With iconic projects that attracted international celebrities such as Donald Trump and David Beckham, the Dubai-based real estate developer Nakheel has always played an important role in fulfilling Dubai’s ambitious dreams.
Its Palm trilogy — Palm Deira, Palm Jumeirah and Palm Jebel Ali — has become a firm feature on Dubai’s map and is now symbolic of the emirate, not to mention the developer’s other distinguished projects such as The World and Discovery Gardens.
Nakheel was established in 2001 as the real estate arm of the state-owned holding company Dubai World. Its operations include real estate development, management, sales and fund management. Until the last quarter of 2008, the company surpassed expectations; launches of large scale projects were coupled with sky-high profits due to land sales and continual hikes in property prices.
Nakheel’s biggest achievements in 2008 were finishing the land reclamation of The World, officially opening Palm Jumeirah to the public and being named ‘Developer of the Year’ at the Arabian Business Achievement Awards.
When the global financial crisis started to rain down on Dubai’s real estate market, investors began to shy away, demand plummeted and prices followed. Consequently, most real estate developers, including Nakheel, began to shelf new project launches and cut costs by decreasing staff and advertising expenditures. Nakheel, being one of the pioneers in the market, repeatedly made headline news and its cash flow problems became the bellwether of Dubai’s real estate market.
The beginning of bad news
In October 2008, the slide started precipitously. Shortly after the Cityscape property convention of that year, Nakheel announced delays on several of its flagship projects, including the Trump International Hotel and Tower in Palm Jumeirah and the Universe Island. Work continued on projects such as the Madinat Al Arab, Canal District and others. The project delays were aimed to “ensure that our model is aligned to meet the market demand,” said the company at the beginning of December 2008.
These announcements came as a surprise to many. Shortly before Cityscape 2008 started, Chris
O’Donnell, chief executive officer of Nakheel, claimed that the global credit crisis would not affect plans for the one kilometer high Nakheel Tower. He said at the time that funds for the scheme would come from a combination of “pre-sales of land in and around the tower, and then project funding.”
Since the delays were announced, Nakheel has not resumed construction on any of its deferred projects, with Donald Trump Jr. remarking at Cityscape 2009 that work on the Trump hotel will not restart anytime soon.
Building contractors reported that all construction companies working on the Nakheel Waterfront development were asked to accord a 30 to 40 percent discount, The National wrote in May.
In an attempt to cut costs as revenues started to fall short, Nakheel announced in November 2008 its first mass layoffs, sending pink slips to 500 employees — roughly 15 percent of its workforce.
“We have a responsibility to adjust our short term business plans to accommodate the current global environment,” said the company in a statement at that time.
Concurrently, realty operators such as Damac, Omniyat and Tameer Holding Investment began implementing large-scale redundancies.
In July 2009, Nakheel announced another 400 job cuts, meaning that in nine months the company shed a total of 1,400 employees, leaving it with some 1,600 on the payroll as of July 2009, according to Zawya. Immediately following Cityscape Dubai in October 2009, Nakheel cut an additional 500 personnel.
As Cityscape Dubai 2009 was about to commence, news surfaced that both Nakheel and its biggest competitor, Emaar, were missing from the list of exhibitors. To save face and prevent further erosion of confidence in the real estate market, both companies declared at the last minute that they would participate.
Despite being officially present, company representatives were noticeably absent from the Nakheel stand at Cityscape, with only a hostess or two offering visitors paper to write down requests or queries. The assumption was that Nakheel would answer these at some point.
On the financial side, Nakheel reported that its revenues in the first half of 2009 fell 78.1 percent to $536 million, relative to the $2.5 billion it took in over the same period in 2008. “Dubai real estate was impacted and as a result Nakheel sales volumes and transaction activities remained low [sic],” said the company in a statement.
It also announced that its liabilities for the same period increased 7.2 percent to $20 billion, as the company had a loss of $3.64 billion due to a large write-down of asset value, mainly land, and due to projects that were put on hold. The statement added that Nakheel was continuously reviewing its operational and overhead expenditures in order to meet the market’s opportunities and challenges.
