Al Rajhi Capital, the investment arm of Saudi Arabia’s Al Rajhi Bank and Bahrain’s Arcapita Bank has launched a US$500 million Gulf property income fund to capitalise on falling prices, the firms said yesterday.

The two companies will seed a joint investment of US$50 million for the fund, which will focus on logistics warehouses, healthcare and education-related assets in Saudi Arabia and the Gulf Arab region, they said in a statement. Saudi Arabia has earmarked around US$400 billion to boost infrastructure over the next five years and is looking to cater for growing demand for new housing from the young population in the world’s largest oil exporter. al Rajhi and Arcapita have completed the first acquisition for the fund and bought a logistics and distribution centre in the kingdom’s capital, Riyadh, for US$79.7 million.

‘We believe that this fund is launching at a time that will allow us to deploy our financial resources to gather a portfolio of prime real estate assets at attractive valuations,’ Jorge Cantonnet, managing director and head of private equity at Al Rajhi Capital said.

The logistics facility is the main distribution hub for Azizia Panda United Company, a leading supermarket firm in the kingdom, and will be leased back to Azizia over 18 years, the statement said.

Dubai-based investment bank Rasmala Investments said in October it was setting up a 500 million riyal (S$187.88 million) Islamic property fund to pursue opportunities in mid-income housing in Saudi Arabia. But in Dubai, which has been worst affected in the region by the economic downturn, the emirate’s second-largest developer, Deyaar, postponed earlier in February a 500 million-dirham (S$191.8 million) distressed property fund after international investors withdrew previously committed funds.

Property prices in Dubai have plunged some 60 per cent since their peaks in 2008 and billions of dollars worth of projects have been put on hold or cancelled.

Source: Business Times, 23 Feb 2010

Dubai’s housing rout sent prices down 52 per cent in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice.

Until now.

Barclays plc has won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about US$16 billion of Dubai home loans to take action when borrowers don’t pay.

Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 per cent of its mortgages are in default.

‘Banks will be more aggressive in pursuing legal action if they see the process is efficient,’ said Antoine Yacoub, a banking analyst at Moody’s Investors Service Inc. ‘They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.’

The successful foreclosures by Barclays may open the floodgates in Dubai’s property market, which went from the world’s best in 2008 to the worst after credit dried up and speculators who had fuelled price increases left the market, according to Deutsche Bank AG. Moody’s estimated in September that 12 per cent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.

Banks and developers until now have avoided the process of reclaiming homes through the courts, barred by tradition and an arcane legal process that few understood. The Barclays and Tamweel cases may change that because they show that a 2008 mortgage law – setting out rules for default, foreclosure and repossession – is working.

The law requires lenders to give homeowners 30-day notice of their intent to pursue a foreclosure, said Jody Waugh, a partner at law firm Al Tamimi & Co in Dubai. Courts then review the case and can issue a debt judgment that turns the property over to Dubai’s Land Department for auction.

Mr Waugh estimates that the process may take two to four months.

Barclays, Britain’s second-largest bank, said in an e- mailed reply to questions that it won the foreclosure orders, without providing details of the cases. The ruling shows that Dubai’s market is ‘evolving and is poised to come at par with other mature markets of the world’, the bank said.

Both lenders and developers in the United Arab Emirates have tried to stem rising defaults through out-of-court settlements with distressed customers after falling prices left buyers with mortgages worth more than their properties. That has helped minimise the amount of bad debt on their balance sheets and kept repossessed houses off a market that’s already suffering from too much supply.

Provisions for bad loans in the UAE surged 68 per cent to 32 billion dirhams (S$12.1 billion) as of November, compared with a year earlier.

Before the mortgage law was passed, lenders and builders could resort to the courts to enforce contracts, though they didn’t have the right to foreclose.

Tamweel’s pending cases, filed almost two months ago, involve homes abandoned by owners who left Dubai at the onset of the global financial crisis, chief executive officer Wasim Saifi said.

Tamweel’s default rate has been ‘hovering between 2.5 per cent and 4 per cent for the past six months,’ he said.

As alternatives to foreclosures, lenders in Dubai have extended payment periods and developers allowed customers with several properties to return some of them.

The absence of mortgage securitisation here makes it easier for UAE lenders to restructure loans than their counterparts in the US, where mortgage debt was often sold on to investors.

