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Real estate – Only the strong survive

In the plummeting markets, debt-laden, over-extended firms will parish

by Executive Staff

The real estate market in the GCC, especially in highly speculative Dubai, is still on a downward trend and companies are struggling to ensure their survival in these tumultuous times. Since the real estate boom began, developers have done everything but play it safe and the financial crisis has caught them off guard. “In our business in the Arab world, the growth was exponential and very promising,” said Dr. Isam Daoud, chairman of Avanti Holding. Daoud also explained that this ambitious growth prompted companies to hire more staff then they would need just to prepare themselves for future projects and expansion. “We were all preparing. If we needed 50 staff, we would hire 100,” he said. Things have now changed and instead of hiring staff, companies are downsizing, delaying projects and even considering mergers. Still, it is unfair to say that all are suffering. Even though most are cutting costs, others are hiring and moving forward with their projects. Ultimately, it all depends on the financial situation of the company, whether it was relying on debt or its own equity to build projects, and whether its market activity was based mainly on speculation or end-

users.

  The liquidity squeeze has been a major factor in slowing down the demand and causing project delays, since buyers and developers who rely on lending have to go cap in hand to banks asking for liquidity in order to guarantee required financing. Although governments and central banks have been injecting liquidity into the banking sector in the last couple of months, the benefits have not yet reached the real estate market. “Unfortunately banks, when they get the money, start offsetting their own losses. So the first impulse for the bank once it receives the injection is to alter its own balance sheet, and this is what is really happening. So the banks are reluctant to give the money out,” explained Amin Al Arrayed, general manager of First Bahrain. This liquidity crunch, in addition to panicky investors, has enormously reduced demand, especially in highly speculative markets like Dubai. Additionally, it induced developers to slow their pace of construction in order to give themselves more time to manage funding constraints.

Given the ongoing situation, most developers — who are far more affected than real estate brokers — are trying to survive financially by cutting costs and reassessing the feasibility of their projects, as well as offering easy and attractive payment plans to restore the market demand and to maintain the loyalty of their customers.

Cutting costs

  Currently real estate companies — like other businesses —

 are cutting their costs. “A lot of developers took on additional staff because staff was very difficult to come by so they were kind of over staffing. Now that the tide has turned, they are in the position where they are forced to downsize,” said Al Arrayed. Additionally, the managing director of Casamia Star, Israr Yousef, explained that companies are also cutting down on their advertising budget since the project delays and market slowdown make advertising unimportant at this time.

  So far, one the biggest layoffs was initiated by Dubai Properties in December 2008, which consisted of the retrenchment of around 600 staff at all subsidiaries across the Dubai Properties Group, which includes Salwan, Injaz and Dubai Retail. Additionally, Nakheel has axed 500 jobs — 15 percent of its workforce — while Emaar and Tatweer are also considering downsizing. Omniyat also cut 69 jobs in November. It is not known how many more workers in the real estate sector have been fired, since not all job cuts have been announced and some developers are skeptical about the issue. “I would say that 60-70 percent will need to cut around 40 percent of their staff,” said Daoud.

  On the other hand, some developers like Avanti Holdings have a strong financial status and do not depend on lending to finance their projects. Their financial status even allows them to give out in-house finance. In fact, they are currently hiring people thanks to their comfortable position. “Yes, sales have slowed down, but it is temporary. We are actually increasing our employees further… a lot of developers are letting go of a lot of their good employees and we are taking advantage of that and hiring them to work for us,” explained Daoud.

Extended payment plans

  As banks started tightening their lending and people lost their money in the financial markets, real estate companies began witnessing payment defaults from homebuyers and property investors. Marwan Bin Ghalita, CEO of the Real Estate Regulatory Authority in the UAE, told The National that some developers reported up to 40 percent of buyers are falling behind on their payments where units were sold off-plan by developers prior to their completion, and in some cases where construction has not even started yet. Consequently, developers started extending payment plans to buyers in order to revive demand and to keep customers’ loyalty.

  For example, Yousef from Casamia Star explained that due to the current situation, the properties that will be sold successfully are the ones with very good payment plans. “Our payment plan was for 18-24 months, which is difficult for the investors and end-users right now. So we extended it to five years. Now if the project will be ready in 2011, they can still make payments until 2013,” he added.

  In November 2008, Emaar Properties launched the ‘To Own’ scheme, which includes ‘Plan to Own’ and ‘Rent to Own’ programs aimed at easing the financial position of potential customers by offering them an extended payment plan with annual payments for five years.

  Moreover, Zaid Ghoul, chief financial officer of Union Properties, said “for our Index and Limestone House developments, we are altering the payment terms as we do not expect someone to walk in with the full 65 percent required before handover in today’s market conditions. We are therefore planning to distribute this 65 percent over two or three payments until handover to ease some of the pressure on buyers considering the slow down on mortgage lending from the banks.”

