Reem Island was billed as a slice of paradise but property companies there are running into the earthly challenges of developing such a massive project during a downturn.
With sales slowed to a near halt and project financing, when available, coming with annual interest of up to 25 per cent, some companies are starting to have difficulty keeping up with land payments and have stalled their construction plans.
This is leading to revised schedules and threatening the original idea that the dozens of buildings at Abu Dhabi's largest residential project would be built at roughly the same time.
Located just east of Abu Dhabi island, the Dh100 billion-estimated Reem Island project represents a major expansion of urban space in the capital, albeit with marinas, one of the city's largest malls and waterfront promenades. Initially envisioned as a 633-hectare island covered by a forest of towers, major design changes could be in the works for some of the projects.
While developers said the spirit of the island project would remain the same, they agreed that the era of "one-phase development" had ended.
"The idea that we were going to have all the developers building at the same time was idealistic," says Gurjit Singh, the chief operating officer of Sorouh Real Estate, one of the island's three master developers. "We are getting back to some basics, which include building on a phased basis."
Despite such changes, two large projects, Sorouh's Sun and Sky towers and Tamouh Investment's Marina Square, are scheduled to have tenants move in to thousands of flats at the beginning of next year.
But they could be the lucky ones. Buyers at some other projects must wait as developers try to raise enough cash to begin construction.
Reem Developers, the master developer of the Najmat project, has made the least construction progress so far.
Kiam Kheong Ho, the chief development officer of Reem Developers, said the company underwent a management shake-up in November last year and has since made major changes to its master plan that include reducing the size of buildings in its second and third phases.
"All efforts so far have been below the ground level," Mr Ho says.
"When the new management came in, we realised we can't possibly just build high rises everywhere."
Of 60 developers in the first phase, 16 have taken over their plots and were either proceeding with construction or making preparations to start building, he says.
"Everybody will be pushed for completion," Mr Ho says. "If they do not proceed with the development as we like, there will be minimum financial damage, but it won't meet our objective. ... Our role is to make sure we watch the timeline and get them moving at the earliest date possible."
Sorouh is trying to minimise delays by creating a working group whose sole purpose is to help developers get started with preliminary work. The group assists developers in obtaining permits as well as meeting with banks to seek financing.
The focus at Shams Abu Dhabi, one of three master-planned areas on the island, is getting work under way on the buildings around the Sun and Sky towers, the company has said. Sorouh also has reduced prices an average of 20 per cent and offered incentives to buyers who keep up with their payments.
Several developers have already started construction, including Dhafir Development and Contracting, an Abu Dhabi company that dates back to 1976.
Dhafir decided to plough forward with the project despite the economic crisis, says Ziad Chaghouri, the manager of the development division. It is using project finance from Abu Dhabi Commercial Bank.
"We are starting to feel that things are getting better," Mr Chaghouri says. "There is more movement in the market."
Dhafir has about 170 workers finishing the foundation at the twin 30-storey Amaya Towers, located near the tip of the island.
So far, the Shams Abu Dhabi project appears to be holding up well, with only 2.25 per cent of payments behind in schedule as of July, according to Moody's Investors Service, which is monitoring the project because Sorouh issued an Islamic bond connected to the assets.
Even after construction starts, more obstacles are near, says Mr Singh.
"One of our next challenges will be for them to start drip feeding their units back into the market," he says. "A lot depends on how individual developers have set up their companies.
"There are secondary market stirings, but financing is a challenge for the broad property sector right now."
The master developer Tamouh Investments, which has decided to develop many of its projects itself, was facing fewer challenges in getting projects going. It has had to contend with price drops that make it more difficult for people to sell on the secondary market.
"Investors should look at the long-term and come back to what the market really is," Joe Ong, the chief executive of Tamouh Investments, said in a recent interview. "It won't turn back to what it was in mid-2008. A reasonable price today on Marina Square is below Dh1,300 (US$408) to Dh1,500 per square foot of property if it is delivered by the next one year. Nothing should be above Dh1,800."
While financing is difficult to come by for developers, another option appears to be emerging. Distressed asset funds and bridge financing funds are forming in the region, with an eye to either acquire assets from cash-strapped developers or lend to them.
Hines Interests, a major US-based developer and investor, plans a $1 billion distressed asset fund that would invest in areas such as Reem Island, says Jurgen Herre, the head of the Hines regional office.
The Kuwait Financial Centre, also known as Markaz, has announced it will invest about $50 million in distressed property in Abu Dhabi.
One benefit of the downturn is that developers are expanding efforts on what they call "place making", or creating engaging places to live. Early last year, buyers were willing to snap up any flats put on the market at ever-rising prices. This easily tapped demand led developers to amass large sales staffs, rather than customer service teams and property managers.
Sorouh, for instance, has pre-leased about 50 per cent of the podium that connects the Sun and Sky towers, so new residents will have access to businesses and activities from hair salons to swimming pools to grocery stores.
"For us, the emphasis is to build a community at Shams Abu Dhabi, not just buildings," Mr Singh says.
Reem Developers also has taken up the challenge. Mr Ho says the company has hired the engineering consultancy Arup to come up with technology that could help make Najmat more comfortable for outdoor activity during the summer months.
Mr Ho says an inspiration for the project is Clarke Quay in Singapore, which was once a humid, nearly uninhabitable industrial quarter on the water.
CapitaLand, a Singapore-based developer, created a trendy shopping and nightlife district there with a system of canopies and umbrellas to shade the streets, as well as giant fans at different locations to create a cool, artificial breeze.
Something similar could work for Abu Dhabi, Mr Ho says.
"Our role is not to just sell land and put in infrastructure," he says. "We want to create activities between these buildings."
By Bradley Hope
© The National 2009