UK-based Standard Chartered plc and HSBC Holdings plc top the list of foreign banks providing mortgages in the UAE, according to Deepak Tolani, senior research associate at Al Mal Capital PSC.

‘While it is not Standard Chartered’s preferred approach, foreclosure is a legitimate course of action should a borrower not meet their obligations,’ the bank said in a statement.

HSBC declined to comment on the issue when contacted by Bloomberg, while Islamic mortgage lender Amlak Finance PJSC didn’t respond to e-mailed questions.

Banks are unlikely to head to the courts to foreclose on properties en masse because of concerns that large numbers of repossessed properties on the market will drive prices lower, said Saud Masud, a Dubai-based real estate analyst at UBS.

While auctioning a few properties ‘will be easy’, hundreds or even thousands of foreclosure sales may draw buyers away from new and secondhand properties, Mr Masud said.

‘It’s a slippery slope,’ he said. ‘Mass auctions may re-price the property market in a meaningful way as investors prefer to pick real bargains in auctions.’

A cultural stigma attached to forcing people out of their homes has also deterred foreclosures. However, that may not protect speculative investors who helped drive prices up by buying several properties with the aim of selling at a profit soon after.

‘The mortgage law has given clarity and certainty to the exact process that must be followed by anyone wishing to enforce a mortgage,’ said Mr Waugh, whose firm is currently handling fewer than 10 repossession cases.

Dubai’s population, which is about 90 per cent expatriate, may drop by 8 per cent in 2009 and another 2 per cent in 2010, UBS AG estimated in March last year. Dubai’s immigration department doesn’t provide regular statistics on visas.

Citizens make up only about 20 per cent of the overall UAE population, which largely consists of workers from countries including Pakistan, the UK and Lebanon. Workers have one month to leave the country after their work visas are cancelled.

Dubai first allowed foreigners to own property in 2002. That led real estate prices to quadruple in the following six years, helped by a growing expatriate workforce and speculation fuelled by borrowing.

The UAE last year scrapped a rule that automatically qualified homeowners in Dubai for a permanent residency visa. Owners of properties valued at one million dirhams or more are now required to renew residency visas every six months.

About 65,000 residential units will be completed in Dubai by 2011 and the emirate needs to create a minimum of 100,000 white-collar jobs to satisfy oncoming supply, Nomura said on Oct 15.

Deutshe Bank estimates that 30,000 units may be delivered by the end of this year.

‘When people talk about litigation in the Middle East, they’re concerned over the possible time it would take to obtain a judgment,’ Mr Waugh said. ‘The speed at which it appears judgments may be obtained under the mortgage law is a real, positive sign for banks.’ The Barclays cases were filed in November, he said.

The UAE’s central bank in October proposed reducing the time it takes for a loan to be classified as non-performing by half to 90 days. Banks ‘most probably’ will be asked to comply during the first quarter of this year, said Sofia El Boury, a banking analyst at Shuaa Capital PSC.

So far, no properties have been auctioned, according to Mohammed Sultan Thani, assistant director general at the Dubai Land Department. Requests may start pouring in this year as banks give up on other alternatives, he said.

‘Amicable solutions are hard to reach when a buyer has lost his job’ or when a property is worth less than the amount owed on it, Mr Thani said.

Mortgage loans totalled 137.6 billion dirhams in July last year, central bank data shows. About 25,000 to 30,000 mortgages have been taken in the UAE with over 95 per cent of them in Dubai, analysts say.

The central bank estimates that real estate accounts for about 13 per cent of total loans in the UAE. Shuaa Capital’s Ms El Boury said the real figure is ‘much higher’ and official numbers aren’t realistic ‘given the financing contributions to real estate construction and development in the UAE.’

The new mortgage law applies to only some kinds of Islamic lending, Mr Waugh said.

Shuaa estimates about 25,000 mortgages were extended by Tamweel and its competitor Amlak alone. The two lenders, which control more than half of the UAE’s mortgage market, are set to merge this year. Shares of both companies have been suspended since November 2008.

The biggest risks to banks come from loans underwritten after 2007, which are ‘most probably in deep negative equity by now’, Moody’s Mr Yacoub said.

Also at risk are Islamic Istisna’ mortgages where a buyer doesn’t make any payments until the property is delivered, he said.

Barclays said the court’s decisions will renew lenders’ faith in Dubai’s legal system, ‘which could result in bigger lending mandates specifically for mortgage business’.

