30 August 2009
The cash position of private developers in the UAE is tight and those with a "build to sell" model will likely see a lot of their equity erased if the investment market does not improve significantly in the country, said analysts and executives in the sector.
"Profitability of master developers too is down 70 per cent to 80 per cent year-on-year owing to a lack of land sales and unsold inventory," said Chet Riley, Analyst at Nomura Real Estate.
Speaking to Emirates Business on how developers and master developers in the UAE have managed to face the downturn in the real estate sector, Riley said: "The larger developers have the luxury of consolidation, discounting their price and other mechanisms to minimise their potential losses and prop up cash flows. Smaller developers cannot do this and therefore have become more constrained."
Meanwhile, real estate developers in Dubai said they have incurred losses in the past one year owing to the downturn in the sector.
Mohammed Nimer, CEO, MAG Group Properties, said lots of developers have been affected by the recession and there is definitely a loss as a result. "The off-plan market has been dead for a while and it has been difficult for developers to earn revenues," he added.
Finance also is not readily available as it should be. Developers have spent a lot in fees and getting approvals and registrations done. "Normally before a project starts there is four to eight months of preparation that goes on which involves a considerable amount of investment on the part of developers as well. All this amounts to a certain loss," said Nimer.
Roger Wakeham, Director of Development, CHI Development, said he has units unsold, which are blocking a revenue stream flowing in for the developer.
According to CHI, its maiden venture, the Limetree Valley project in Jumeirah Golf Estates comprising 121 villas, has 26 villas with Dh300 million unsold. "The year 2009 was not a sales year for us at all. We were hoping to sell off the 26 villas this year, but prices have fallen more than 50 per cent and we have been forced to keep them with us. If we cannot sell these villas we will retain at least 15 of them for lease purposes," said Wakeham.
Riley said the real estate sector is being forced to mature much more rapidly than normal cycles would generally allow. "Transferring unsold inventory into a leasing portfolio is sensible, but this prolongs the investment payback period. Larger developers with balance sheet capacity can absorb this and it does accelerate the move towards more stable earnings profiles, but this has to be financed," he said.
According to CHI, all the 121 villas will be ready by November this year.
Wakeham said the 26 villas left to sell in the market are still recording as an asset in the balance sheet of the developer showing as a mature asset. "The only issue for us now is that our capital is blocked since we are unable to invest into other projects. Aside from a financial loss, we have had to re-align our expectations for growth and to committing to any future projects until the situation of Dubai's real estate sector is clearer. Our bottom line is damaged and we have had to absorb extra running costs for a longer period."
For Darshan Hiranandani, Director, Hircon, the downturn in the real estate market has slowed down the company's future plans in Dubai. "We have a land bank in Business Bay that is fully paid-up but we have not launched anything there owing to the downturn in the real estate sector. The crisis affected our existing 23 Marina project in the beginning of the year because we were unsure about how to handle our defaulters," said Hiranandani.
According to Hircon, of the total 288 apartments in 23 Marina, about 20 investors have said they will not be able to pay up on their investment. "Another 50 of the investors are paying slowly. Our shortfall is not so significant since only 20 investors of the 288 apartments have defaulted. We are meeting with the investors to re-structure the payment and seek Rera's help to cancel their allotment. Dubai Land Department has advised us to re-sell those units," said Hiranandani.
He said Hircon has not incurred a loss on the development and the project is financially strong. "The slow payment from investors has not effected our cash flow as yet. We are confident that we will be able to resell the apartments of defaulters and our profitability will remain unchanged."
He added that 23 Marina was 80 per cent complete with only 20 levels of the total 90 levels left to construct.
Ammar Sweis, Group Chief Financial Officer, Ishraqah, said: "The last one year has been challenging for us as well as other developers in the market. It is difficult to estimate potential future losses or gains on our projects due to a number of unknown variables such as payment defaults of our existing customers, future sales of available units, future demand for retail space in our projects, and the shape of the Dubai market in the upcoming months.
"Our projects are currently under development and we recognise revenue at completion of the project. Our two main projects - Seasons Community and The Onyx, residential and commercial properties - have already been substantially sold out. We are currently assessing the different options for retail and restaurant units at our projects which have not been offered to the market."