At the beginning of 2009, reports emerged that Nakheel was considering plans for an initial public offering (IPO) to raise $15 billion to offset its cash flow problems. Speaking to the press on several occasions, officials from Nakheel neither confirmed nor denied the reports, but said that an IPO might be one of the funding options the company would consider. “We’ve got different options and an IPO is one of the options — it doesn’t mean that an IPO is imminent,” O’Donnell told The National in December 2008. Since January 2009, no further announcements were made in that regard.
The maturing sukuk
During the growth years of the real estate market, Nakheel issued three sukuks (Islamic bonds), to help finance its projects. The first three-year sukuk was issued on
December 14, 2006, and had a total value of $3.5 billion.
The Islamic bond had a profit rate — in other words a Sharia-compliant interest rate — of 6.345 percent. Over the three years since, Nakheel paid half the profit (3.1725 percent per year), leaving the rest to be paid on maturity. The sukuk was backed with land and asset collateral more than twice its value.
In addition to the 2006 sukuk, Nakheel issued two other Islamic bonds; Nakheel Development 2 Limited, issued in January 2008 with the value of $750 million due in 2011, and Nakheel Development 3 limited, issued in May 2008, valued at some $980 million. These bonds were set to come due in 2010.
By the end of 2011, Nakheel is scheduled to repay more than $5 billion in debt. Several months before the $3.5 billion sukuk bond came to maturity, investors started to question whether the company would be able to pay its liability in the wake of the liquidity crunch it was facing. As the bill came due, analysts expected that the probability of default would be quite low, since Nakheel is a Dubai World subsidiary and would obtain government support when needed.
“The Untied Arab Emirates authorities are acutely aware of the amount of profile the Nakheel 2009 sukuk instrument has in the international capital markets,” Chavan Bhogaita, head of credit research at the National Bank of Abu Dhabi, told Bloomberg late in October 2009. “In our opinion, they fully intend to repay this bond.”
The bond bomb
On November 25, Dubai world unexpectedly announced that it was asking its creditors for a standstill on its $59 billion debt, and on December 1, it said that the restructuring to the Nakheel and Limitless liabilities would total $26 billion.
In the first week of December, it was reported that cash-strapped Nakheel received a $2.45 billion cash injection as part of the $10 billion government aid program for businesses, launched in February 2009.
In mid December, Dubai received another present from its oil-rich neighbor. Through Dubai’s financial support fund, Abu Dhabi pumped another $10 billion into the indebted emirate, of which $4.1 billion went towards meeting Nakheel’s first sukuk repayment. Dubai world will use the rest to repay its contractors and suppliers.
A spokesperson from the Dubai Department of Finance said that the $10 billion received from Abu Dhabi will be repaid as a 5-year bond with 4 percent annual profit.
“[Nakheel] will honor all obligations related to the 2009 Nakheel Development Limited sukuk using funds that will be provided by the Dubai Financial Support Fund. In accordance with the terms of the sukuk the repayment will occur within the next 14 days,” said Nakheel in an announcement published on the Nasdaq Dubai.
Although Nakheel’s first debt will be repaid, the rest of the Dubai World obligations will still be negotiated for restructuring. As a next step, Dubai World is in negotiations with representatives of more than 90 banks to discuss the remaining $22 billion debt.
Whether Nakheel repaid its debt or not had implications for the six ratings Moody’s has for Dubai, as the ratings company told Bloomberg the sukuk was a “litmus test” for the accredited companies — DIFC Investments LLC (the investment arm of the Dubai International Financial Center), Jebel Ali Free Zone, Dubai Electricity and Water Authority, Dubai Holding Commercial Operations Group LLC and Emaar Properties PJSC.
The credit rating agency Standard and Poor’s has described December’s developments regarding Dubai World’s debt as “steps toward rebuilding confidence,” but said it was uncertain about the ability of the government to bailout other firms.
There is no doubt that the ride has been rough for Dubai’s flagship developer over the last 15 months, and whether Nakheel will once again re-launch its ambitious projects and re-hire a workforce on the previous scale remains to be seen.
The main concern at this moment is for the developer and its parent company to meet their debt obligations; a default risks opening Pandora’s box on the property market and on Dubai as a whole.