By Zainab Fattah and Stefania Bianchi
Dec. 17 (Bloomberg) -- Dubai, gearing up for a new
, will need to prove to lenders and investors
that this one won’t end like the last.
With the same bravura that turned the desert sheikhdom into
a hub for finance, tourism and real estate, the government is
pitching massive projects in the hope of inspiring investment
even as banks and builders remain buried under debt from the
property-market collapse in 2008.
“They are floating a trial balloon to see how the market
responds,” said Jim Krane
, a researcher at Cambridge
University’s Judge Business School and author of the 2009 book
“City of Gold, Dubai and the Dream of Capitalism.” Dubai has
excelled at “soaking up the excess liquidity in an oil-rich
region. The city’s game is to create schemes to channel some of
that liquidity to itself.”
Two projects announced last month, a new district featuring
the world’s biggest shopping mall, and a complex of five theme
parks, may cost as much as $43 billion to build, according to
of London-based investment adviser at Religare.
There are also plans to construct a replica of the Taj Mahal
four times the size of the original, and revive other
developments that stalled four years ago.
Developers relied on bank lending and advance sales of
unbuilt properties before 2008, when Dubai had the world’s
fastest-growing real-estate market. This time, they will need to
tap bond markets or find investors from private equity, pension
funds and hospitality companies to fund construction.
“Dubai is going to have to be very creative on how it
finances these projects,” said Ghassan Chehayeb
director for the Middle East and North Africa at Exotix Ltd.
“The traditional debt-fueled building boom is not going to work
this time and the financing capacity and appetite is just not
Dubai government officials were unavailable for comment, a
spokeswoman said yesterday.
The property crash pushed Nakheel PJSC
, the developer of
Dubai’s palm-shaped islands, to the brink of bankruptcy and led
former parent Dubai World Ltd. to clash with about 80 banks as
it pushed to renegotiate terms on $25 billion of debt. Concern
over Dubai World in late 2009 caused equity markets including
the New York Stock Exchange to drop and hurt crude oil prices.
Dubai racked up about $113 billion in debt on its
transformation. About $7 billion matures
next year and another
$56 billion from 2014 to 2016, Bank of America Merrill Lynch
said in an October 2011 report.
“Banks remain wary about lending to real estate
developments at a time when they still have to make major
provisions against nonperforming real estate loans from the last
development boom,” Alan Robertson
, chief executive officer for
the Middle East and North Africa at broker Jones Lang LaSalle
Inc., said by e-mail.
Moody’s Investors Service downgraded
Dubai’s biggest banks
on Dec. 7, saying they hadn’t done enough to address the bad
loans that piled up in the crash. Banks in the city have set
aside 30 percent to 45 percent of the value of the non-
performing loans, compared with 72 percent to 96 percent for
similarly-rated lenders globally, Moody’s said. As the lenders
catch up with provisioning, profits will be pressured and some
may need to raise new capital, it said.
Loans and advances from banks in the United Arab Emirates,
which includes Dubai, grew 2.7 percent in the first eight months
of the year, down from an average of 3 percent in 2011,
according to central bank data. That’s a fifth of the pace in
Saudi Arabia and lower than Kuwait’s 3.5 percent growth.
The U.A.E.’s central bank yesterday said it’s postponing
new regulations that cap bank lending to governments and their
related companies for further review by the lenders. The rules
barring banks from lending more than 100 percent of their
capital to local governments and state-related entities is part
of plan to reduce the risk of over-concentration.
The postponements came after Emirates NBD PJSC
U.A.E.’s biggest bank by assets, and second-ranked National Bank
of Abu Dhabi PJSC
did not meet the September deadline to comply
with the new lending rule.
Asian banks, meanwhile, “have been burned very badly and
many don’t want to have anything to do with Dubai real estate
developments anymore,” Chehayeb said. “European banks have
been treated poorly throughout the debt restructurings and are
having significant problems
Royal Bank of Scotland Group Plc was the biggest
underwriter of loans to Dubai World while HSBC Holdings Plc has
the most at risk in the United Arab Emirates, JPMorgan Chase &
Co. said in a 2009 report. RBS, which had to be rescued by the
U.K. government, Commerzbank AG and Standard Bank Group Ltd. in
July walked away from talks to restructure $6 billion of debt
with Dubai Group LLC.
Dubai Group is controlled by Dubai Holding LLC, a company
owned by the emirate’s ruler Sheikh Mohammad Bin Rashid Al
Maktoum. Dubai Holding is one of the two companies responsible
for developing the new district, which will be named after the
, where “too much money” is chasing
diminishing returns, offer the best option for funding projects,
according to Religare’s Mostaque. For that to happen, the
government may have to back sales with guarantees, he said.
“There is immense demand for any hard currency bonds and
Gulf bonds in particular because they are pegged to the U.S.
dollar,” he said. “Since the crisis, the U.A.E. has tried to
do away with sovereign guarantees, but they would have to start
deploying them in one form or another,” he said.
Holders of Nakheel’s Islamic bonds got a 48 percent return
in 2012, four times higher than its global peers, as an increase
in investors sent Dubai yields
to record lows. The company in
January announced plans to build The Pointe at Palm Jumeirah, a
300 million-dirham ($82 million) retail development on the
The project, Nakheel’s first major development since
receiving a government bailout in 2009, is under final design
review and financing will progress once the development goes out
to tender, a company spokeswoman said by e-mail.