Sweis added that due to the market conditions, the developer has revisited and revised its strategies and growth plans to cope with market conditions. "We are currently focusing on our existing projects and developments, and construction is moving ahead according to plan. We have put new developments and projects that have not been launched on hold until we have a clearer view of market dynamics and customer needs. Identifying, understanding and monitoring company and project risks are crucial at this stage, and so we are carefully monitoring these factors. Also, we are trying to have better management of our cost and timely assessment of the company and our project cash-flows."
Riley said maintaining cash flows until the completion of a project is key, so payment plans are critical, and the developer generally takes the profit from the final installment. "The marginal developments which had to entice investors with attractive pricing plans are at most risk of default with many probably insolvent. This is particularly true for those projects that are being delivered over the next 12 months."
According to Nimer, the developer was adjusting itself to the slowdown in the real estate sector and has had to revisit its sales and marketing plans. "We are also trying to minimise our running costs as much as possible and we have cut down on our staff strength. For the jobs that we did not start digging out and we have a land bank already in place, we have put all those projects on hold. A number of labour was recruited and we have had to let them go as well."
Meanwhile, Wakeham put away all notions that any recovery in the real estate sector can be expected after Eid. "Dubai will recover when it has to and it cannot be based on any timescale. If Dubai is seen as a place to invest and live in then the market will recover some confidence and prices will pick up in time. There is no reason at present to believe that the end of summer or Eid has any corollary with the sentiment of the market."
Hiranandani said the market will recover only if there is a sound intervention by the government. "In a bad economy interest rates need to come down, and the government needs to significantly increase money supply. Until you don't find net lending increasing by banks and interest rates coming down the real estate sector cannot possibly rebound."
Riley said, "financing is difficult in the current market, where local banks are less likely to underwrite more real estate lending. Overall returns for a developer are lower today, but more stable, and capital cannot be recycled very quickly, so new capital would have to be raised to grow the business. This then becomes a natural curb on sector growth, which is partly why we are now seeing the emergence of distressed asset funds. They allow property developers to recycle capital and protect the cash position.
Further, he said there will be some pressure in both the sales and rental markets in the near-term with prices likely to fall further from a sales and rental perspective. "We think that there is downward pressure on rents, particularly with the readily quoted new supply coming on stream. We see stabilisation rather than recovery," said Riley.
The cash position of private developers in the UAE is tight and those with a "build to sell" model will likely see a lot of their equity erased if the investment market does not improve significantly in the country, said analysts and executives in the sector.
"Profitability of master developers too is down 70 per cent to 80 per cent year-on-year owing to a lack of land sales and unsold inventory," said Chet Riley, Analyst at Nomura Real Estate.
Speaking to Emirates Business on how developers and master developers in the UAE have managed to face the downturn in the real estate sector, Riley said: "The larger developers have the luxury of consolidation, discounting their price and other mechanisms to minimise their potential losses and prop up cash flows. Smaller developers cannot do this and therefore have become more constrained."
Meanwhile, real estate developers in Dubai said they have incurred losses in the past one year owing to the downturn in the sector.
Mohammed Nimer, CEO, MAG Group Properties, said lots of developers have been affected by the recession and there is definitely a loss as a result. "The off-plan market has been dead for a while and it has been difficult for developers to earn revenues," he added.
Finance also is not readily available as it should be. Developers have spent a lot in fees and getting approvals and registrations done. "Normally before a project starts there is four to eight months of preparation that goes on which involves a considerable amount of investment on the part of developers as well. All this amounts to a certain loss," said Nimer.
Roger Wakeham, Director of Development, CHI Development, said he has units unsold, which are blocking a revenue stream flowing in for the developer.
According to CHI, its maiden venture, the Limetree Valley project in Jumeirah Golf Estates comprising 121 villas, has 26 villas with Dh300 million unsold. "The year 2009 was not a sales year for us at all. We were hoping to sell off the 26 villas this year, but prices have fallen more than 50 per cent and we have been forced to keep them with us. If we cannot sell these villas we will retain at least 15 of them for lease purposes," said Wakeham.
Riley said the real estate sector is being forced to mature much more rapidly than normal cycles would generally allow. "Transferring unsold inventory into a leasing portfolio is sensible, but this prolongs the investment payback period. Larger developers with balance sheet capacity can absorb this and it does accelerate the move towards more stable earnings profiles, but this has to be financed," he said.
According to CHI, all the 121 villas will be ready by November this year.
