Nakheel PJSC, Dubai’s biggest developer by assets, told creditors it wrote down its real estate by 78.6 billion dirhams ($21 billion) after property values in the Persian Gulf emirate fell by more than half.
The state-owned company wrote off 301.4 million dirhams in the first half of last year, 73.8 billion dirhams in 2009 and 4.44 billion dirhams in 2008, according to its Islamic bond prospectus distributed last month and obtained by Bloomberg News. After the write-offs, the company’s share capital dropped to 10.6 billion dirhams as of June 2010 from 87.1 billion dirhams in 2008. Nakheel declined to comment.
“This shows Nakheel is cleaning up its balance sheet,” said Matthew Green, head of United Arab Emirates research at real-estate broker CB Richard Ellis Group Inc. (CBG) “The company has restructured its debt and is moving toward a more sustainable business model that relies more on income-generating assets, such as malls and leasing.”
Dubai’s property market had one of the world’s biggest reversals following the global credit crisis three years ago, with home prices slumping 64 percent since they peaked in mid- 2008, Deutsche Bank AG estimates. So far, Nakheel has received an $8.6 billion bailout from Dubai’s government, helping it avoid default. The company cut jobs and halted projects including the man-made islands of Palm Deira and Palm Jebel Ali.
Dubai World, Nakheel’s former owner and one of the emirate’s three main state-controlled holding companies, roiled global markets in November 2009 when it tried to stop repayments on about $25 billion of debt. The company reached a restructuring agreement with its creditors in March.
“The magnitude of impairments is surprising,” saidMajed Azzam, a property analyst at AlembicHC Securities. Nakheel will need “significant” spending before it can capitalize on its “highly leveraged” land assets and that’s been a main concern for lenders and investors, he said.
Nakheel had a profit of 58.9 million dirhams in the first half of 2010 compared with a loss of 13.4 billion dirhams a year earlier, according to the prospectus. The developer had a loss of 76.6 billion dirhams in 2009, after a year-earlier profit of 505.3 million dirhams, according to the document.
The company last month said it would issue 3.8 billion dirhams of Islamic bonds to its contractors and suppliers on Aug. 25 as the last step in restructuring $16.1 billion of liabilities. Nakheel plans to issue an additional 1 billion dirhams of bonds as part of an 8.5 billion-dirham program.
The bonds, known as sukuk, pay a return of 10 percent and are being used to pay 60 percent of what’s owed to contractors and suppliers. The rest is being paid in cash. Sukuk pay asset returns to comply with Islam’s ban on interest.
The sukuk, maturing in 2016, was trading at 80 cents to the dollar, or at a yield of 16.02 percent at 11:30 a.m. Dubai time, according to prices from Standard Chartered Plc.
“This sukuk will be riskier than debt instruments issued by other Dubai companies because the repayment will depend to a large extent on the recovery of the real estate market in Dubai,” said Zafar Nazim, senior credit analyst for the Middle East at JPMorgan Chase & Co. in London. “I think they will need to start some new projects later on to be able to service these obligations, and that’s a big question mark.”
Tourism and trade in Dubai are recovering after a $20 billion bailout in 2009 from the U.A.E’s central bank and neighboring Abu Dhabi. The emirate and its state-owned companies borrowed at least $113 billion, according to an International Monetary Fund report in June.
Nakheel has cut spending by “aggressively” scaling back most of its projects and infrastructure work and suspending land reclamation, it said in the prospectus. The company is focusing on a limited number of projects, most of which are set for completion from 2012 to mid-2013.
Nakheel had assets of 77.5 billion dirhams at the end of June 2010. Emaar Properties PJSC (EMAAR), developer of the world’s tallest tower, has assets of 61.9 billion dirhams across 15 countries, according to the Dubai-based company’s financial statement for the 12 months through June 2011.
To reduce costs, Nakheel cut its workforce to 986 in March 2011, after employing 3,818 in October 2008, according to the prospectus. It also delayed projects such as the Waterfront.
In the past, Nakheel derived most of its income by selling completed properties to home buyers and land plots to smaller developers after providing infrastructure such as roads, water, sewage and electricity. The company is building up its leasing business and has increased occupancy in its 20,000 rental units to 70 percent from 40 percent last year, Chairman Ali Rashed Lootah told reporters on Aug. 24.
Nakheel expects to spend 7.4 billion dirhams this year and another 1.4 billion dirhams in 2012 to complete nine projects across Dubai, according to the prospectus. On Aug. 24 the developer said it plans to complete 7,982 homes in the 12 months ending December 2012. The value of its properties under construction was 52.3 billion dirhams at the end of June 2010.
“Nakheel has also adopted a policy of phasing the delivery of associated infrastructure in accordance with demand and the stage of project completion,” it said. “Rather than build infrastructure that is intended to service an entire proposed development from the outset, Nakheel staggers the building and delivery of infrastructure, thereby reducing excess capacity.”
Nakheel is restructuring 59 billion dirhams of liabilities, including 32 billion dirhams owed to the Dubai government, 19 billion dirhams to trade creditors and 8 billion dirhams to banks, Sanjay Manchanda, Nakheel’s chief executive officer, said last month. The developer in July won approval from all its bank lenders for the debt reorganization.
Though Dubai’s government is not guaranteeing the bond, it may choose to step in if the company struggles with repayment because it has already invested so much money in Nakheel, Nazim said.
About 54,000 homes in Dubai will come onto the market from 2011 to 2015, about 15 percent to 20 percent of the existing supply, Jones Lang LaSalle Inc. (JLL) estimates. That may lead to further price declines, according to the real-estate broker.
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