Riffa Views Bahrain: GP Zacharides Walks

Because if it’s not remarkable it will become invisible.

The Gulf Daily News reports that GP Zacharides, one of the main contractors at RV, had terminated its contract due to non payment of some BD4 million due since February.  

"We have been left with no option following numerous attempts to come to a mutually-beneficial agreement with the client to right the debts outstanding since March and provide comfort that future dues would be paid when due," he said.

"Unfortunately, it is reported that the client could not provide this due to their current and longer-term financial outlook."

GPZ's was contracted to build 300 villas in the Lagoons section of the project.   It claims to be owed BD4 million since last February.  With demobilization and other termination costs, its claim may more than double to BD10 million.

The project has been struggling since 2008 (when it was hit with dramatic cost increases in building materials due to the real estate irrational exuberance - a particular cause was the Dubai delusion).  Then later the collapse in real estate prices slowed sales, reportedly caused some buyers to walk from their commitments.  Tight financing terms didn't help either.

Arcapita brought the project to market in December 2004 for some US$260 million.   It's a measure of its own financial condition that it is not bailing out the project to finish it.

Jones Lang LaSalle: "Dubai Real Estate Slowdown to Continue"

You've probably seen reports quoting Jones Lang LaSalle's prediction that half of Dubai's commercial office space will be vacant in 2011 and that the residential property market will also be under stress until then as well.

Well, here's the original JLL report that is the basis for those news items.  Besides containing more information, the JLL report also provides some nuances.

Commercial Office Real Estate

1. While there is a substantial vacancy rate in commercial office space currently at 38%,  only 12% of single ownership stock in the Central Business District ("CBD") is vacant.
2. JLL sees very little demand for "strata titled" space.
3. There is in some respects a shortage of good quality supply (location, specification, legal title) as evidenced by the lower vacancy rate in the CBD.

Residential Space

1. Rents for  higher end apartments (Burj Khalifa) continue to decrease significantly.
2. Higher end villas are hit even harder.

Retail Market Space

1. Estimated Rental Values down 39% from 2Q09 to 2Q10.
2. Retail sales growth expected to come from department stores and mid market value chains rather than luxury goods.
3. No significant new supply until 2013 (Mall of Arabia in Dubailand).

Hotels

1. Beach hotels have higher Average Daily Rates than business hotels - AED1,386 versus AED660.
2. New hotels are expected to intensify competition and lead to a decline in ADRs not a decline in occupancy percentages.

There's a lot more in the report and you can "mine" it according to your own interests.

Dubai Rents Continue to Fall

Emirates Business reports that rents in Dubai continue to fall with new supply responsible for the price pressure.  Lower rates in Dubai are tempting relocations from the Capital.  As if the Abu Dhabi - Dubai deathway isn't busy enough.

Given the number of new units coming on stream in the next two years - estimated here at 100,000 - it seems this trend is likely to continue.

"Tenants are increasingly seeking more value for their rental dirham and are able to leverage alternative options to negotiate very attractive deals. This is pushing up bid-ask spreads and illustrates that landlords are conceding in negotiations with ever more discerning and value-seeking tenants. More significantly, this is a trend now observed in high-quality units in prestigious locations, which is a segment that has experienced relatively minimal volatility in late 2009 and the first quarter of 2010 due to relocation trends.

The lower limits for a one-bedroom on the prestigious Jumeirah Lakes Tower (JLT) have fallen six per cent while one-bedroom apartments in JLT have fallen a further 10 per cent since publishing the previous lease guide."

Dubai Rentals - Bargain Time

What's interesting about this article is the assertion of a new found willingness by landlords to negotiate rents.

Apparently, tenants are taking advantage of the market to move from older to newer properties.  Or to properties that are more convenient.

As a result not only are the explicit rentals coming down, but landlords are offering incentives like free months, absorption of utilities, enhanced maintenance, etc.

A key factor going forward will be the balance of inward and outward migration by expatriates.  A negative trend will depress rates.  A positive one may lead to stability and some increases.  And the balance will have clear implications for property and development firms as well as their creditors.

According to Colliers estimate, average rental rates have declined by 25 per cent between Q2 2009 and Q1 2010. As per Harbor's calculations, International City rents are 20 per cent lower than Q4 2009 and eight per cent lower than Q1 2010; Discovery Gardens rents are 13 per cent lower than Q4 2009 and eight per cent lower than Q1 2010, while rents in Dubai Silicon Oasis are five per cent lower than Q4 2009, but remain stable compared to Q1 2010.

