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House arrest, Part II
The UAE’s real estate industry is in shock, but the country’s mortgage providers will feel even greater pain from an expected wave of property defaulters, Part II
January 29, 2009 8:47 by Ehtesham Shahid
Back to the future
In Dubai, extraordinary times are eliciting extraordinary responses. A restructuring of the real estate finance sector has already commenced, with the UAE’s federal government orchestrating a merger of leading mortgage finance companies Amlak and Tamweel, under the umbrella of the government-owned Real Estate Bank and Emirates Industrial Bank. The combined entity – named Emirates Development Bank – will receive government funding and equity capital to energize the mortgage sector. In another bid to support the real estate sector, Abu Dhabi has also announced a government-sponsored mortgage finance entity, Abu Dhabi Finance.
At another level, adversity is also giving rise to consolidation. “The Advisory Council – which includes the leaders of the largest public and private real estate developers in Dubai – has disclosed that the relationship between the top three developers (Emaar, Nakheel and Dubai Properties, which together control 70 percent of Dubai’s property projects) has moved from competition to cooperation, and that they will work in tandem to orchestrate a prudent strategy for the upcoming period,” states a market overview by Dubai-based Rasmala Investments. It’s a much-needed synergy that arguably is the surest way forward for Dubai.
Regardless of this rapid response, analysts are calling for caution regarding mergers. Strategic consulting firm A.T. Kearney says after a long period of unparalleled growth and entrepreneurs creating new companies, the global financial crisis has set off a wave of consolidation in the Middle East. “Like in any good marriage that is expected not only to last, but to produce many children, when considering a merger, company boards need to know why they want to merge and choose their merger partner carefully. One plus one does not automatically equal three. Almost 70 percent of all mergers go horribly wrong. Nothing is worse than merging with the wrong partner,” says Dirk Buchta, partner and managing director at A.T. Kearney Middle East.
Mergers aren’t the only new initiatives. On Dec. 16, the Macquarie Group and Abu Dhabi Commercial Bank (ADCB) together announced the launch of a fund that is expected to raise up to $1 billion to invest in infrastructure opportunities in the Middle East and North Africa.
Throughout the industry, however, the major worry is the expected wave of defaults at various levels. Barmak Besharaty, managing director of Dubai-based Almas Capital, says they are beginning to happen and are manifesting themselves in a variety of forms. “Every party involved is trying out ways to stem defaults in Dubai. As investors realize they cannot afford to keep units and are staring at defaults. Developers, on the other hand, are willing to re-jig contracts and offer one unit in place of several others,” says Besharaty.
For Al-Mal Capital’s Robert McKinnon, defaults are bound to happen in the present circumstances. “The assumption when things were good was that you will always be able to get credit in order to bridge a gap in funding. Now with that [factor] gone you are going to see more defaults,” he says. However, he adds that overall, the crisis should bring the focus back to infrastructure spending. “Non-infrastructure construction in general is going to tail off, but from now on it is going to be easier from a planning standpoint. It is going to be less short-term driven.”
Clearly the focus is shifting from quick and cheap earning, to value addition and long-term benefits. Call it the light at the end of the tunnel. Well-run companies will most likely still find projects to work on. Others, on the other hand, will suffer alongside imprudent investors.
First seen in Trends magazine.
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