Judging by the first cases, the process seems to be working, Al Tamimi’s Mr Waugh said. ‘Like anything, there are a few teething problems that are being resolved, but the fact that we have obtained judgments so quickly is positive.’

Source: Business Times, 12 Jan 2010

It is not considering a merger with rival Nakheel, which has about US$20b of debt

Dubai’s Emaar Properties will focus its efforts abroad and on non-property sectors such as hospitality and hospitals, the company said yesterday, as a real estate crunch hits its home market.

On the day it was due to open the world’s tallest building, Burj Dubai, Emaar said it was not considering a merger with unlisted rival developer Nakheel, which is at the centre of a US$26 billion debt storm involving its government-held parent company Dubai World.

Emaar said the US$1.5 billion tower would provide a 10 per cent yield for the firm and that the opening would boost earnings for most of 2010. But investors took little heart from the outlook and sold Emaar shares down 2.2 per cent, pulling Dubai’s broader index down 2.1 per cent.

Emaar cancelled a merger in December with the property units of Dubai Holding in a dramatic strategic reversal following the financial implosion of companies tied to government-owned Dubai World, one of the emirate’s largest conglomerates. Dubai Holding is owned by the ruler of the Gulf emirate.

‘All the studies which we made, we couldn’t find a way ahead and it wasn’t the right time for a merger at this time,’ said Issam Galadari, chief executive of Emaar Dubai, at a media briefing.

Chairman Mohamed Alabbar told reporters there were no plans to merge with Nakheel, the largest property company in the Middle East, which is struggling under a collapse in earnings and a debt pile worth around US$20 billion.

The Emaar executives put a brave face on the launch of Burj Dubai, saying it was a positive move forward as the emirate’s property prices stabilised, despite wider expectations for continued stress in Dubai’s real estate sector.

‘You have to ask why we are building all this? To bring quality of life and a smile to people and I think we should continue to do that,’ Mr Alabbar told journalists. ‘Dubai is where our life is. We have beautiful long-term plans for development in Dubai,’ he said.

Emaar is the Arab world’s largest listed developer.

The needle-shaped concrete, steel and glass Burj Dubai, described by its developer as a ‘vertical city’ as it dwarfs existing skyscrapers, boasts new limits in design and construction.

Emaar has maintained the suspense over the final height of the skyscraper, saying only that it exceeds 800 metres. But it revealed yesterday that the tower will have over 200 floors, only 160 of which will be inhabited, while the remaining floors will be for services. The tower’s opening has been delayed twice and, unlike other projects, survived cancellations after the crisis hit the once-booming city.

‘We build for years to come. Crises come and go,’ said Mr Alabbar. ‘The world has gone through two years of difficult times. We must have hope and optimism.’

When Dubai’s ruler Sheikh Mohammed bin Rashed al-Maktoum opens the world’s tallest tower, it won’t be the world’s fullest.

The occupancy rate at Burj Dubai may reach 75 per cent this year, with office leasing proving the biggest challenge for investors, said Roy Cherry, an analyst at Shuaa Capital PSC. ‘Those who bought with the intention of leasing will face a difficult time, because few companies today can justify paying premiums for luxury,’ Mr Cherry said.

In the five years it has taken to build the tower, the sheikhdom’s debt-fuelled property market has gone from the world’s best performing to the worst, forcing officials to renegotiate loans and seek bailouts from neighbouring Abu Dhabi.

Apartment prices in the tower, which soared as high as 10,000 dirhams (S$3,809) per sq ft at the 2008 peak, have dropped to less than half of that.

‘It may still run at a premium to the rest of the market, but I’d be surprised if there were no defaults and if vacancy rates didn’t creep up’ since a large proportion of the developer’s sales were financed through mortgages, said Saud Masud, a Dubai-based analyst at UBS. ‘This is a symbol of the economic momentum that Dubai had and an ironic reminder of its property bubble.’

Source: Business Times, 5 Jan 2010

Nakheel PJSC creditors may win the right to seize a strip of barren waterfront land the size of Manhattan if the company defaults on the US$3.5 billion bond backing the development.

Investors will be able to seek foreclosure on the property’s mortgages should the Dubai World unit fail to repay the loan, according to the bond’s prospectus.

The debt is due next Monday, after which Nakheel has two weeks to remedy a default. The property forms part of the Dubai Waterfront project, where Nakheel plans to build a city twice the size of Hong Kong.

