DUBAI // As the world enters what appears to be the most formidable downturn since the Great Depression, with tremors being felt in the Gulf, the Dubai Government is reassuring its creditors and introducing measures aimed at supporting the property and financial sectors.
Mohammed Ali Alabbar, a member of the Dubai Executive Council, told an audience at the Dubai International Financial Centre that it was time to address the new economic reality. "We are rationalising our expenditures and consolidating our activities," he said, adding that the country's property industry would "see more consolidation, especially with third-party developers, who may be facing some lending difficulties".
Mr Alabbar, who is also chairman of the emirate's largest developer, Emaar Properties, said Dubai would be able to handle its debt. "The government can and will meet all obligations going forward," he said, adding that the emirate had debts of US$10 billion (Dh36.73bn), plus a further $70bn with Dubai-affiliated companies balanced by Government assets of $90bn and assets belonging to state-backed companies of $260bn.
He added that a special advisory council had been established to look at each sector of the economy, in particular the property market. The committee is making recommendations to the rulers and will manage the "current and future supply of new projects on to the market" in a bid to slow the decline of prices. The moves this week to reassure the markets have come after large declines in the stock exchanges, a softening of prices of new homes and a first round of layoffs at many property developers all developments that would have been unthinkable just six months ago at the height of the property boom.
The most dramatic development for the property market came earlier this week with the announcement by the Government that it would merge two banks and the country's two largest home finance providers into a rescue vehicle called Emirates Development Bank. The new bank would receive funds from the federal government and become the largest provider of home loans in the country, Mr Alabbar said. A source close to the new bank said the move was the Government's most comprehensive attempt yet to fight the crisis.
"This is the Government's message," the source said. "We are providing full support to the key businesses." In the past three months, the Government has pledged Dh120 billion to help banks fill the funding gap created when foreign investors began withdrawing their money from the region this summer. However, bankers have expressed reluctance to re-lend the emergency money to home-loan companies or real estate developers, for fear of exposing themselves further to a rapidly declining property market.
Amlak Finance especially showed signs of strain last week when it announced it would issue no new home loans until it had reviewed its credit policy. Other mortgage lenders have either stopped lending or cut their loan-to-value ratios dramatically, making it difficult for both buyers and speculators now without any choice but to hold on to their purchases to get financing. Cash flow at property development companies has all but stopped and distressed buyers have started offering discounts of as much as a third on the resale market.
The impact is already being felt at the biggest companies. Emaar, whose shares fell 9.5 per cent in trading yesterday, has seen its share price drop by 83.4 per cent since the beginning of the year. Amlak and Tamweel, which have had their shares suspending from trading pending details of the merger, have lost 80.1 and 85.6 per cent since the beginning of the year, respectively. The decision to merge Amlak and Tamweel with Real Estate Bank and Emirates Industrial Bank into Emirates Development Bank is widely seen by analysts as a move to reverse the slide of the property sector by restoring financing for would-be buyers and speculators. However, both the Dubai Financial Market and the Abu Dhabi Index fell yesterday, 5.3 per cent and 3.4 respectively, with the property and finance sectors worst hit, indicating that investors remain sceptical of how effective such measures will be.
The new institution will "really be a strong entity", Mr Alabbar said. "It means that this country is serious about consolidation during interesting times. This structure will facilitate the lending and move liquidity into sectors needed, especially in real estate." He added the Government would be "cautious going forward, but will increase flexibility of real estate funding". This is likely to be just the first in a number of takeovers, with a dramatic restructuring of the market still on the horizon, analysts said.
Sofia el Boury, a banking analyst at Shuaa Capital, said a wave of consolidations was likely in the market. During downturns, "weak companies become ideal targets for acquisitions by profitable, highly liquid and well-capitalised institutions", she said. There is also a growing sense that a push to strengthen the federal union has been sped up in response to the credit crunch. However, Mr Alabbar rejected the suggestion that Abu Dhabi was preparing to bail out Dubai.
"It is not true," said Mr Alabbar. "Dubai has received no offer either directly or indirectly from Abu Dhabi or any other party on earth," he said when asked if Dubai's assets were for sale. * additional reporting by Travis Pantin firstname.lastname@example.org email@example.com firstname.lastname@example.org