Robinson points to a one-bedroom apartment being leased in December 2009 in Discovery Gardens for Dh57,000, which came down to Dh50,000 in March 2010 and is available for Dh40,000 in May.

However, a studio apartment in International City, leased for Dh30,000 in December 2009, declined to Dh22,000 in March 2010 and is being still leased for the same rate.

Dubai Debt Problems - Someone Else's Fault

As per this article from The National

Dubai’s financial slowdown should be treated as a “special case” caused by the downturn in world trade and had nothing to do with the intrinsic productive capacity of the emirate’s economy, the UAE economic report says.

It seems the culprits were:

1. Banks and investors who didn't provide sufficiently long-dated capital to finance Dubai's real estate projects.
2. Foreign investors whose tremendous and apparently imprudent large capital inflows contributed to a form of the "Dutch" disease causing rampant inflation.
3. The global financial crisis.  Long time readers of this blog will appreciate our standing comment that this is a "global" and not a "Global" crisis.

Despite the short-sighted actions of these external parties, there are a few bright spots:

“The case of Dubai is ‘special’ also because very large investments have been made in its soft infrastructure, in both industry and government, which will have highly positive effects on the long-run development of the emirate,” the report says.

Besides being "special", and I trust you'll note the comparison here is Emirate-wide:

“But perhaps the biggest improvement in the overall productivity of the UAE in general, and specifically in Dubai, is the high efficiency of Dubai government agencies and departments which adopt first-best policies and international best practices …,” the report says.

 And

When these factors are recognised, it will position Dubai as one of the “most competitive cities in the long run”, the report concludes.

A hat tip to The National for helping to set the record straight.

Dubai Begins to De-Register Defaulting Property Owners

 Copyright Tasja - Creative Commons Attribution-Share Alike 2.0 Generic license.

The National reports.

If the percentage is anywhere near the 20% mentioned and these properties are put on the market via auction, it's not going to be helpful.

First, it's going to cause existing investors and developers to crystallize their losses.  That in itself is not a bad thing.  When you make a bad investment or business decision, it's best to recognize it and move on.

But will this salutary and necessary step lead to negative reactions?

What will be the impact impact property values - both in those developments and others? 

1. Will other investors in other properties at less than the 80% threshold decide that it will be cheaper to buy at auction than to make the payments on their existing contracts?  
2. If they do, what will happen to developers' ability to finish their projects?  Or on the quality of the completion work?
3. What will lenders do if there is a significant erosion in collateral values?
4. How will borrowers' react?

A lot more shoes have to drop before stability is reached in the market.  And how hard they drop will affect the path and the pace of the recovery.

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!

Markaz Report on Dubai and Dubai Real Estate

Markaz has published another of its excellent research reports.

This one's on Dubai Real Estate and the prospects through 2012.

Here's the link.

Essentially, they see

1. Dubai's economy marking time in 2010 and 2011 with a moderate uptick in 2012.  
2. Trade will be up all three years.  
3. Tourism down in 2010, marking time in 2011, and up beginning in 2012. 
4. Real estate down in 2010 and 2011 and marking time in 2012,

Nakheel Property Holders Seek Legal Help

The National reports that some 700 investors in Palm Jebel Ali are unhappy with the alternatives presented under Dubai World's restructuring plan and may hire a law firm to act as advisor.  

They seem to be looking to secure the following:

1. A firm schedule for completion to ensure a quick handover
2. Assurance that quality and design standards won't be compromised to save project costs
3. Recalibration of future installments to actual construction progress.  The article goes on to say that on average investors have paid in about 30% of the total purchase price.

Personally, I'd be concerned about the effects on maintaining project and building  quality in a stop-start project, particularly if there is a constraint to keep the costs within the original pricing.  Unless of course costs have come down significantly from then.

As well, it would seem natural that given the economic downturn some of the non residential attractions on the island might be scaled back or eliminated. 

Think I might be inclined to take my credit to an existing or almost built project, especially if the credit was against current market value instead of "rack rate".

Perhaps, The Real Nick could weigh in with a comment.

"Dubai World Property Plan Not a Quick Fix" UBS

Copyright The Truth About

Creative Commons Attribution-Share Alike 2.0 Generic License

The National has an article with the above headline and this lead paragraph.

If you thought the troubles in Dubai’s property market would be cleared up overnight if Dubai World successfully restructured its debt, you may want to think again.

