Finance key to reviving Abu Dhabi property

Bradley Hope

• Last Updated: November 04. 2009 6:55PM UAE / November 4. 2009 2:55PM GMT

While observers have focused most of their attention on Dubai’s property woes over the past year, developers in Abu Dhabi have quietly slipped into a similar imbroglio.

Half of the 90,000 homes that were expected to be finished by 2013 are stalled, a recent analysis by the property consultancy Jones Lang LaSalle (JLL) says. For the other 45,000 homes, JLL estimates property developers need to come up with between Dh50 billion (US$13.61bn) and Dh60bn in financing.

“The issue is that all the developers set up their business models with pre-sales,” says David Dudley, the head of JLL in Abu Dhabi. “The pre-sale market has collapsed and these developers don’t have financing.” As late as the early autumn of last year, speculators were buying Abu Dhabi properties in the same manner as they were in Dubai. They put down cash deposits on multiple apartments or villas, hoping to sell it on for a profit before future payments were due.

But when credit markets across the world stalled and the perception that prices had risen too high spread widely, these owners tried desperately to sell their units. Few were successful.

Many of them stopped paying and others negotiated new terms, including lower prices and payment plans that skewed most of the price until after the home was completed.

Now, nearly a year after the global economic downturn took hold, developers in Abu Dhabi – like those in Dubai and elsewhere in the region – are left in the position of having to build their towers without a guaranteed source of finance.

To make matters worse, a bank loan is becoming a rare option.

“It comes down to availability of financing or funding from the banks,” says Jassem Busaibe, the chief executive of the private equity company Arady, which is building towers on Reem Island. “Banks are limiting their exposure to real estate now.”

Mr Busaibe says banks will play a role in financing property but they will choose only the best placed buildings from developers with a track record of success.

This has already been proven. While small sub-developers are floundering, the likes of Aldar Properties – the largest developer in the emirate – have been able to tap into the credit markets with relative success.

To meet the needs of these companies, new financing options will have to fill the gap. This could include everything from a property developer from abroad coming in to form a partnership with a local developer, to mezzanine financing and bridging loans.

Abu Dhabi has already seen the early stirrings of this. Several distressed asset funds are being formed that will lend to developers and buy units from sellers willing to part with them at low prices.

Invest AD, a fund owned by the Abu Dhabi Government, said last week it was forming a property fund that would invest in distressed assets in growing markets. The fund would be between $200 million and $500m, says Nazem al Kudsi, the fund’s chief executive.

Hines Interests, a US investment company and developer, has said it was planning to launch a distressed property fund that could be as large as $1bn, with a combination of equity and debt. Other smaller firms from across the region have announced they would make similar investments in Dubai and Abu Dhabi.

Mubadala Development, the strategic investment arm of the Abu Dhabi Government, could turn out to be the biggest player in this field. Mubadala is in discussions with the US investment firm Prudential Financial to set up a fund that could, among other things, lend to cash-strapped property developers in the capital and make investments in projects, three informed sources say.

Mubadala officials declined to comment about any talks, saying the company is constantly looking at new ventures. A Prudential spokeswoman also declined to comment.

Chet Riley, an analyst at Nomura Securities in Dubai, says a large-scale fund that invested in distressed property could be a profitable business and pave the way for a quicker recovery in the sector.

“If you can structure it right and be the first into the market, it could be quite lucrative,” Mr Riley says. “The overarching effect is that it stabilises the market and helps private developers. It has a public and private effect.”

But the market will not pick up overnight, even if the fund has the power to help many developers, he says.

“The sector is going through a long, drawn-out process,” Mr Riley says. “If people think this is going to be a one or two-year issue, they are going to be disappointed. It’s going to take longer than that.”

What puts the Abu Dhabi property market in a stronger position than its neighbour to the north, however, is its core economic drivers, economists say. The capital’s huge oil revenues are being ploughed back into infrastructure and new industries.

A favourite example of this, bandied about by property executives in Abu Dhabi, is that with every new aeroplane arriving at the hangars of Etihad, several dozen people join the airline.

Many of those people will have families, which will necessitate Abu Dhabi bringing in teachers, doctors, lawyers, grocery store proprietors, waiters, chefs and so on.

In short, the population is still rising and there is a sharp demand for housing that will only increase over the next few years.

Mr Dudley says the 45,000 units likely to come online by 2013 will not be enough to meet the demand for homes.

“A very high proportion of the amount of housing supply from now to 2013 is on hold,” he says. “We see this as an opportunity. There is genuine interest here.

“We’re seeing big foreign institutional investors tying up with government entities. There is a lot of interest around the Middle East region. There is a view that now is the time to get involved. The markets are maturing.”

bhope@thenational.ae