CANNES, Fra., March 19, (RTRS): Dubai’s “build and they will come” model is in a state of flux, rather than broken, as the emirate suffers growing pains in its evolution from emerging economy to global business hub, one of its key developers said.
Santhosh Joseph, president of Dubai Pearl FZ LLC, the developer of the recently revived $4 billion Pearl project said Dubai’s property sector weakness had been exaggerated by those who had little or no first-hand insight into the market.
“My firm belief is that the same people who are talking down Dubai will be among the first people to come back,” he told Reuters in an interview on the sidelines of the MIPIM real estate trade fair at Cannes.
“I believe that by 2012, the troubles of 2009 will be forgotten. It is a young city, and like a young human being, it must suffer growing pains,” he said. In less than 60 years, Dubai has evolved from barren desert into one of the world’s most-developed urban landscapes, studded with one mega-project after another, including vast skyscrapers and man-made islands visible from outer space.
However, many properties have become empty trophies for their developers as the speculative building model stimulated oversupply of high-end offices, hotels and homes.
Despite this overhang, Joseph’s team restarted construction at the 20 million square feet Dubai Pearl project earlier this month, reflecting confidence in Dubai’s post-crisis market.
“For me, that model has worked for the last 20, 30, 40 years, why should it stop working now?,” he said.
“By 2012 and 2013, I expect the majority of Dubai’s commercial space to be absorbed. In residential, there is supply of between 16,000-18,000 apartments per year for the next 3-4 years but the annual population growth is almost 10 times the supply of apartments,” Joseph said.
The Pearl developer, which is backed by a consortium of investors led by Abu Dhabi’s Al Fahim Group, has tweaked old designs to create a more environmentally-sensitive project, which it said marked a “new era” in the evolution of Dubai.
Lending
Meanwhile, UAE banks are likely to keep a tight lid on lending in coming years, even if the sector manages to avoid an immediate hit from the Dubai World debt restructuring, analysts say.
The state-owned conglomerate, which is grappling with $26 billion in debt, is in the final stages of preparing a debt restructuring plan to put to its 97 creditors.
Analysts have voiced concerns that domestic lending would dry up if banks are forced to take big losses on Dubai World-related debt.
The IMF estimated banks across the region would have to raise $10 billion in funds if they were forced to absorb a 50 percent loss, or “haircut”, on their Dubai World loans.
The UAE banking sector, already crippled by large-scale defaults in Saudi Arabia and the Dubai property bubble, is struggling to reach pre-financial crisis profit levels.
Dubai-based banks in 2009 posted a 31 percent overall decline in net income, a report from Global Investment House showed. Mashreq and Dubai Islamic Bank were worst hit, largely because of a spike in bad loans provisions.
“Banks will take a cautious approach in credit expansion until they see their non-performing loans peaking,” said HC Brokerage banking analyst Janany Vamadeva.
Debt deal
A Dubai World debt deal will help lift investor concerns about the regions’ financial stability but local firms trying to raise money will still pay a higher price and face more scrutiny, analysts said
Dubai World, which said in November it would delay repayment on $26 billion in debt as it restructured, is in the final stages of preparing a debt restructuring proposal to present to its creditors.
Analysts expect any proposal that sets less attractive terms for creditors will set a precedent that will make it harder for companies in Dubai World’s wake to borrow money or raise funds.
Analysts are expecting the plan to have less attractive terms for the creditors, setting a precedent that will make it harder for companies coming in Dubai World’s wake to borrow money or raise funds.
“It (the debt proposal) will likely make capital raising more challenging. Risk premiums should be higher going forward,” UBS analyst Saud Masud said.
Masud said though the exact impact for Dubai-based companies will depend on the deal, the extent to which creditors will see a reduction in the principal and by how much the maturities will be extended.
“You will see, in the medium- to long-term, increased demand from investors for more transparency, disclosures and unfortunately, on pricing as well,” Mohieddine Kronfol, managing director at Algebra Capital in Dubai, said on Friday.
Dubai-based companies have already been hard hit, with a near-50 percent fall in property prices and most construction projects in the area have come to a halt as well as a curb in lending by provisions-hit regional banks.
Before the financial crisis hit global markets, foreign banks were lending extensively to the region, aiming to cash in on the oil-rich emirate’s growth prospects.