  information directly to the shareholders, usually to advise them of regulatory and other violations  by the company.  These days the MOCI seems to be holding a lot of such meetings.

AlQ mentions two of the comments made by the Ministry:  the Company's financials were delayed.  And it had not registered a piece of property it owns in Bahrain in its own name. Oqyana's Chairman, Nabil Jafar Abdul Rahim noted that the delay was because of the delay in Stehwaz preparing its financials and Oqyana holds 100 million shares in Stehwaz (!).  As to the second comment, he noted that the Company had set up a 100% owned Bahraini subsidiary to hold the real estate.

The Chairman also commented that the primary cause of the Company's loss of KD72.6 million for 2009  versus a gain of KD98 million the year earlier was the revaluation of assets.  Or perhaps more precisely devaluation of assets.  Shareholders' equity stood at KD369 million at FYE09 versus KD429 million the year earlier.  Total assets were down from KD493 million to KD438 million.  

Oqyana holds both Stehwaz and The Investment Dar shares in its investment portfolio.   What value they are being carried by Oqyana is not clear.  If you're not aware, all three companies can be considered distinguished business partners and members of The Investment Dar Group.

Abdul Rahim also noted that Nakheel had given the Company a two year extension to develop its property in Dubai.  Originally the property was to have been developed within 42 months ending in 2009.  Oqyana was unable to secure the necessary financing.  So the extension.  It's unclear  but presumably it's two years from 2009.   Recently, it's been knocking on the doors of local and other banks looking for between US$50 million to US$100 million in loans to move forward.  But it has had no success so far.   

As I'm sure The Real Nick can confirm, a real estate development company without access to loans is in dire straits.  Sort of the equivalent of "The Donald" losing his ego.

On the subject of financing, the Chairman noted that the Company had obtained a loan from a bank in Bahrain against shares of Stehwaz.   This apparently dates from more than a few years back given that Stehwaz has been in rather distressed conditions for some years now.

A new board was elected consisting of Mr. Nabil Jafar Abdul Rahim and representatives of TID, Safwat Real Estate, Efad Real Estate (also affiliated as a business partner with TID), and Adeem.  

If you're not familiar with Adeem, you can link here to "The Navy Seals" of the Investment World!  You can also use the tags "Adeem", "Stehwaz" and "The Investment Dar" to find earlier posts on those entities if you're interested.

Al Mazaya Kuwait - The Villa Project Dubai

When Global floated the subsequently "ill-fated" AlThourayia Project Management Company to invest in Mazaya Saudi Arabia, it noted on page 25 in the Private Placement Memorandum that one of the attractive features of that transaction was the involvement of Mazaya Holding (in which Global has presciently acquired a stake earlier, though Global's stake in Mazaya was not mentioned directly in the PPM):

Mazaya Saudi will be positioned to leverage on Mazaya Holding’s competitive market edge, an absolute advantage against competition. As a new entity, Mazaya Saudi will enter the real estate market backed by Mazaya Holding’s respective expertise. The Company will gain from Mazaya Holding’s breadth of practice,  which has materialized through the 18 projects Mazaya Holding has on hand. Such projects range from megascale residential communities, to high rise mixed-use towers, to BOT projects. Mazaya Saudi will benefit from the know-how of Mazaya Holding, and will seek to develop similar scale projects, which shall be backed by Mazaya Holding’s vigorous methodology.

One of the projects touted as evidencing Al Mazaya's absolute advantage (and if you know the Economics definition between comparative and absolute advantage, you'll know just how remarkable a claim that is) was The Villa Project in Dubai, which involved the construction of 500 villas scheduled for completion in mid 2009. (PPM Page 28).

Gulf News recently ran an update on the project's progress.

The villas were to have a garage and vary in size starting from four bedrooms. "The whole attraction for the project was that you could customise the villas with swimming pools and the landscaping would be included in the fee. We were promised courtyards, water features, a school, mosques, shops and a medical centre, but there is none of that," said the businessman.

According to him, the original location for the development was supposed to be near Global Village, but it was moved by seven kilometres to the current location.

"The big thing at the moment is that [Al] Mazaya are expecting us to pay the Dh25,500 cost of connecting the sewage and Dewa [Dubai Electricity and Water Authority] lines even though its not our responsibility, that's the job of the developer. The frustrating thing is that my neighbour who has Dubai Properties as the developer doesn't have to pay."

The businessman had bought his villa in 2005. "It does say in the contract that they have leeway of a year on completion, but even with that it's two years behind schedule and most of us are still paying rent when we should have moved in," he said.

Other issues concern the poor workmanship and finishing, no boundary demarcation, landscaping or community facilities.

These are some rather serious charges.  But AlMazaya is not shy about taking responsibility for its actions as this quote from the CEO of Al Mazaya Dubai evidences:

"The problems with ‘The Villa' have been due to circumstances beyond our control," he said.

It seems even an  absolute advantage cannot overcome the actions of others.  Unclear if the global financial crisis (lower case "g" on global) is the culprit here.

And a tip of AA's massive tarbouche to Laocowboy2 for calling this article to my attention.

The Sweet Smell of Err .... Sky Gardens Tower

From The National - the downside of upkeep.  Or perhaps an indication of the quality of construction.

But he has been told by the building’s maintenance staff that the pipes running through the tower have likely sprung a leak, which is allowing sewage odours to permeate through the walls.

The issue has persisted for about nine months and he says there are no plans at the moment to permanently fix the problem.

Next time don't use the cardboard pipe.  It has a short service life.