Wise words indeed.  

To which AA might add, that if you did, you might want to consider turning over your financial affairs to someone more reality based.  That being said, if you do execute a power of attorney, choose your "wakil" wisely. 

In which case the following word's from the Bahraini Newspaper AlBilad may offer some helpful guidance:   لا تدع زوج ابنتك يقود سيارة عائلتك

Saudi Mortgage Law to Allow Foreclosures?

So says Reuters according to  Maktoob Business.

As well a prediction that initial lending forays will be for commercial space - which seems to make sense.

It may be socially a lot easier to foreclose on a shop than on someone's residence. 

Saudi Emaar SAR 5 Billion (US$1.3 Billion) Loan from Saudi Ministry of Finance

Reuters reports that Saudi Emaar will receive a SAR 5 billion loan (US$1.3 Billion) from the Saudi Ministry of Finance for its King Abdullah Economic City project.   KAEC is a SR 100 billion (US$26.7 billion) mixed use city to be built north of Jeddah.  

Emaar Economic City, listed on the Saudi Tadawal, (Symbol #4220) is the developer of the project.  This entity reportedly will get the loan.  As of its preliminary 31 December 2009 financials, EEC did not have any significant loans.

The loan is being described as designed to help speed up construction and delivery of the project.  I'd guess with a project this size there are bound to be delays.

What isn't clear is if this loan is an indication of difficulty for the project in accessing finance (Dubai World fallout, general trends in the area)?

Or whether this loan had been planned from the start and is just being announced now?

Knowing the answers to these questions would be a highly useful insight.  I am guessing it is the former.

Saudi Mortgage Law on the Way?

So says the Gulf News quoting Bloomberg quoting HE Muhammad Al Jasser, Governor of SAMA.

It might come as a surprise to many out there but there is substantial unmet demand for housing in the Kingdom.

This law will facilitate the mobilization of real estate finance, particularly for residential housing.  It will also provide alternative investment opportunities for local financial institutions.  

In 2006 Unicorn Investment Bank in Bahrain teamed up Standard Bank and the IFC to launch the first ever securitization of housing receivables in the Kingdom.  Here's the IFC's write-up on the transaction. It was a modest sized deal of some US$18.5 million.  But followed by further deals by UIB in 2007 (US$600 million and US$1,000) for Dar Al Arkan.  Here is the portal page to UIB's press releases on these transactions, if you're interested.

Dubai's New "Strata" (Real Estate) Law

If you missed it,  The National has an explanation of this law designed to clarify the legal status of common (shared) areas and individually owned units in real estate projects where a building or complex has been sub-divided into separately owned units.  The new law (once implementing regulations are issued) will legally define these spaces and set rules, including how common areas are to be managed. 

As the article notes, an important step in protecting owners' rights and thus enhancing the local real estate market.

The Power of the Blackberry?

In today's fast paced wireless world of business, one's office can be in one's pocket.

Ex-chief of Deyaar accused of taking bribes while in jail.

Property Sector to Build on Past Mistakes (UAE)

Picture Copyright The National Newspaper Abu Dhabi

This probably consists of piling on, but I just couldn't resist quoting this headline from The National Newspaper in Abu Dhabi. 

And this absolutely delightful quote:

“A large number of brokers have left and the same with developers. There’s been a lot of correction. Going forward, you’ll have a much maturer market. People are now aware of the risks.”

Usually, it's considered better form to be aware of the risks before the project heads south.  But as those rich visitors from up North say, "Лучше поздно чем никогда".

Emirate Real Estate - Saudi Investors' Perspective

Today AlRiyadh published interviews with two Saudi investors in the UAE real estate market: Muhammad Bin Husayn AlNimr, Marketing Manager of Awali Real Estate (described as one of the largest Saudi companies investing in real estate in the UAE) and Muhammad AlJarbu', a major investor in Dubai real estate.

The article leads off by noting that Saudis have invested approximately SAR100 billion (US$26.7 billion) in UAE real estate.

Here are highlights from AlNimr's interview:

1. In summary, he thinks rather than massive losses, Saudi investors will see much lower profits.  He estimates it will take five years for prices to recover to their previous high levels.
2. The main problem Saudi companies face is purchasers paying the installments  for the units they have bought.  Their own repayment of bank debt or access to bank credit is a much lesser issue.
   
