Monday, Feb 23, 2009

(From THE WALL STREET JOURNAL)

 
   By Chip Cummins 

DUBAI -- The United Arab Emirates said Sunday it will spend $10 billion to bail out the once-highflying emirate of Dubai, whose huge construction and financial-sector expansion plans became a symbol of boom times, and now of a world-wide recession.

Dubai financed much of its recent growth with international borrowing, and a big chunk of that debt comes due this year. The Dubai government said in a statement Sunday it would issue $20 billion in long-term bonds, and that the first installment of $10 billion was fully subscribed by the U.A.E.'s central bank.

The bond issuance will provide Dubai "with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months and accordingly meet all upcoming financial obligations," the U.A.E. said. The bond will be unsecured, fixed-rate paper, yielding 4% a year, with a five-year maturity.

Debt analysts and investors have questioned whether Dubai is able to pay back all its loans, especially as the city's once red-hot property market cools.

It's unclear if the bailout will be enough to keep Dubai from turning into a cityscape of half-finished buildings. Dubai said last week that a handful of international banks participated in a modest refinancing of one loan, for $3.8 billion, that was coming due. But they didn't agree to lend much, forcing Dubai's government to step in and pony up most of the cash.

Analysts have long held out hope that U.A.E. capital Abu Dhabi would come to the rescue if Dubai found itself in serious trouble. The seven emirates of the U.A.E. are bound together in a longstanding and relatively stable federation dating to 1971. Abu Dhabi, one of the world's largest oil producers, provides the lion's share of the federation's spending. Unlike its neighbor, Dubai doesn't have much oil to bolster its finances.

But the emirates also tend to act independently. The ruling families are hereditary monarchs with sometimes-competing business, political and diplomatic interests. That's led to speculation that Abu Dhabi would insist on onerous terms in any bailout, such as stakes in some of Dubai's prized companies. But the package publicly announced late Sunday didn't appear to have any strings attached.

It's uncertain whether Abu Dhabi would be willing to lend Dubai more cash. Though it sits on vast foreign-exchange reserves and foreign assets snapped up during the oil boom, Abu Dhabi's fortunes have also faded. Property prices are sagging there, and its sovereign-wealth fund has been stung by some overseas investments.

Dubai and U.A.E. officials didn't respond to requests for comment.

The cash infusion from the U.A.E. comes as Dubai's once-soaring real-estate market comes crashing down. Falling prices, some down by 50% or more, have burned speculators who never intended to hold on to properties in the first place. Sales have plummeted, crimping cash flow for developers -- which are now scrambling to shed employees, cancel or postpone billions of dollars worth of projects and extend installment plans to avoid missed payments.

Banks, meanwhile, aren't lending to buyers or to developers.

"Suddenly, the sales stopped, and when [developers] went to the banks, they found there was a credit freeze," says Saleh Muradweij, a director at privately held contractor Drake & SkullDrake & Skull.

Jim Delkousis, a partner in the Dubai practice of DLP Piper, a business law firm, says the practice has seen a "significant increase" in debt-collection claims in the construction industry.

Last week, Emaar PropertiesEmaar Properties PJSC, which is one of Dubai's biggest developers and 31% government-owned, said it will recommend withholding dividends at its annual meeting next month in order to save cash.

The strain is reaching the very top of Dubai's corporate empire. Earlier this month, Dubai HoldingDubai Holding, the conglomerate controlled by Dubai ruler Sheik Mohammed bin Rashid al Maktoum said it would merge its two investment firms and combine the back offices of three of its property developers to cut costs.

The downturn here is a stunning reversal from just last summer, when oil was above $100 a barrel and the region looked insulated from the worst of the economic storm gathering over much of the rest of the world.

Dubai was seen as the new economic model for the Middle East, plagued for decades by war and economic stagnation. Businessmen from many of the region's fallen commercial hubs -- including Cairo, Beirut and Bahrain -- set up shop here.

The emirate's property market had been rising for years, from 2002, when Sheik Mohammed opened up certain developments to foreign ownership. That move lured property buyers from across the region, Europe and the U.S. Prices took off, and so did more construction.

Now, prices are tumbling just as builders complete dozens of office and residential towers, and the glut of supply looks poised to depress prices further. Cranes loom over dozens of half-finished or just-started buildings along Sheikh Zayed Road, the eight-lane superhighway that serves as Dubai's main artery.

Last year, builders finished more than 50,000 residential units in Dubai, according to regional bank EFG-Hermes. Another 70,000 are expected this year.

"You have these buildings that are finished now, but empty," says Robert Macnair, sales director for Dubai-based property agent Elysian Real Estate.

Foreign workers -- from professionals to laborers -- are leaving in droves. Basha Abdul Qader, the general manager of a local debt-collection agency, says he's reclaiming about 20 cars a month, up from seven just a few months back.

Zahir Safi came to Dubai in the summer of 2006 to wait out a war in his home country of Lebanon. He quickly found work selling construction supplies, and decided to stay. "There was a lot of opportunity," the 27-year-old says.

The city's property market was in full swing. NakheelNakheel, a government-owned developer, was well into its construction of the city's iconic palm-shaped island development. EmaarEmaar was building the Burj Dubai, which now stands as the world's tallest skyscraper. Investors rushed to buy into these and other projects. A secondary market quickly emerged even for half-built or unbuilt properties.

In late 2007, Mr. Safi bought four studios and a one-bedroom apartment from a big, private developer. He put 10% down on each unit. He sold one studio quickly to another investor, pocketing a 25% profit.

In February of last year, NakheelNakheel opened sales for a phase of the Waterfront, a residential, commercial and tourist development designed to add 500 miles of new beachfront property and house 400,000 people.

Mr. Safi showed up at NakheelNakheel's sales office and put down 10%, or $34,000, on a one-bedroom apartment. He agreed to pay the full $340,000 price tag in installments.

Investing in property was seen to be so safe "it was like buying gold or diamonds," he says.

Average prices for villas and apartments rose 65% in the first half of last year, according to property consultant Colliers International. By mid-summer, Mr. Safi had sunk $200,000 into deposits, fees and down payments on a handful of properties across Dubai. He owed another $1.1 million in future payments.

But clouds were gathering. Real-estate regulators tried to crack down on speculators, who they feared had taken over the market. Authorities started investigating and locking up executives at some of Dubai's biggest real-estate and finance companies, spooking investors. When international credit markets seized up in the fall, banks in Dubai stopped lending, too.

By November, advertised prices were falling, a first since Dubai opened its market to foreigners. By the end of last year, Colliers reported average prices had fallen 8% in the final quarter of the year. The city's most expensive real-estate -- which rose the fastest in the boom -- dropped much further.

A 750-square-foot, one-bedroom apartment near the Burj Dubai tower listed last summer for about $685,000. Now, it's on the market for less than half that.

Dubai officials announced that developers, both government-backed and privately owned, would throttle back supply to cope.

Mr. Safi watched in shock as the value of his property dropped. Now, he's unsure if any of the developers will go forward. His next payment on the apartment at NakheelNakheel's Waterfront was due in January. But he says the company offered to extend it next until the summer. He just wants his cash back.

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Stefania Bianchi and Maria Abi Habib contributed this article.

(END) Dow Jones Newswires

23-02-09 0605GMT