The Real Estate Bust Hits Oman's Blue City

Blue City, a $20 billion real estate development, was supposed to help transform Oman, the Persian Gulf nation of about 3 million people. Government officials extolled the project as an important step in its plan to diversify the economy and prepare for the depletion of oil reserves. But Blue City, envisioned as a community for more than 200,000 people, missed sales targets as real estate speculators left Middle Eastern markets and a legal battle between the project's owners made potential buyers wary. Now it may face liquidation.

Oman, bordered by the United Arab Emirates, Saudi Arabia, and Yemen, has been ruled by Sultan Qaboos bin Said since he overthrew his father in 1970. Heavily dependent on dwindling oil reserves, it managed to boost production in 2009, according to the CIA World Factbook. It's not an OPEC member.

Blue City, an hour's drive from the capital, Muscat, was to be "a whole new city for the present and future generations," according to its website. The first phase would include more than 200 villas, 5,000 apartments, 4 hotels, 2 golf courses, and a clubhouse, according to the prospectus. A total of $925 million was raised from bondholders, and construction started in 2006. Blue City turned down requests for interviews with its executives.

As of November 2009, sales of Blue City properties totaled $75 million, compared with a forecast of $860 million, according to Khalid Howladar, senior credit officer at Moody's Investors Service in Dubai. "The business model was to keep building with the purchase payments received," says Howladar. "Now there are no buyers and those that did buy are no longer paying, so there's no cash flow." Mohamed Ayjaz, general manager of Hamptons International in Oman, which was responsible for marketing the project from 2007 to mid-2009, said about 400 of the 5,000 properties on offer had been sold.

Today, idle yellow cranes hover above the skeletons of buildings with dark holes for windows. Security guards turned Bloomberg reporters away from the site, and one followed them to a nearby hotel.

Now Blue City's fate may be in the hands of its bondholders. Owners of $661.5 million worth of Blue City bonds are discussing measures to push the project ahead, a person familiar with the talks says. A vote on liquidating the project, proposed by holding company Al Sawadi Investment & Tourism, has been put on hold, the person says.

What happens next also depends on the outcome of a three-year legal battle between owners Cyclone in Oman and AAJ Holdings in Bahrain. Cyclone sued AAJ in September 2007, claiming the Bahraini company's purchase of a

70 percent stake in Blue City was invalid and the stake should be handed over to Cyclone. After a split decision in lower courts, the dispute is headed for the country's highest court.

"It's too early to say the project has failed," says Wael Lawati, chief executive officer of Omran, the investment arm of Oman's Ministry of Tourism, which says it is not involved in Blue City. He suggests that one possibility would be to shift its marketing focus away from wealthy foreigners. "In the past, Oman was only targeting the five-star-plus buyer in places like Britain and Germany," he says. "Now it's time to see what the Omani investor is looking for."

The bottom line: Blue City joins the list of troubled real estate projects conceived when it looked like boom times would last forever.

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