3. Payments are not being made for two basic reasons.  Either the individual can't pay.  Or has decided that with the fall in real estate prices it's better to walk away.  The loss of the installments already made is outweighed by paying the old market price for a much depreciated asset.
4. Sales levels have fallen by approximately 75% from a year ago.  So it is difficult to find new buyers for property as it comes on stream.  And perhaps more importantly to buy the defaulted units.
5. Many of the buyers purchases were financed with loans secured by their salaries (AA:  A typical bank "security package" for personal loans in the region - though not as typical as before.  The borrower agrees to have his salary deposited at the lender who then deducts the monthly debt service payment).  
6. As a result, lenders face difficult choices when employees lose their jobs.  What he describes as the difficulty facing US banks.  Take the property in satisfaction of the loan, but watch it decline in value with eventual sales below the capital of the loan.  He describes as a "vortex or whirlpool" of losses.  (AA:  How developers are not going to be sucked into the vortex is hard to imagine.)
   
7. He also notes that banks have stopped "name lending" to projects.  (AA: That is lending on the reputation of the borrower - project developer in this case - without too much focus on the economic fundamentals of the project a la Saad and AlGosaibi).
8. Banks have not yet begun seizing real estate projects but have slowed or stopped additional lending to them.  His belief is that they will only do this when the distress is abundantly clear.  (AA: Remember this is a developer/real estate company spokesman and not a banker.  A key characteristic of a real estate developer is optimism).
9. This is temporary crisis which he expects to end soon.  A bit of rescheduling of loan repayments will  set everything right.  (AA: Remember this is a real estate developer speaking.  Think of "The Donald" and you'll have an insight).
   
10. Finally he ascribes the problem to Dubai's excessive use of short term debt.  He believes that if they had used longer term financing no crisis would have occurred.  (AA: The Donald mentality again.  Apparently, he sees little reason that real estate prices need to be anchored to economic reality).

Muhammad AlJarbu' (described as having special expertise in Dubai):

1. A decline of between 35 to 40% in the price leased properties in Dubai.  Elsewhere in the Emirates about 50%.
2. Almost a standstill (rukud) in the sales of units - down 75% from the prior year.
3. Only two nationalities are active - based on their faith that this is a temporary problem.
   
4. Saudi investors are hunting for bargains.
5. Most nationalities not buying save for the Russians.

In addition to the insights these interviews provide, there are two other points worthy of note:

1. The potential for an additional wave of credit and economic distress as the buyers of properties default.  Previously booked sales and profits may need to be reversed.  Banks and other lenders may face a tsunami of bad loans.
   
2. The reality that the problem is not only a problem for Dubai Inc -the Dubai Government  and its independent commercial companies - but that other parties are going to feel real pain.  Developers,   end unit buyers, the banks who financed both as well as contractors, building materials suppliers, and household furnishings retailers.  And those who work for them or supply them various ancillary services.  Simultaneously, a proof of the validity of the Chicago School "price theory" as well as refutation as the market price seems to have been wrong for a prolonged period and sent highly distorting signals - the wreckage of which will have to be picked up for some time.
   

Kuwaiti Ministry of Commerce and Industry Refers 11 Real Estate Companies to the Public Prosecutor re Foreign Real Estate Sales

Another AlQabas report.

At the end of last week the Kuwaiti MOIC referred the names of 11 companies to the Public Prosecutor for failure to comply with regulations concerning the sale of real estate outside the country. 

Local regulations require that the MOIC approve any such sale and that each sale be documented by (a) an official power of attorney from the company (owner) for the sale, a deed certified  by an official organization confirming the ownership (this is presumably by an official agency in the country where the real estate is located), and as well certified by the Kuwaiti Embassy in the country where the real estate is located.

Apparently, one can't be too careful.  And who would better know local business practice than the local MOIC.

GCC Real Estate Projects - A Survey

With all the discussion about the fall out from real estate  in Dubai and the declines in real estate elsewhere in the GCC, I thought it would be useful to provide a bit of macro context. 

Luckily, Global Investment House has recently issued a report on the GCC real estate sector. You'll have to register to get the full text.  Click here to do so.

Based on information from MEED Projects, they've compiled a comparable table across the six members of the GCC.

