x Abu Dhabi, UAEFriday 21 July 2017

Cirrus offers equity in Aquarius Gate

A Dubai property company offers investors at one development the opportunity to become shareholders in a new company to run the project.

Benham Eshragh, the chairman and chief executive of Cirrus Developments, and Rehan Khan, the chief operating officer.
Benham Eshragh, the chairman and chief executive of Cirrus Developments, and Rehan Khan, the chief operating officer.

A Dubai property company, Cirrus Developments, has offered investors at one development the opportunity to help determine their fate by becoming shareholders in a new company to run the project. The offer for buyers in Aquarius Gate, a Dh3 billion (US$817 million) commercial and residential development at Nakheel's Waterfront, is a response to the growing risk of default and legal disputes among the 108 investors who have bought units in the two-tower project.

Benham Eshragh, the chairman and chief executive of Cirrus Developments, said the solution would create a "win-win situation" for the company and its customers, who would have to agree to the proposal by a majority before it goes ahead. "We understand the economic situation and people's financial situation have changed and we're here to build relationships, not damage them," he said."We have spent millions of dollars on marketing ourselves and gathering these investors. Forfeiting customers, even though it's contractually permissible, is not an outcome we'd like to have."

The plan involves the creation of a project company, which will be 30 per cent owned by Cirrus and 70 per cent by the investors and registered as the developer with the Real Estate Regulatory Authority (RERA). The investors will have a say in how the project is developed and be entitled to a share in the profit, to be paid out as a dividend upon completion. The offer is open to those who have paid, or who can still pay, 20 per cent towards their purchase. They would have a year to pay the next instalment of 10 per cent.

Enabling work at Aquarius Gate began in January and is expected to take between six and nine months. Once 30 per cent of instalments is paid, shareholders will decide whether to begin the main construction or postpone it until economic conditions improve. Under the current payment schedule, investors would have had to pay 80 per cent of the unit cost within two to three years. "Obviously, if we do this, we have to do it for the majority. It wouldn't make sense to do it for a couple of customers and bring additional shareholders in," said Mr Eshragh.

It was the easiest solution the company could find to weathering the slowdown, financing construction and retaining customers, he said. "It's not feasible for us to just put the project on hold as we will default on our obligations. "As we speak, purchasers have defaulted on their obligations, whereas for us, construction has gone ahead as scheduled and we have done everything as per the sales purchase agreement. So my answer to purchasers who ask us to put things on hold is, 'We will, but we share the risk and benefit. You become a shareholder in the project as well'."

The move would also shield Cirrus from the risk of higher construction costs in the future. Investors who cannot meet their payment obligations would forfeit their rights. "There will be the unfortunate few that we have to forfeit. If they still cannot meet their 30 per cent obligation in a much longer timeframe, it means they made a drastically wrong commercial decision. There's a limit to how flexible you can be. But in my opinion, the majority of people should be able to bring it [the payment] to this stage."

The proposal will apply only to Aquarius Gate, the one of three Cirrus projects that has been most affected by the downturn. It was launched last year when off-plan prices were inflated by speculators who entered into long-term financial commitments with limited cash in the hope of quickly selling for a profit. Off-plan property prices have since come down by as much as 50 per cent in some areas of Dubai, while restricted access to liquidity has left buyers struggling to pay and developers unable to build.

Blair Hagkull, the managing director of the regional office of Jones Lang LaSalle, a property consultancy, said such a strategy would need to have a compelling financial case for buyers for it to make sense, while trust and transparency would be paramount. "What we're finding right now is the profile of investors in the region is very different," he said. "Some people might find the opportunity to share risk appealing, while others only want to actually buy a unit in a building."