Neighboring Abu Dhabi, holder of 7 percent of the world’s
oil reserves, this year revived suspended projects including
branches of the Louvre and Guggenheim museums. The U.A.E.
capital plans to invest $500 billion in industry, tourism and
culture to increase non-oil revenue as a proportion of its
Advance sales of properties in Dubai, a key source of
development funding in before the collapse, dried up after the
practice fueled speculation that hurt buyers, developers and
Dubai first allowed foreigners to own property in 2002,
drawing investors from Iran, India, Pakistan and Russia. Many
made quick profits by paying a developer 10 percent of a planned
property upfront and then reselling the contract as values rose
at the fastest pace in the world. Most of the emirate’s
developers became paralyzed when buyers failed to make further
payments towards completing the properties in the aftermath of
the global credit crisis.
Lenders in the six-member Gulf Cooperation Council region
risk creating a new bubble if they continue to finance real
estate projects, according to a study by AlixPartners LLP. The
U.A.E., which includes Dubai, is part of the GCC group.
“Banks shouldn’t be caught out again,” AlixPartners
Managing Director Claudio Scardovi
told reporters in Dubai on
Dec. 11. “Certain banks remain crippled by a real estate
overhang, asset quality concerns and a post-credit bubble
Mohammad Bin Rashid City is the biggest of the new and
revived mega-projects. Located on 5.1 square kilometers (2
square miles) directly east of the world’s tallest skyscraper,
the development will include 100 hotels, residential areas and
the biggest cluster of art galleries in the Middle East and
North Africa region. Its “Mall of the World” would cater to 80
million shoppers a year.
The district, known as MBR City, will be developed by Emaar
as well as Dubai Holding.
An Emaar spokesman
didn’t respond to e-mailed questions about the construction time
frame, cost and financing plans. The first project in MBR City
will include luxury villas set around an 18-hole golf course,
the companies said in a Dec. 9 statement. A spokeswoman for
Dubai Holding said the company isn’t providing details on
financing plans, costs and construction time frames.
Financing of MBR City rests with the developers, said
Sheikh Ahmed bin Saeed Al Maktoum
, who heads Dubai’s supreme
fiscal committee. His comments contradicted statements by Hani
, secretary general of Dubai Economic Council, who was
quoted in Arabian Business
as saying the emirate won’t be
relying on the global markets to fund the new projects because
it has its “own resources.”
If Dubai avoids backing bonds with guarantees, developers
may have to search for regional or international investors such
as hedge funds and hotel companies, Exotix’s Chehayeb said. The
emirates’ surging tourism market may encourage that type of
investor. The industry grew 13 percent in 2011 and international
traffic at Dubai’s airport climbed by 13.5 percent to 47.5
million passengers in the year through October.
Hotel occupancy rates averaged 75 percent this year, among
the highest in the world, as conflicts elsewhere in the Middle
East and North Africa drove more Gulf tourists into Dubai,
according to Philip Wooller, Middle East and Africa director at
Dubai’s economy is headed for the biggest expansion in five
years as its hotel and restaurant industries expanded by 16
percent. Gross domestic product increased by 4.1 percent in the
first half, putting the emirate on track to reach the
government’s forecast of 5 percent for the year, the Dubai
Statistics Center said in November.
Still, the projects are being announced even as Dubai is
barely recovering from a drop that wiped 65 percent off
residential values. Two months before the plan for MBR City was
unveiled, state owned Meydan City Corp. said it would revive a
stalled development with low-rise buildings and lagoons and
another for a tower with “sky gardens” and nine swimming
pools. At about the same time, the emirate’s government re-
approved construction of a mile-long canal from the Business Bay
commercial area to the ocean.
“They are looking for investors who are willing to take
another gamble on Dubai,” Krane said. “Nobody who has detailed
understanding of the financial situation in the city is going to
risk their money on Dubai,” he said.
The cost of the planned projects may be mitigated by long
development periods. Construction will probably stretch out 15
years, during which time the lending market is likely to
improve, said Ian Albert
, regional director at property broker
Taking part in MBR City represents a reversal for developer
Emaar, builder of the world’s tallest tower and biggest mall by
area in Dubai. The company has outperformed its peers since the
crash by moving away from mega-projects in the city and focusing
on developments abroad and local properties that generate
The scarcity of new funding may turn out to be a blessing
in disguise as it tempers the pace of development, Jones Lang’s
“The level of available finance is likely to act as a
natural brake, limiting the number and timing of the announced
projects that proceed,” Robertson wrote.
Central bank rules that cap real estate lending to 20
percent of a lender’s deposits and restrictions on lending to
state entities will be “a healthy constraining factor,” Khalid
, a Dubai-based vice-president at Moody’s Investors
“There is a risk of increasing leverage, but hopefully the
experience of the last crash will bring some discipline to the
debt raising process,” he added.
For Related News and Information: More mortgage columns: NI
Top real estate stories: TOP REL
Top Gulf stories: TOP GULF
For U.A.E. property news TNI UAE REL
Middle East stock market news: NI ARABWRAP
--With assistance from Arif Sharif in Dubai. Editors: Ross
Larsen, Andrew Blackman, Pierre Paulden.
To contact the reporters on this story:
in Dubai on +971-4-364-1027
Stefania Bianchi in Dubai at +971- 4-364-1051
To contact the editors responsible for this story:
Andrew Blackman at +49-30-70010-6223 or
Rob Urban at +1-212-617-5192 or
To contact the editor responsible fo
Dale Crofts at +971-4-3641068 or