Dubai World is trying to restructure US$26 billion of debt after seeking a ’standstill’ agreement on liabilities, including Nakheel’s sukuk bond on the waterfront parcel.

The bond is secured against a 50-year lease on 63 million square metres of land on which Nakheel plans to build the southern part of Dubai Waterfront, and a series of manmade islands in the shape of a crescent.

‘The project isn’t likely to happen,’ said Saud Masud, a Dubai-based property analyst at UBS AG. ‘I’d be very surprised if anything is built in the next five years.’

The land was valued at US$4.2 billion by Jones Lang LaSalle Inc three years ago, based on the entire project being ready by 2018, when it would be worth US$11.8 billion, the prospectus said.

Sukuk are securities that comply with Islamic law, which forbids interest-bearing bonds. The leases on the two Nakheel properties were sold to a special-purpose vehicle that issued the sukuk. They were then leased back to Nakheel, which made rental payments to stay within the law.

The sukuk’s trustee, acting on behalf of noteholders, can ‘take any action to enforce any of the security documents’, if Nakheel doesn’t redeem the bond, said the 2006 prospectus, which classifies the mortgages as security documents.

‘The outcome of Nakheel will set the tone of how people will approach the question of access to assets, what a security package is really worth, and legal rights with a jurisdiction,’ said Brinda Kirpalani, head of credit and convertible research at ADI Alternative Investments SA in Paris.

The waterfront project was among Dubai World’s most ambitious. Dubai Waterfront posters had lined a wall of billboards about 10 metres high and stretched for at least a kilometre along Sheikh Zayed Road, which surrounds part of the land. The posters were removed in the last month. Smaller billboards with Nakheel’s corporate logo remain.

Now the area is bare, except for a cluster of partly finished low-rise buildings and idle cranes for hundreds of metres. Yesterday, camels roamed part of the land.

Source: Business Times, 8 Dec 2009

Comment sends Dubai stock market down almost 6% to 20-week low

Dubai moved on yesterday to ring-fence prized assets from the US$26 billion debt restructuring of Dubai World, denting already fragile investor sentiment ahead of talks between the struggling conglomerate and key creditors.

Bahrain’s central bank governor said that the kingdom’s exposure to Dubai World was limited, echoing top monetary officials in Saudi Arabia and Oman, while the biggest lenders in Qatar and Deutsche Bank both said that they had no exposure.

Dubai World is expected to meet its main bank creditors this week, possibly as early as yesterday, to discuss a request to delay debt payments that has shaken global markets and damaged the reputation of the Gulf’s business hub, bankers said.

London-listed Standard Chartered, HSBC, Lloyds and Royal Bank of Scotland will attend, along with local lenders Emirates NBD and Abu Dhabi Commercial Bank, an unnamed Abu Dhabi bank executive said last week.

Dubai’s finance chief said yesterday that state-controlled Dubai World might sell some assets to finance its commitments, but that the emirate’s government would not chip in with any disposals of its own.

‘Part of obtaining finance is selling assets . . . belonging to the company and not the government,’ Abdulrahman Al-Saleh, director-general of Dubai’s department of finance, said in an interview with Al Jazeera television.

‘There is confusion in the media that the government plans to sell assets . . . The company has foreign investments and real estate investments abroad. There is nothing to prevent selling these assets.’

The struggling conglomerate on Nov 30 shed some light on how it planned to restructure the US$26 billion debt pile, including through asset sales.

It said that the restructuring excluded firms on a ’stable financial footing’ such as Istithmar World, DP World and Jebel Ali Freezone, implying its global crown jewels would not be up for grabs.

Istithmar’s portfolio ranges from US high-end retailer Barneys to the luxury W Hotel in Washington, D.C. as well as sought-after property in London including 10 Whitehall Place.

Infinity World, another unit exempt from the plans, is a stakeholder in MGM Mirage.

‘They need to do this in order to support their statements about the separation between Dubai World and Dubai government . . . The question now is which assets and at what price,’ said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh.

Mr Saleh’s comments sent the Dubai stock market tumbling almost 6 per cent to a 20-week low, reversing quick gains made on Sunday, with DP World, the flagship unit of Dubai World, slumping 5.5 per cent, while property stocks were all trading down.

‘(The market) did not react well to the Dubai government news, which again cast a cloud of doubt,’ said Ayman El-Saheb, Darahem Financial Brokerage’s director of operations.