Even brokers who do not decide on these payment plans are trying to accommodate the developers and buyers by helping them find common ground. “We can help our customers by presenting their point of view to developers [who] have been very responsive, they understand what is happening in the market and are not willing to lose their clients,” explained Puniet Singh, director of operations and projects at Sherwoods Property Consultants. “Developers have been diligent about having the customer’s best interests at heart, and we are more than happy to assist our clients in this manner,” he added.

Project delays

  Developers have three ways to finance their projects. “One of them is the end user by selling off-
plan, the other is direct lending from banks and the final component is the equity that the developer puts into the project,” explained Al Arrayed. In the current situation, developers who rely on banking or selling off-plan have been hit the most, while those who rely mostly on their own equity were less affected. Daoud explained that “96% of real estate developers are financing their construction using local banks and of course because of the lack of funds in the banking system, it directly affected the development phase, whereby they cannot develop anymore.” This presents a harsh situation for developers, as they have no more funding to construct.

  Those who are strong financially are still proceeding with their projects, focusing on the current construction, while delaying any future plans until the market clears. Yousef explained that projects already launched by Casamia Star will not be delayed, since it will negatively affect the market. “No, absolutely not. We do not want to postpone, because it will hurt the confidence of buyers and users who are investing with us.” He added the projects that were postponed are the ones that have not been launched yet.

  “Our projects are above 85% completed and they are on schedule for delivery during 2009 and 2010. We have no plans to slow down on any of the existing commitments. We have however decided not to announce any new projects until we are clear on the status of the credit market and the appetite of banks to go back into lending.” said Ghloul. Many other companies are doing the same thing, like Omniyat, First Bahrain, Al Mazaya Holding, and other developers.

  While some developers are focusing on delivering their current projects on time, others are failing to do so and postponing projects that are under construction. For example, Nakheel has confirmed that some of its $80 million worth of projects will be delayed, including the Trump International Hotel and Tower. Furthermore, it is planning an initial public offering to raise up to $15 billion to manage its cash flow problems. Additionally, the construction of six man-made islands would be put on hold, as well as the Jumeirah Gardens City by Meraas Development, and many other projects.

  Brokers, who were concentrating on selling off-plan projects, were greatly affected by the delays. “A large part of our sales revenue was based on off-plan projects that were newly launched and which were to go under construction for two-three years,” said Singh. He explained that a large proportion of this segment has been affected, which boils down to a substantial percentage of sales. Therefore Sherwoods, like other companies with similar business models have also started concentrating on the projects under construction by working closely with developers to package value added features and to give investors assurances that the property is an income and revenue generating asset.

Experts agree that delaying projects that were already launched would have negative ramifications, as investors who have already bought a stake in these projects will want their money back. As well, not all countries have versions of the escrow law implemented in Dubai, which guarantees investors’ cash in case of cancellation. Therefore developers will have to deal with contract obligations, which would be very costly. This would further deteriorate buyers’ trust in the sector in general and the company in particular. “Projects that developers are undertaking should be followed through and this is an important message to the market,” said Singh.

Mergers

  Amid the current chaos, talks are growing about possible mergers, especially small companies that will not be able to handle the current situation by themselves. Experts concur that mergers are not necessarily a negative development, especially if they mean that a solution for a given company’s woes has been found and its position in the market will strengthen again.

  In late November 2008, it was said that Emaar Properties would welcome a merger with Nakheel PJSC, however, Dubai authorities then denied the rumors later the same day. “Regarding big companies who are owned by the government like Emaar and Nakheel, I do not think they will be looking for mergers, but small companies may. It depends on how strong they are and what their policy is,” explained Yousef. He added, “I do not think a merger is a bad thing, as long as you keep the confidence of the investor in the market.” Therefore, if the crisis worsens, more mergers are likely to happen, especially among small companies who will have no other choice for survival.

  In brief, all companies are currently reassessing their projects, as well as their strategies and financial situations in order to overcome this crisis. Experts are pessimistic when talking about companies that mostly relied on debt to build and had market activity based mainly on speculation. “I think that for some it may be too late, unfortunately, to come back to the market where they can actually revise their business model,” said Al Arrayed. He advises companies to focus on domestic demand, rather than speculative and to focus more on quality than quantity.

  Daoud said that all companies have to reengineer their strategies and to transform the way they do business. “We have to do a total genetic transformation of our strategies if we want to survive in the next two years. The way we are building, selling, collecting the money and financing buildings must be different, since we are entering into an environment we have no experience in,” he added.

  “Companies should bring more professionalism into the industry by training employees and by teaching them new things regarding real estate, which will be very helpful for the company,” said Yousef. He also asserted that governmental rules and regulations should be welcomed and implemented among companies, making companies and markets more mature.

  As the crisis develops, real estate companies are cautiously planning every step. Eventually things will get better, but when and how are still unknown. The only sure thing is that the strong will survive.

 

 

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Executive Staff


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