While the global economic uncertainty is increasingly trimming down investors’ confidence and consequently, leading to panic selling and the pulling out of millions of dollars worth of foreign investments, the stock market is bearing harsh consequences with share prices suffering precipitous fall. This drop in share value is also due to the sharp fall in oil prices, which has made investors increasingly concerned about the future of Gulf economies. All seven GCC markets fell in the past three months and $150 billion of their market capitalization has been lost since the end of 2007.
Since the beginning of the crisis, banks and mortgage houses have become very conscientious about lending and even though most GCC governments like Bahrain, UAE and Saudi Arabia are injecting liquidity into the banking sector to keep work going on major projects and to ease liquidity pressure, the real estate market has not shown any improvements yet. Moreover, amidst the increased government regulations and the corruption scandals in the UAE, the demand for real estate is slowing down and consequently causing real estate companies’ shares to experience heavy falls.
Since the beginning of the year, Emaar, the Gulf’s largest property developer by market value, has lost more than 80% of its share value. To overcome this crisis, the company bought back 200,000 of its shares in October, aiming to restore investors’ confidence in the real estate sector and the entire UAE market. Mohamed Ali Alabbar, Emaar’s chairman, told Arabian Business that, “at Emaar, we firmly believe that there is no better investment we can make than in our own future. The decision taken by the board of directors to buy back Emaar shares reflects our firm belief that those shares are currently undervalued.” Apparently, this attempt was not effective since the company is now preparing to cut jobs by reviewing its 5,000-strong workforce. No details about how many employees will be fired have yet been announced. Moreover, Emaar — as well as Union Properties and ETA Star — has also started offering easy payment options to attract buyers.
Other companies have also started to cut jobs. DAMAC fired 200 employees in the beginning of November in response to the continuing global slowdown. Omniyat has also announced job cuts. No number has been publicized as yet, but it is estimated that around 60 jobs will be cut. Jean Pierre Nammour, managing director of Al Nahda Real Estate, remarked that this cut in budget could have a negative effect on the UAE economy. He explained that companies, after they lay off staff, will first begin to cut back on their advertising budgets, since they have already advertised previous projects and no new projects are currently initiated. Consequently, the advertising agencies will lose a large amount of revenue and will also let people go. Therefore, the effect will be extended to include other companies and thus hurt other sectors in the economy.
Dar al-Arkan, the largest Saudi developer by market value, has lost around 64% of its share value since the beginning of the year, despite announcing a 44.9% jump in second quarter profits. It seems that Dar Al-Arkan is not slowing down its business since it has already set up a mortgage finance company targeting the middle-class sector of Saudi Arabia’s growing population. The managing director of the company, Abdullatif bin Abdullah al- Shelash, showed upbeat expectations and told Arabian Business that with the measures that the kingdom has taken to increase liquidity, the market will not face any mortgage crisis. However, the company’s reputation was damaged when the Saudi bourse regulator imposed a SAR100,000 ($26,667) fine in early November, for violating disclosure regulations.
“Any problems faced by local real estate companies are a consequence of the global financial crisis, but as soon as the global financial markets begin to improve and the local real estate market starts to take shape again, companies on the stock market are definitely going to improve their current situation,” said Hayan Merchant, CEO of Ruwaad Holdings LLC.
Corruption in the UAE
A major corruption investigation in Dubai has lead to the arrest of dozens of executives in state-backed companies linked to the property sector. This is the most extensive anti-corruption exercise in the emirate’s history, as Sheikh Mohammed made it clear that Dubai will not tolerate any officials abusing their authority for personal gain.
The investigation began in April when the former CEO of Deeyar, Zack Shahin, two company executives and two company suppliers were arrested. Since then, the company’s shares started to lose their value, which have declined by 73% to date. Moreover, Mohammed Khalfan bin Kharbash, former chairman of Dubai Islamic Bank and its real-estate affiliate Deyaar, as well as Minister of State for Finance and Industry, was implicated in November in connection with allegations of financial wrongdoing at Deyaar. Many of the company’s ex-employees might also face trial.
In late August, four employees of Dubai Holding Subsidiary real estate developers Sama Dubai were taken into custody following accusations of bribery. A few days before that, two men from the sales department of Nakheel were also arrested.
In October, Abdullah Nasser Abdullah, the deputy CEO of Tamweel and CEO of Tamweel Properties and Investment LLC was arrested on charges of embezzlement. Additionally, the company’s former chief executive and the former head of investment were also arrested on embezzlement charges. In the same month, the former CEO of real estate developer Mizin was questioned over irregularities in selling lands.
This anti-corruption probe reduced investors’ confidence and was one of the main reasons for the freefall of stock prices. However, these developments should benefit the economy in the long-run by increasing transparency in the real estate market and creating a healthy environment for investors.
Scaling back activity
Currently, Dubai’s largest developers are reviewing their projects in response to the economic climate. For example, Nakheel announced that it is reassessing its business objectives and will scale back activity on some projects. Union Properties said it would not announce any new projects until the status of the credit market becomes clear. Sama Dubai, which has already unveiled projects worth almost $55.2 billion, is reviewing these to adapt to the current economic situation. DAMAC is following suit by reviewing its construction timetable and is planning to reschedule some of its latest projects. Additionally, Mohamed Al Zarah, CEO of Great Properties, announced that, “we will not be launching new projects this year as we feel it is a good time for us to reassess our projects and improve the company internally. This is key for us to successfully operate in the market alongside the credit crisis recovery phase.” He added that, “We will wait to see what January 2009 will bring.”