Since Dubai World requested a payment standstill on Nov 25 for US$3.52 billion worth of Islamic bonds maturing this month, regional government officials and bankers have looked to downplay the impact of the measure on their economies.

Bahrain’s central bank governor joined the chorus yesterday, saying that the kingdom’s exposure to Dubai World was less than 0.1 per cent of total assets or US$281 million.

Deutsche Bank’s Middle East’s chief executive Henry Azzam said that the bank did not have any exposure, and that he did not expect the crisis to have a major impact on the region’s banking sector.

Source: Business Times, 8 Dec 2009

The Burj Dubai tower opens on Jan 4 even as hundreds of other building projects in the emirate are mothballed

NEXT month’s opening of the Burj Dubai tower, the world’s tallest building, will bring Dubai’s era of exuberant expansion to a shuddering halt as hundreds of other building projects are already mothballed.

Plunging property prices and weak demand had already put a dampener on new schemes even before last week’s shock announcement by state-owned giant Dubai World that it wants to halt debt payments for six months.

‘It’s not exactly going to improve investor confidence,’ said Matthew Green, associate director at property agency CB Richard Ellis (CBRE), which has reported a 55 per cent year-on-year drop in downtown Dubai commercial rental rates and a 67 per cent fall outside the centre.

The 800m tall skyscraper is the centrepiece of a US$20 billion new shopping district, Downtown Burj Dubai, which also includes 30,000 apartments and the Dubai Mall, which claims that its space for 1,200 shops makes it the world’s biggest indoor shopping centre.

The tower, whose needle-shaped upper section is visible from 15 km away, stands on one side of a popular piazza, thronged with strollers in the evenings, when a fountain gushes in the central lake.

Developer Emaar has officially announced that Burj Dubai tower will open on Jan 4, the fourth anniversary of Mohammed bin Rashed al-Maktoum’s accession to power in Dubai.

Under construction since 2004, the opening of the steel-and-glass landmark has unofficially been put back from late 2008, but no further delay is likely for fear of loss of face by Emaar, which has not escaped the impact of the global property downturn.

It is keeping quiet about how many tenants it has found for the 160-storey building, and the company’s plan announced in June to merge with state-owned Dubai Holding gave the impression that stockmarket-listed Emaar was not in the healthiest financial condition.

That impression was reinforced on Thursday by ratings agency Standard and Poor’s Corp, which included both Emaar and Dubai Holding among six state-linked companies that it downgraded to junk bond status.

Despite the debt crisis that unfolded last week, Dubai remains a bustling city full of eye-catching sights.

The city state’s iconic national symbol is the three km long Palm Jumeirah artificial island, full of luxury villas whose owners are said to include David Beckham and Brad Pitt.

Immigrant workers were still busy yesterday beavering away on a dozen new housing projects on the island, but Palm Jumeirah’s developer Nakheel had halted plans for two more islands even before its credit woes were broadcast around the world last week.

Nakheel’s US$3.5 billion Islamic bond programme, due for repayment on Dec 14, is the main deal immediately affected by parent company Dubai World’s debt standstill.

All over Dubai, work was still in progress yesterday on dozens of more modest projects, although most are buildings near completion, with the scaffolding only remaining around the upper storeys.

Grand schemes such as the Burj Dubai and Palm Jumeirah are a thing of the past.

The World, an enormous project for artificial islands shaped like the continents, is now no more than a group of sandbanks, and no-one expects Nakheel to go ahead with a one km tall tower announced a year ago.

Market research company Proleads has estimated that projects worth US$582 billion or 45 per cent of the value of all developments, have been put on hold in Dubai or the other members of the United Arab Emirates.

The turning point in Dubai’s seemingly relentless ballooning growth came exactly a year ago, on Dec 4, 2008, when state-owned Meeras suspended plans that it had announced only two months previously for a US$95 billion city within a city called Jumeirah Gardens.

Now the question under discussion is not whether Dubai will go on growing but whether Sheikh Mohammed can stop the city going into sharp decline.

‘Lease rates are below those of 1996, a reflection of the true extent of the downturn,’ CBRE said in its third-quarter report on the commercial leasing market, written before Dubai World suspended its debt payments.

Rents for homes are down by as much as 48 per cent, and CBRE noted: ‘Newer areas are faring comparatively badly in the downturn when compared to more established communities.’

CBRE’s Mr Green said that his company is not seeing many newcomers to Dubai looking for apartments, as ‘there is not a lot of hiring going on’.

