Nakheel, the master developer of Dubai’s trademark Palm Islands and many other ambitious projects, has recently restarted a portion of its developments after a difficult period of two years. Fully owned by the state of Dubai via parent company Dubai World, Nakheel had to restructure and refinance. The restructuring is near completion, with separation of the company from Dubai World planned before the end of this quarter. Nakheel Chairman Ali Rashed Lootah agreed to elaborate on the scope and pace of the company’s turnaround in an exclusive interview with Executive.
In the past few months, Nakheel has announced the resumption of work on several developments. What is the rationale behind this?
As a real estate company, we are committed to deliver what we have promised to [our] investors. After the approval of our restructuring and the approval of our business plan by the authorities, we had to go ahead and implement it. That is the rationale behind it.
In restarting your projects, how much could you restore the confidence of your investors and of the market?
We have different partners. From the side of our contractors, who are partners with us, I am sure there is trust in Nakheel. We are paying them ahead of time and the most important thing, you know, is to pay people.
In all of the projects that we have re-launched, most of the contractors are back. I can tell you that 90 percent of our contractors have not changed. We offered them a lot of incentives, we gave them additional advance payments to bring them back to the sites, but for the 10 percent with their own problems we had to find alternative contractors to complete the projects and enable us to deliver to our investors. We had, to my recollection, only two cases where a contractor could not go back. By now we have about a 9,000-person labor force on site.
Did the large number of contracting relationships and the involvement of numerous developers and sub-developers cause extra pressures or increase your cost in restarting the projects?
Let me say one important thing: without the support of the government we would not have been able to restart. The government gave us financial support, legal support, all the support we need. That enabled us to meet all our requirements. We don’t have any financial issues. The government is committed and we are meeting all our obligations. But some of the sub-developers are having some issues and don’t want to meet their commitments. We are trying to accommodate them as much as possible, giving them different scenarios, different payment plans, but they have to be committed to their contracts. There is give and take, but up to a certain extent.
You said previously that Nakheel is preparing to become a stand-alone entity by the end of this quarter. What is the reason for this revision of your corporate structure?
It is public knowledge that we will be separated from Dubai World. The reason is that Nakheel on its own is a real estate entity and I think, simply speaking, that the best way to manage Nakheel is to have it totally separated, financially and practically.
Will the restructuring affect ownership in any way?
There will be no change in ownership through this restructuring and the shareholders won’t be changed.
The board of directors will be chaired by you?
Yes, and the board will remain as it is.
Nakheel is so big in the real estate sector of Dubai that people tend to blame you for everything, from a leaking faucet to a swimming pool that has not been maintained or a parking lot that is not clean. How do you deal with this?
I take this always in a positive way. If we are talking about our clients, to me the customer is always right. We have to make them happy. People will not complain unless there is some ground for the complaint. They might exaggerate the complaint but there cannot be groundless complaint. Some people have suffered in the previous three years because of the stand still situation and they think things will change overnight. That is not possible. But the feedback we are getting includes a lot of communication from our customers where they thank us and recognize that there are changes.
What has Nakheel done to mitigate risks for investors going forward, such as global risk, local risk or internal controls risk?
The global risk was not about Nakheel; it stemmed from what you can call the global incident. I think the solution we are offering the people is really an excellent solution. Nakheel, or the government, had the choice of declaring [our company’s] bankruptcy. We didn’t choose to go that way.
How do you view opinions that the underlying risk existed before the crisis and should have been managed differently?
In a free economy you cannot control anything.
But when we look back at 2006 — 2007, many research reports on the real estate outlook for Dubai were published and all of them were positive, to the point that they sounded like they were trying more to please than to assess…
I will disagree and agree with you. If the Lehman Brothers case didn’t happen we might still be going at the same rate as before. The Lehman Brothers crisis triggered the global economic crisis and if the United States government dealt with it in a different way we might still have the same abnormal growth. Dubai was cheaper and still is cheaper than any destination, so people were willing to take this so-called risk, if you want to call it that.
Dubai is certainly more competitive today than during the final bubble period before the global crisis…
Yes. It was crazy and it was a good thing that there was a cleaning up. Only the serious people will stay.
People who purchased villas and homes in Nakheel developments before the crisis included both individual buyers and large-scale investors who bought properties for financial gain or even speculation. How do you differentiate in treating the two groups?
To individual investors who bought homes we are giving alternative solutions. We are giving them alternative properties.
How many buyers have accepted the proposal for shifting to a different property than they originally signed their contracts for?
We have actually managed so far to relocate about 50percent. About 50 percent of the people in what we call long-term projects have accepted to be relocated into short-term projects. I think we mitigated over4.5 billion dirhams ($1.22 billion).
Do you see yourself as setting an example for the whole real estate sector in Dubai in your practice of mitigating and relocating people?
I don’t know about that. I cannot speak about [other developers]. But if we can manage to relocate such a big number, people are happy, and keep in mind it was done in less than one year. The restructuring started in early April [of 2010] and that is a short period for 4.5 billion dirhams in transactions.
What is your vision for 2015 – 2020?
I think we can say the worst is over. We have achieved the business plan and are doing much better than what is envisioned in that plan. I am confident to say that.
In the portfolio of your long-term projects, you cancelled some, such as the Trump Tower.
I probably said canceled in the last brief but it is, in the current market situation, not logical to go and develop more real estate.
So the reason was not the cost of any individual project but the market?
The market for sure. We have to be realistic and see the market.
Do you expect that projects like Trump Tower or Tiger Woods Golf Course could be implemented five or 10 years from now?
I doubt it.
So you were appointed because you have the strength…
…Of saying ‘No’. I am going after people to collect money(laughing). But believe me, I’m not after the individual investor. I am really very sympathetic toward the individual investor and I am sometimes even harsh on my people because I always put myself in the poor investor’s place. But [the individual buyers] have to also accept that they could have faced a worse scenario. The government really did a good job by keeping the commitment of Nakheel. At the end of the day, the reputation of Dubai is at stake.
And the reputation and credibility of Dubai…
…That’s our capital. I feel there is a positive feeling in the city. I think there were a lot of speculators in the city and they have runaway. As I said, Dubai is here to stay. If you exclude the real estate, other sectors in the economy are really growing.
There was talk of some new developments?
We will be developing retail business on the Palm and the Dragon Mart; we are planning to drastically increase the size of the mall, more than doubling it. On the Palm, a mall is needed. We will be tendering all these projects in the second half of the year.
What are the biggest challenges you see in the coming 18months for the real estate market in Dubai?
I think the big challenge is to cope with the existing oversupply and encourage more people to move to Dubai. I think this is happening by having the real estate value reduced by 50 percent. That is really encouraging a lot of people to move. I don’t really know the size of the oversupply — nobody can really have a figure — but the good thing is that there are no new projects.
From what you are saying, now is the time to buy in Dubai.
For sure. We are also really working hard to bring our service charges down. That will also make Dubai more affordable. We are in negotiations with all our services’ providers.
Do you have a target figure in percentage reduction of service charges?
I am squeezing my people every day. They come with a proposal and I reject it. I keep challenging them because I always put myself in the investors’ shoes. People will be happy if you reduce [service charges] by 10 or 20 percent, but I want people to be even happier
Have you stepped up the Emiratization of Nakheel’s staff?
The percentage [of Emirati employees] is higher because if we have redundancies we release expatriates whom we don’t need. We are identifying the good ones whom we have to keep. Practically speaking, I am dealing with Nakheel in the same way in which I would be dealing with my private business; when it comes to business, you keep only the people you need.