Sorouh Real Estate will begin selling a Dh4 billion (US$1.08bn) securitised sukuk in a significant test of the market for raising funds in dirhams at a time when interest in dirham-denominated bonds appears to be waning. The Abu Dhabi-based property company said yesterday that it would use the money to finance infrastructure related to its Shams Abu Dhabi and Saraya projects, which are sections of the company's huge 633-hectare development on Al Reem Island that is expected to cost billions of dollars to build. Shams alone is projected to cost upwards of US$25bn.
The announcement comes against a backdrop of less than stellar performances for dirham-denominated sukuk, or bonds that comply with Islamic laws forbidding the charging of interest. All of the major dirham-denominated sukuk issued this year have seen flagging interest and dropped in price below the "par" value at which they were issued. From Aldar Properties, which issued a Dh3.75bn, five-year floating rate sukuk last month, to Nakheel, which issued Dh3.6bn in debt in May, the results have not been encouraging.
"The bottom line is that the dirham sukuk market and the dirham fixed-income market in general has grown very quickly and I think is showing signs of saturation," said Abdul Hussain, the chief executive of Mashreq Capital in Dubai. Dirham-denominated bonds became hot assets last year, when many people thought that the UAE and other GCC countries might revalue or de-peg their currencies from the US dollar as the American currency declined sharply against the euro. Such a move could have driven up the value of dirham-denominated assets. It never materialised, and Gulf central banks have since reaffirmed their commitment to the pegs ahead of a unified currency to be introduced as early as 2010.
"When revaluation and de-pegging was an issue, people didn't want to put their money into dollars," Mr Hussain said. "People hit the market and got deals done. Now the talk of de-pegging and revaluation has receded, at least for the time being, and interest in the local dirham market has waned." Market conditions may indeed be rough, but with oil prices reaching all-time highs in recent weeks, the GCC is awash with cash, and Sorouh hopes that some of it makes it into the company's coffers.
Pricing would be the key, said Samer Aojaouni, the general manager of Middle East Financial Brokerage Company in Dubai. "When you can see that all of [the dirham-denominated sukuk] are trading under par, there is an issue in terms of pricing," he said. "Maybe expectations of interest were overestimated. The market now has a track record where investors can see where sukuk of other companies are trading, so they may be more reasonable in expecting or valuing the sukuk."
The Sorouh sukuk marks the first time a developer in the UAE has issued securities backed by the value of property holdings. Many market observers believe there is a rising appetite among Gulf investors for securitised sukuk like Sorouh's, in spite of the trouble that securitisation has caused in developed Western markets. One type of securitised asset - mortgage-backed securities - contributed to the collapse of the US mortgage market last year and led to multibillion-dollar write-downs at many large banks.
As the UAE's property sector grows at a breakneck pace, securitisation, or the repackaging of assets as securities sold to investors, could help raise up to $250bn in the GCC by 2010, according to an estimate last year. Sorouh is a public company with 55 per cent of its equity listed on the Abu Dhabi Securities Exchange. @Email:firstname.lastname@example.org