Amounts in Billions of US Dollars

Country	Nov 2009	Nov 2008	% Change	Held Projects	% Held
Bahrain	$ 68.3	$ 57.7	+18.3%	$ 9.1	11.8%
Kuwait	$ 271.5	$ 298.7	- 9.1%	$ 41.0	13.1%
Oman	$ 104.6	$ 106.4	- 1.7%	$ 6.7	6.0%
Qatar	$ 204.8	$ 216.9	- 5.6%	$ 7.9	3.7%
Saudi Arabia	$ 609.4	$ 606.5	+ 0.5%	$ 39.2	6.0%
UAE	$ 915.9	$1,228.2	-25.4%	$368.2	28.7%
TOTAL	$2,174.5	$2,514.5	-13.5%	$472.1	17.8%

At 42.1% the Emirates' share of real estate projects seems outsized relative to their population as a percentage of the GCC total or to their economy as a percentage of GDP total. When the held projects are factored in, their share goes to 48.5%.

That level of activity could be the sign of several things:

1. Severe underdevelopment relative to the rest of the GCC.  I think we can rule that out.
2. A speculative boom.  From the nature of the projects, this is the leading candidate.
3. The development of needed infrastructure.  For anyone who has endured the traffic jams in Dubai or elsewhere in the GCC,  the Dubai Metro seems a worthwhile project.  But this does not seem to me to the major driver of the activity.
   

I suppose an argument related to #3 above is that they are developing the next London or Manhattan.   To paraphrase  "Field of Dreams":  If you build it, they will come.  

Not sure I buy that there is a need for a major financial center between Hong Kong and London.   Nor that there is any "natural" location for any such additional center.  Capital is highly mobile these days.  There are few to no impediments to cross border flows.  And the state of today's communications has eroded whatever earlier benefit there was from having a physical presence in a specific location.  If the new center must have a "seaside" location, Shanghai or Mumbai could serve as well as Dubai.

It's more likely that a regional center will arise in the GCC, but I doubt that at present it would need to be as large or as elaborate as London or Manhattan. 

The critical work that needs to be done is building another form of infrastructure:

1. The creation of a set of appropriate laws and regulations
2. The development of a cadre of trained judges and lawyers to implement them
3. Enhancements and actual implementation of accounting standards and regulations
4. Establishment of a sovereign bond curve as a benchmark for pricing other issues in the debt markets
5. Greater institutional participation in local stock markets 
6. More liquidity in both debt and equity markets - not only in terms of demand but also on the supply side. 
   
7. On the debt side many of the issues are not traded, particularly the Islamic structures.  Or to be more precise not traded in local markets.
   
8. The free float on many equity issues is rather shallow.   Relatively small transactions can move the price disproportionately. 
   
9. And in certain markets there are sadly issues with brokers and market makers - who seem more focused on making a market for themselves than for their customers.  Though to be fair this is not just a GCC phenomenon.  
10. Finally, there is the "silo" nature of the GCC.  At this point, countries by and large stick to their own national business.  There isn't a lot of cross border investment. 
    

Governments in the area are not oblivious to these issues as evidenced by the initiatives launched QFC, DIFC, the Saudi CMA and in Bahrain. 

There is also another issue and that is the nature of the market.  Is the market intended to be one that  primarily mobilizes capital for local use?  Or one that provides funding to other geographic regions?  

For the first alternative, Saudi Arabia would seem the natural site given its population and major share in GCC GDP.  One could I suppose argue that as happened with commercial lending in the 1980's, a nimble neighbor with a more congenial regulatory regime and living conditions could play this role.  There are two major differences between then and now.  First, GCC nationals have the primary role in financial firms - at all levels.  There is less need for Western experts to be parachuted in.  And thus less need for concern about their life style preferences.  Second, the Kingdom is not sitting on the sidelines watching others develop an offshore center to serve the Kingdom.  New regulations - particularly those from the Capital Markets Authority are designed not only to foster the development of the market  but also to "encourage" foreign firms to open offices in the Kingdom. 

Is there a role for a regional Hong Kong?  Perhaps.  And several contenders as well.

Real Estate Gets Sick But It Doesn’t Die

Many of you out there will recognize this saying so beloved of those in the GCC.

But two things that aren't are covered in the saying are:

1. How severe the illness can be.
   
2. How long the convalescence is.
   

Much has been written about the follies of the "locals" in the GCC with their real estate investments so much that AA has been thinking about enlisting "The Donald" as another of the experts from the West who might come to help put things right. He's got quite a track record especially with his gaming properties – which in true fashion he's bet the house on a couple of times, lost, then won. Sadly, each time his stack of chips seems to get smaller.

Here's a link to some other stories detailing how one can make a small fortune in the real estate business. As another old saying goes, the first step for many is to start with a large fortune. Link here.