Ownership and the "Joy" of Maintenance Fees

The National points up one of the issues of the strata or condominium form of ownership of real property.

One is at the mercy of one's neighbors.  If they fail to pay the maintenance fee, the upkeep of the building suffers from cosmetic to more substantial matters.    The market value of one's apartment or villa then declines. 

Mr Aldendorff said: “How many owners have disappeared or are just not paying? And how viable is it to put a property on the market in an economy where nobody is buying? The legal process is so lengthy, we won’t be able to immediately recover the money.”

There's an even more serious question.  Who in their right mind is going to buy into a property - even in a good market - where there are substantial arrears?   Unless perhaps one is the buying the last defaulter's unit.

If there are projects with a 75% maintenance default rate, they are going to be hard pressed to recover.  And the 25% who do pay aren't going to be able to shoulder the defaulters' share - at least not without serious economic consequences.   One also expects that banks would (if they are alert, perhaps a questionable assumption) be highly concerned about deterioration in the physical condition of  their collateral on top of general market price levels.

There is a bright side.

As one of my local friends said:  "It's all part of the "Vision".  When the existing properties get run down enough, they'll have to be knocked down and new ones erected.  And there will be another boom."  At least perhaps from the demolition.

Limitless Limits Its Exposure: Pulls Out of Haute Development Malaysia

On 8 July Bandar Raya Developments Berhad announced that its subsidiary had entered into a conditional sales agreement with Limitless to buy its 60% stake in Haute Property SDN.  Haute was set up with UEM  (who own 40%) to develop luxury homes in Johor State.

Ardent will pay Limitless:

1. RM1.0 (roughly US$0.31) for Limitless' 60% stake in Haute.  (The company's unaudited financials show negative shareholders' funds).
2. RM 75 million (US$22.9 million) to reimburse Limitless for partial payment of development rights.  The amount will be converted to US$ at the FX rate at time of payment RM3.27 = US$1.00.  While the RM/US$ rate is currently RM3.196, this will not represent a loss to Limitless as it should get back the exact amount of US$ it paid.
3. RM1 million representing full and final compensation to Limitless for the RM10 million it advanced Haute for operating and development expenses.

The project is still in the development stage.  It's expected that there will be revisions to the development plan.

For those interested in a trip back to the original Limitless announcement, here is the link.

This move allows Limitless to exit the project with minimal losses and eliminates potential cash calls.  And no doubt not the last step by the various companies in Dubai Inc to reduce foreign projects to concentrate now limited resources at "home".

BTW anyone out there able to cite a single instance of such a comprehensive announcement on a GCC exchange?

International City Dubai

Sewage floods a road in the Russia and England area of International City yesterday.  

Paulo Vecina / The National

That is a heck of a lot of sewage.  It is hard to avoid drawing the conclusion that a few corners were cut in building the project.

Perhaps, our resident civil engineer/construction expert The Real Nick can weigh in.

The Real Nick on The Real Estate Sector in Dubai

A comment from The Real Nick to one of my posts that deserves a bit more prominent place here at this blog.

And considering my last few posts, perhaps a new feature here at SAM - informed commentary.

TRN's commentary is immediately below.

The fear of losing face seems to be stronger than reason (nothing new there..). There is no way Nakheel can resurrect the 'vision'. Even if the guy who "wrote [a poem] on water" around Palm Jebel Ali continues to wish it...It's over, and out.

The consolidation may not look brutal to you, from a distance. Here on the dusty ground, it looks scary: Thousands in the real estate and construction have lost their jobs and continue to lose. Contractors have stamina. They'll not shut up shop at the first hiccup but should be able to sustain one or two years without work. Many have done that, but the two years are over now and Abu Dhabi for one hasn't pulled the finger out. Watching AD make decisions is like watching paint dry. Only less fun.
And one has to remember that this industry accounted for way more than 30% of Dubai's economy. My boss, who's been around the Dubai construction /development business for thirty odd years, reckons that we are staring into an abyss of seven to ten lean years (supermodel style lean; anorexic style lean).
You can make this up on your fingers: Add the tidal wave of oversupply which is about to break on our real estate shores and swamp if for years, and the pre-contract (pre-construction) timeline of any new substantial projects of two/three years and then a construction period of three years. I.e to do big things you need 5/6 years and you'd be a fool do start even thinking about anything before 2012/2013 /2014...

Nakheel, khallas!

Aldar AED 9.1 Billion Sale of Yas Island Assets = Bailout

In its press release on 2009 performance, Aldar noted it had sold some infrastructure and land assets on Yas Island.  Apparently, as the sale was for only a small amount no further details were felt  necessary.  

A week later when it released its 2009 financial report, Aldar noted the sale had been to the Government of Abu Dhabi for AED9.138 billion (US$2.49 billion).  At that point Aldar did not provide any discussion of the profit on the transaction.  Either they spell الشفافية with a capital ش   in Abu Dhabi.   Or the company and the Government were still figuring how to structure the sale.

Today Aldar responded to a letter from the Abu Dhabi Stock Exchange to advise that the sale had been at cost.

Clearly, the Government of Abu Dhabi is bailing out Aldar - either with some additional cash or loan forgiveness.  It appears we'll have to wait for the release of Aldar's 1Q10 financials or the ADX to send another letter to the company to learn how the bailout was structured.

Yas Island website here. 

Construction Industry - Background Primer

The Real Nick, who advises he works in the industry, has contributed some insightful comments. 

If you're not familiar or would like to check what you think you know, suggest you check out the comments here and here.