A year ago, Deyaar Development was in crisis mode. The company's former chief executive had just been detained by police on allegations of fraud and the global credit crisis was threatening to overflow into the UAE in a serious way. By the time of the Cityscape Dubai property conference in October, the situation was looking even grimmer, with sales slowing and speculators beginning to flee the market. Markus Giebel, the chief executive since last August, looked shell-shocked before a crowd of reporters pressing him for details on the company at the time. It turns out he was being quiet for a reason.
"I spent weeks just listening," Mr Giebel said this week. "The key to any business is to get all of the information first and then manage it." In the months since then, Mr Giebel and Deyaar's leadership team have completely redefined the company, turning it into what Nomura Securities called a "market leader" in a recent report. Not only does the company have a new logo and strategy, it is taking some of the most proactive measures in the region to combat the rising number of people defaulting on their property purchases.
The so-called default rate is a UAE property developer's worst nightmare. Largely, this is because the construction projects here are being financed entirely by buyer payments as they come in. In some more developed economies, much of property construction is financed by loans to the developer to avoid problems caused by hiccups in demand. Without these regular payments from buyers, some developers here have been forced to delay projects and stall construction until they can figure out a way to survive.
For this reason, Deyaar focused on the default rate from the beginning of the property slowdown last autumn, Mr Giebel said. "Defaults are very dangerous," Mr Giebel said. "The key is to bring this number down as low as possible." What emerged over months of planning and consultations was a five-part strategy to lower Deyaar's natural rate of defaults from 50 per cent - a potentially staggering loss of income - to the low single-digit range. At the recently delivered Al Seef 2 project, the default rate was 3 per cent.
The first step the company took was to ease payment plans, he said. This did not solve the problem of defaults, as much as buy the company time to come up with a fuller strategy. "Easy payments don't solve the problem," he said. "They delay the problem." After this, Deyaar started cutting prices of its properties. This made it easier for people who had already bought a home to get a mortgage because their paid-up capital would be higher. It also brought the company's properties more in line with the market.
Deyaar also began a series of consolidations. It allowed distressed customers who had bought multiple units to reduce the number of their holdings while increasing their equity in the remaining units. So a buyer who had paid 20 per cent for two floors of a building could change to having paid 40 per cent for one floor. This left the company with unsold inventory, but that was taken care of in large part by Deyaar also consolidating its projects, the fourth step of the strategy. Deyaar effectively has been cancelling some projects in areas with a low probability of getting infrastructure on time by convincing buyers to shift their purchases into buildings further along in development.
So far, about half of the buyers in these buildings had opted for the consolidation option, and Mr Giebel said the company's sales staff were working with the remaining buyers to increase this number. In some cases, they were giving these buyers discounts to accept the transition, he said. Still, after all these steps, Deyaar is left with a default rate of about 20 per cent. That is where the final step comes in.
The company has created a distressed asset fund that will take over property from buyers who default on their payments. This works especially well because of the recent introduction of Law No 9, which specifies how much a buyer is refunded if they default, based on a sliding scale. For instance, if they have paid 30 per cent, but the project is more than 80 per cent complete, they lose the entire amount. If they have paid 30 per cent and the project has not started construction, they would get a refund of 70 per cent of the money they had paid until that point.
Mr Giebel said that this ensured that Deyaar could then sell the defaulted unit to the distressed asset fund at a very steep discount because the company gets to keep some or all of the payments from the defaulted buyer. Deyaar would prefer to do this because if it sold the unit at a discount to the market, they would be unfairly competing with their own buyers who were listing their property on the resale market, and destabilising prices in Dubai as a whole.
The fund, which was created together with Dubai Islamic Bank, will be between Dh500 million (US$136.1m) and Dh1 billion in size. Mr Giebel said he had already secured about Dh200m in solid commitments to the fund from investors, with another Dh300m in advanced negotiations. Despite these ambitious efforts, Mr Giebel said the most important part of Deyaar's recovery was not the formulation of the strategy. "Strategy is always the easy part," he said. "The challenge is how do I make the organisation ready to implement the strategy."
To start, Deyaar had to create its first customer service unit. Many of the sales staff members had to undergo extensive training to understand things such as how to talk on the phone with angry customers and how to find out what their needs are if they are to be able to continue paying for their purchases. Perhaps the most difficult task of all, Mr Giebel said, was changing the public image of Deyaar in the market. The company underwent a complete rebranding with a new logo and corporate image and made itself more accessible to the media in order to give a more transparent account of what was happening at the company, he said.
"We had to make Deyaar a brand that people can come and trust. The strategy is interesting, but never forget that the implementation is much more complicated." @Email:firstname.lastname@example.org