Wakeham said the 26 villas left to sell in the market are still recording as an asset in the balance sheet of the developer showing as a mature asset. "The only issue for us now is that our capital is blocked since we are unable to invest into other projects. Aside from a financial loss, we have had to re-align our expectations for growth and to committing to any future projects until the situation of Dubai's real estate sector is clearer. Our bottom line is damaged and we have had to absorb extra running costs for a longer period."
For Darshan Hiranandani, Director, Hircon, the downturn in the real estate market has slowed down the company's future plans in Dubai. "We have a land bank in Business Bay that is fully paid-up but we have not launched anything there owing to the downturn in the real estate sector. The crisis affected our existing 23 Marina project in the beginning of the year because we were unsure about how to handle our defaulters," said Hiranandani.
According to Hircon, of the total 288 apartments in 23 Marina, about 20 investors have said they will not be able to pay up on their investment. "Another 50 of the investors are paying slowly. Our shortfall is not so significant since only 20 investors of the 288 apartments have defaulted. We are meeting with the investors to re-structure the payment and seek Rera's help to cancel their allotment. Dubai Land Department has advised us to re-sell those units," said Hiranandani.
He said Hircon has not incurred a loss on the development and the project is financially strong. "The slow payment from investors has not effected our cash flow as yet. We are confident that we will be able to resell the apartments of defaulters and our profitability will remain unchanged."
He added that 23 Marina was 80 per cent complete with only 20 levels of the total 90 levels left to construct.
Ammar Sweis, Group Chief Financial Officer, Ishraqah, said: "The last one year has been challenging for us as well as other developers in the market. It is difficult to estimate potential future losses or gains on our projects due to a number of unknown variables such as payment defaults of our existing customers, future sales of available units, future demand for retail space in our projects, and the shape of the Dubai market in the upcoming months.
"Our projects are currently under development and we recognise revenue at completion of the project. Our two main projects - Seasons Community and The Onyx, residential and commercial properties - have already been substantially sold out. We are currently assessing the different options for retail and restaurant units at our projects which have not been offered to the market."
Sweis added that due to the market conditions, the developer has revisited and revised its strategies and growth plans to cope with market conditions. "We are currently focusing on our existing projects and developments, and construction is moving ahead according to plan. We have put new developments and projects that have not been launched on hold until we have a clearer view of market dynamics and customer needs. Identifying, understanding and monitoring company and project risks are crucial at this stage, and so we are carefully monitoring these factors. Also, we are trying to have better management of our cost and timely assessment of the company and our project cash-flows."
Riley said maintaining cash flows until the completion of a project is key, so payment plans are critical, and the developer generally takes the profit from the final installment. "The marginal developments which had to entice investors with attractive pricing plans are at most risk of default with many probably insolvent. This is particularly true for those projects that are being delivered over the next 12 months."
According to Nimer, the developer was adjusting itself to the slowdown in the real estate sector and has had to revisit its sales and marketing plans. "We are also trying to minimise our running costs as much as possible and we have cut down on our staff strength. For the jobs that we did not start digging out and we have a land bank already in place, we have put all those projects on hold. A number of labour was recruited and we have had to let them go as well."
Meanwhile, Wakeham put away all notions that any recovery in the real estate sector can be expected after Eid. "Dubai will recover when it has to and it cannot be based on any timescale. If Dubai is seen as a place to invest and live in then the market will recover some confidence and prices will pick up in time. There is no reason at present to believe that the end of summer or Eid has any corollary with the sentiment of the market."
Hiranandani said the market will recover only if there is a sound intervention by the government. "In a bad economy interest rates need to come down, and the government needs to significantly increase money supply. Until you don't find net lending increasing by banks and interest rates coming down the real estate sector cannot possibly rebound."
Riley said, "financing is difficult in the current market, where local banks are less likely to underwrite more real estate lending. Overall returns for a developer are lower today, but more stable, and capital cannot be recycled very quickly, so new capital would have to be raised to grow the business. This then becomes a natural curb on sector growth, which is partly why we are now seeing the emergence of distressed asset funds. They allow property developers to recycle capital and protect the cash position.
Further, he said there will be some pressure in both the sales and rental markets in the near-term with prices likely to fall further from a sales and rental perspective. "We think that there is downward pressure on rents, particularly with the readily quoted new supply coming on stream. We see stabilisation rather than recovery," said Riley.
By Anjana Kumar
© Emirates Business 24/7 2009