‘We have witnessed a rise in movements either to larger apartments which were previously too expensive, or to the lower end of the market where terms are more flexible and rates lower, due to continued fear of job security,’ he said.

But those are people who already live within the Emirates transferring to a different neighbourhood, Mr Green said.

Even if there was continuing demand for new homes and offices, Dubai’s debt crisis means that investors would be likely to think three times about putting up the money, especially to any state-linked company.

‘Although the authorities are at pains to say this is corporate default and not sovereign, it undoes all the implied security of ever wanting to do business with any state entity in Dubai this side of 2020,’ said Manny Cranus, an analyst with London’s MF Global.

‘Trust is a very expensive commodity and can be very quickly squandered,’ he said.

Source: Business Times, 5 Dec 2009

Dubai lacked a development plan backed by fundamentals and prudence

IT IS really a contrasting tale of two cities.

Singapore, which is fundamentally strong, is now bracing itself for an economic recovery next year, while debt-ridden Dubai finds itself under the spotlight due to its credit woes.

But as recently as four years ago, Dubai was portraying itself as the ‘Singapore’ of the Middle East, not least because of the fact that the tiny Gulf state’s economic model closely mirrors that of the South-east Asian country in the last decade.

For example, both resource- scarce city states poured vast amounts of resources into aviation, transport, financial services and healthcare – sectors that will presumably boost the country’s development and attract plenty of foreign direct investment (FDI).

In Dubai’s case, its airport was pitched as a strategic stopover point between Asia and Europe, much like Changi Airport, while flag carrier Emirates sought to rival Singapore Airlines (SIA) by adding to its fleet of carriers, even in the face of the economic downturn.

Then there is the Dubai Aerospace Enterprise set up in 2006 to capture some airport development and operations projects in emerging markets, while Dubai Ports beat PSA International to buy P&O Ports for £3.9 billion (S$8.95 billion) in 2007.

Dubai, the world’s sixth-largest container port handler, wanted to run more terminals in China and India to tap growing economies and challenge rivals such as Singapore’s PSA International.

The Gulf state also challenged Singapore in the US$25 billion market for marine oil by setting up an exchange in 2005 to allow futures trading in marine oil at the port of Fujairah, one of the world’s top three fuel stops for ships.

The dizzying pace of development certainly represents a deliberate part of the ruling family’s strategy to transform the Gulf state into a world-class hub.

Construction spree

But beyond the similarities, key differences remain between the two, perhaps made all the more important when it comes to the crunch.

The first difference concerns the types of projects that Dubai has undertaken and the amount of debt it used to fund them.

In the past few years, Dubai went on a construction spree that included building the world’s tallest tower, the 818-metre-high Burj Dubai, and a man-made island called Palm Jumeirah.

Consider the amounts that was poured into those projects: The Burj Dubai building alone will cost an estimated US$1 billion, while US$1.5 billion was invested in the Atlantis hotel on the palm-shaped island. It is fair to ask if there is ever going to be demand for these projects, and will the tourist numbers be as claimed – a staggering 10 million hotel visitors annually by 2010. Or is it just mere hubris driven by the bubble of the past few years?

Of the US$99.6 billion worth of assets in Dubai World, close to 60 per cent or US$59.3 billion is leverage. With an unpredictable stream of cashflow, a long time horizon plus a debt-ratio higher than one, the credit crisis looks like an event that was waiting to happen.

In Singapore, state-owned Temasek Holdings started in the 1970s on a more solid footing by investing in infrastructure and providing basic services for the economy.

Temasek-linked companies such as SIA and PSA are in strategic sectors that are expected to do well in the long run, and the government investment firm certainly did not undertake any lavish property projects on the scale of Burj Dubai or the Palm developments.

Secondly, Dubai lacks a significant electronics manufacturing base that lends support to its export dollars, as the factory output accounts for just under 15 per cent of GDP. A look at the sectors into which it has poured its money (property, tourism, financial services, etc) reveals that they are all services-related – meaning that export flows can easily reverse in a matter of months, if not weeks. This inherently hampers Dubai’s ability to meet its short-term obligations especially in times of economic crisis.

Cushion

In contrast, manufacturing has been a significant contributor to Singapore’s economic growth for many years, and still accounts for about a fifth of economic activity here. This not only acts as a cushion for any downturn in the services sector, but the returns are often less volatile.

