The consolidation of Dubai Inc

A series of consolidations and debt restructurings in Dubai are bringing needed clarity to the emirate's response to the financial crisis as it works to reorganise government-controlled companies. Emaar, the Middle East's largest developer, said on Friday it was in talks to acquire the property interests of Dubai Holding, bringing three companies - Sama Dubai, Tatweer and Dubai Properties - under its umbrella.
Also last week, Dubai World, the major property and ports conglomerate, said it was consolidating the management and property operations of Leisurecorp, Dubai Maritime City and the Dubai Multi Commodities Centre, all of which it owns. The property divisions of these companies will now be run by Nakheel, another property arm of Dubai World. And the resolution last week of a dispute between Shuaa Capital, one of the region's oldest investment banks, and Dubai Banking Group (DBG), an arm of Dubai Holding, over a Dh1.5 billion (US$409 million) convertible bond has brought an end to one of Dubai's longest-running financial disputes.
Shuaa and DBG came to terms after months of negotiation and legal threats in which DBG said it would sue Shuaa, and Shuaa tried to force DBG to accept a conversion of the bond into shares, which would have implied a paper loss for DBG of more than Dh1bn. While it has yet to be approved by Shuaa's shareholders, the compromise has Shuaa issuing 515 million new shares, giving DBG a 48.4 per cent stake in the company and reducing its potential losses in its investment.
These developments reveal in more detail than before the reaction of Dubai's business scene to the financial crisis. "Consolidating these three companies with Emaar is a natural progression in the evolution of the Dubai real estate landscape, providing benefits to all stakeholders," said Mohammed al Gergawi, the chairman of Dubai Holding. Dubai World's stance on its own reorganisation is cast in similar terms: to emerge from the crisis in a stronger position will require an agility that wasn't as necessary in pre-crisis boom times.
The company recently hired AlixPartners, a corporate turnaround company that is advising General Motors on its multibillion-dollar bankruptcy, to assist in the transition. "The move aims at consolidating activities of the same nature to better accommodate current market conditions and optimise resources and expertise," a Dubai World spokeswoman said. "The staff engaged in the real estate function of the merged entities will be transferred to the Nakheel management and AlixPartners are helping Dubai World in the process of optimising the combined organisation."
With their focus on getting Dubai's financial and property development in order, moves like these appear to represent a new phase in the recovery, in which developers get back to basics and concentrate on fundamentals of development and property sales that were easy to overlook in the six-year property boom that ended last autumn. Sources in the industry say a major part of the $10bn in recovery funds that have been funnelled to Dubai companies from the Central Bank will be used on infrastructure at master developments.
This is aimed not only at helping the newly enlarged Emaar and Nakheel, but also sub-developers who have stalled on construction because their buildings do not have the necessary roads, electricity lines and sewers to go ahead with construction. As consolidation progresses, developers are taking other kinds of steps to smooth a recovery. Deyaar, a developer in Dubai, recently set up a distressed asset fund with the help of Dubai Islamic Bank - which owns a large stake in Deyaar - to help it scale back and refocus. Others have restructured financing offerings or partnered with banks to revive sales.
However, the recent consolidations mean Emaar and Nakheel are not only taking over assets but also, possibly, large liabilities. Sama Dubai, for instance, has several projects, including The Lagoons, that are partially sold but have made little progress. Getting the project moving again could mean scaling back designs, cancelling some buildings and changing the mix of units to include more middle-income housing, which is in the highest demand in the market now.
And there are likely to be more consolidations and company collapses to come. The Real Estate Regulatory Agency, which has become increasingly powerful since the property downturn, has said it is whittling down the number of approved developers from its high of 447, as it becomes clear which ones can no longer move forward with projects. There is also continued discussion of a merger between Deyaar Development and Union Properties. The latter is having major liquidity problems and recently had its chief executive of 23 years, Simon Azzam, step down.
"Consolidation is gathering momentum, driven by structural, market and regulatory factors," said Dirk Buchta, the Middle East managing director of the management consultancy firm AT Kearney, in a report this month. The firm is said to be advising Deyaar and Union Properties on merger options. While these structural shifts in the industry are signs of a broader strategy to help Dubai recover from the credit squeeze and property downturn, the true challenge ahead is how the government-owned and controlled companies will deal with an estimated $70bn of debt, much of which is coming due in the next several years.
Two companies, Borse Dubai and the Dubai Civil Aviation Authority, have already successfully restructured debt, showing there is still some appetite in the credit markets for Dubai risk. The major test comes in December, when a $3.5bn Islamic bond from Nakheel comes due. So far the company has not said what path it will take, but there are increasing indications it will pay back the bond in full, or extend the debt at favourable terms.
These indications were bolstered by the Dubai World announcement of consolidations of its property activities under Nakheel, which shows it plans to keep Nakheel in business instead of folding it into another entity. afitch@thenational.ae bhope@thenational.ae