Region Blue City, the largest property development project in Oman, is being hit hard by the financial crisis
Oman's Blue City property development adapts to survive
ABU DHABI // Blue City, the largest property development project in Oman, is being hit hard by the financial crisis and may need to make changes to survive, analysts say. The developer behind the first phase of the US$20 billion (Dh73.46bn) project has missed sales targets since last summer, leading Fitch Ratings and Moody's Investors Service to downgrade its credit rating this week to reflect the project's vulnerability to the downturn.
Blue City issued bonds worth a total of $925 million in 2006 when markets were booming, but sales of $53.9m are far short of the $639m it expected to have by August. "Given the current environment they are really going to struggle to be able to try and address that shortfall," said Khalid Howladar, a vice president and senior credit officer for structured and Islamic finance at Moody's. "Blue City was being built in Oman in anticipation of the growth they thought would happen. Unfortunately, the timing of this wasn't really working in their favour."
With oil revenues declining, Oman has begun a campaign to capitalise on its cooler and mountainous terrain by becoming a high-end tourist destination. At the forefront of these efforts was Blue City, a 2.2 square kilometre piece of land that would bring five-star hotels to the coast near Muscat and create housing suitable for the growing Omani population and expatriates looking for holiday homes. The project was to include hospitals, schools and entertainment facilities for 200,000 residents by the end of its 20-year construction process.
Even before the economic crisis began having an impact on its sales, the project was facing challenges because of an ownership dispute between the two stakeholders, Bahrain's AAJ Holding and Oman's Cyclone. Then, just as the project's sales push began, the global credit crisis weakened interest in Middle East property. Speculative buyers, in particular, left the market. Blue City, also known as Al Madina A'zarqa, has tried to sell larger groups of units to investors to boost sales but it still has not been able to meet its obligations.
Moody's said it was lowering the credit rating on about $399m of senior notes from the company to "Ba1" from "Baa3" because of "worse-than-expected transaction performance and a less favourable macroeconomic environment". Fitch Ratings downgraded four other classes of notes, worth $526m, to "CCC" and "C" from "B plus" and "B minus", citing the deterioration of Oman's property market. "Demand for retail villa and apartment at integrated tourism resorts in Oman appears to have reduced significantly over the last 18 months and has collapsed entirely on the project itself, with no sign of recovery in the short or medium term," Fitch said in a statement.
"Fitch understands that only a handful of units have been sold at the Blue City development since the start of the year." Executives at Blue City declined to comment. In an interview last September, Richard Russell, the chief executive of a company in charge of the first phase of the development, said he would finish the initial phase "on time" by Dec 2012. Fitch said sales were so slow that there was not enough money to pay the construction contractor, AECO, and that if "revenues do not significantly increase in the short term, money remaining from the advance payment will likely allow the contractor to be paid for approximately three more months".
This could lead to construction stalling and would mean the company may have to restructure some of the debt. @Email:firstname.lastname@example.org