Indeed, Dubai represents all that was wrong with the pre-crisis financial world – built on hubris, loans, speculation, and the fallacy that the champagne-popping party could continue forever.

But, as the saying goes, all good things must come to an end. And the lesson from Dubai’s experience is this: without a development plan backed by fundamentals and prudence, even an oasis in the sand will end up as a mere mirage in the desert.

Source: Business Times, 4 Dec 2009

DUBAI: Dubai World’s debt crisis is likely to result in a large-scale sell-off of assets as varied as the QE2 cruise liner, Turnberry championship golf course, and a raft of properties worldwide.

Mr Paul Reynolds, head of Rothschild’s advisory operations in the Middle East, was this week asked to assess the group’s assets alongside Mr Aidan Birkett of Deloitte, who was appointed last Wednesday.

A spokesman for the Dubai Department of Finance told Britain’s Telegraph newspaper that all options and asset sales would be considered, except for the DP World subsidiary that bought P&O, the British port company.

‘I’m sure all of the assets of Dubai World will be reviewed,’ he was quoted as saying.

‘It’s part of the restructuring process, though it’s too early to say whether there’s any sale in mind.’

Dubai rocked the financial world last Wednesday when it said it would ask creditors of Dubai World, the conglomerate behind its rapid expansion, and Nakheel, builder of its palm-shaped islands, to agree to let it cease payments on billions of dollars of debts until a restructuring agreement has been negotiated.

Abu Dhabi – the richest state in the United Arab Emirates (UAE), the federation to which Dubai belongs – is seen as one of the main buyers of Dubai’s assets. Analysts say Abu Dhabi will probably insist on Dubai selling some assets as part of its conditions for rescuing it.

On Sunday, the Abu Dhabi-based UAE central bank moved to quell fears that Dubai’s debt crisis could escalate, by promising to provide liquidity for both foreign and local banks that had been expecting repayments, effectively covering any short- term losses.

Last year, when rumours about Dubai’s debt problems first surfaced, sources said Abu Dhabi had offered to buy Emirates airline, but Dubai had refused to part with its flagship carrier.

Abu Dhabi is also said to be interested in Emaar, the property company that owns the Burj Dubai skyscraper, the Dubai Mall shopping centre, and Dubai’s aluminium company Dubal, the Telegraph reported.

Dubai World’s venture capital arm, Istithmar, owns stakes in global assets, including MGM Mirage, the Las Vegas gambling operation; Barneys, the New York department store; Cirque du Soleil; South African entrepreneur Sol Kerzner’s hotel chain; and Standard Chartered Bank.

The group’s London properties include Adelphi on The Strand and the Grand Buildings in Trafalgar Square.

Source: Straits Times, 1 Dec 2009

Dubai World, with US$59b of debt, set off a global stock market selloff last week

(NEW YORK) Dubai’s debt woes could further unhinge an already fragile US commercial real estate, as it illustrates the importance of that tiny country to global investors in an increasingly interconnected world.

A state-owned investment conglomerate Dubai World, with US$59 billion of liabilities, set off a global stock market selloff last week after it said it wants to restructure its debt, including at its property subsidiary Nakheel.

‘This downturn has had more of a global impact,’ said Tony Ciochetti, chairman of Massachusetts Institute of Technology’s Center for Real Estate in Cambridge, Massachusetts.

‘As I try to explain to my students, with a global economy, we’re all attached at the hip financially in some way, shape or form,’ he added.

The Dubai news also cast doubt over the strength of the fledgling US economic recovery, and the prospects for a bottoming of property prices.

On Friday alone, the Dow Jones US Real Estate Index fell 2.9 per cent, nearly twice the decline of broader US market indexes. ‘Dubai may have to unload some very prestigious properties at distressed prices and this will drive the price of all commercial real estate lower,’ wrote Richard Bove, a banking analyst at Rochdale Securities in Lutz, Florida.

In the US, Dubai World’s portfolio includes several well-known properties, and the fallout could have a larger impact on the entire real estate market.

The company is a partner with casino operator MGM Mirage in the US$8.5 billion CityCenter project, which would add 6,000 rooms to a Las Vegas Strip gambling corridor already saturated with unoccupied hotel rooms.

Nakheel, perhaps best known as the developer of Dubai’s palm-shaped islands, also carries the Mandarin Oriental and W hotels in New York in its portfolio, and has a 50 per cent stake in the Fontainebleau Miami Beach resort.

And, through its Istithmar affiliate, Dubai World controls the upscale retailer Barneys New York Inc.

The main threat to US commercial property from Dubai World woes may be ‘potential for contagion’, said Sam Chandan, chief economist at Real Estate Econometrics LLC in New York. ‘It has the potential to spill over into the broader perception of real estate development and real estate as being a very risky area for exposure,’ Mr Chandan said.

Many have already been burned.

US commercial real estate values have already fallen 42.9 per cent from their 2007 peak, Moody’s Investors Service said. Last month, delinquencies on US commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8 per cent, more than six times the year earlier level, according to Trepp LLC in New York.

In a Nov 23 report, Moody’s analyst Nick Levidy said prices could bottom at 45-55 per cent below their peak, implying an additional 5-28 per cent decline, but in a ’stress case’ could drop 65 per cent from their peak. Like US investors, foreign investors were enticed through much of this decade to buy US real estate aided by cheap credit and the hope that property prices would steadily rise for a long time.

Currency fluctuations also provided a boost. And the US dollar lost about one-third of its value against a basket of currencies since late 2002, making it easier for foreign investors to scoop up US real estate even when valuations grew too rich for investors at home.

Dubai World’s holdings go far beyond real estate. It has a 20 per cent stake in Canada’s Cirque du Soleil, and also invests in the global bank Standard Chartered Plc and New York boutique investment bank Perella Weinberg Partners.

Other investments go farther afield – or under water. Dubai World is suing a former executive in a case arising from a wayward foray into submarine financing. But Mr Ciochetti suggested that it is premature to quantify Dubai World’s impact on US commercial real estate.

‘It is hard to focus on any one particular participant and then generalise about the whole market,’ he said. ‘It illustrates that very few places and participants in the commercial real estate market are totally exempt from the global economic crisis.’ – Reuters

Source: Business Times, 30 Nov 2009

THE debt troubles of Dubai World appear to have had a limited impact on Singapore companies with links to the Gulf emirate.

Property group City Developments (CDL), which tied up with the Dubai government investment company to develop the billion-dollar South Beach site near Suntec City, said it does not expect ‘any impact at all’ on the site’s development.

‘Dubai World holds only a one-third share’ of the development, a CDL spokesman said yesterday. CDL has another third, and the last third belongs to the United States-based El-Ad Group.

The spokesman told The Straits Times that no further capital needs to be pumped into the project at present.

‘However, when the time comes for construction to proceed, all partners will be required to put in their share of additional funds. Should Dubai World decide not to contribute their proportionate share for whatever reasons, their shareholding will be diluted.’

Dubai World had asked on Thursday for six more months to repay its debts, sending global financial markets into a panic over Dubai’s possible bankruptcy.

Analysts singled out banks as among the most vulnerable to a Dubai debt default. The news could have a ‘meaningful impact’ on banks across Asia, said Mr Daniel Tabbush, a banking analyst at CLSA in Bangkok.

He listed Standard Chartered, HSBC and Singapore’s DBS Group as the most exposed in the region.

DBS has a branch in Dubai that was opened in 2006, marking the bank’s first foray into Islamic finance. DBS could not be reached for comment yesterday.

Along with United Overseas Bank and OCBC Bank, DBS is also part of a syndicate helping to finance CDL’s South Beach project.

Market observers said the banks that have exposure to Dubai only through the South Beach project are unlikely to be affected by Dubai’s financial problems, as they will have collateral in the form of the property.

Public transport company SMRT also has a partnership with Nakheel, a property developer that works under the umbrella of the Dubai World group.

SMRT has a six-year contract worth about $120 million with Nakheel to operate and maintain a monorail running through the Palm Jumeirah development in Dubai.

In response to queries about how Dubai’s debt difficulties would affect SMRT, chief operating officer Yeo Meng Hin said the impact to the monorail’s operations, if any, would be minimal.

‘We are long-term partners with Nakheel, and will continue to work closely with its management during this challenging time,’ he said.

Other Singapore companies that have crossed paths with Dubai World include Labroy Marine and Pan-United Marine. The Dubai firm bought both Singapore shipyards in 2007 for about US$2 billion (S$2.7 billion).

Earlier that year, Dubai World’s sister firm Dubai Ports World grabbed headlines in Singapore when it beat PSA International to buy P&O Ports for £3.9 billion (S$8.8 billion).

Source: Straits Times, 28 Nov 2009