Financing remains a challenge for foreign builders

Global developers building projects are concerned about the difficulty involved in securing loans from local banks for funding their projects.

Emirates Business did a reality check with a few of the international developers operating in the UAE and found most have factored in the market fluctuations. "Even as a developer who is completing a project before nine months, there is no commercial debt available in the market from banks for international developers," said Darshan Hiranandani, Director, Hircon.

Salwa Malhas, Executive Vice-President, Al Mazaya Holding, said: "We have a good history of longstanding relationship with banks, however, even for us there is often some difficulty involved such as providing the required collateral and backup for the loans."

Rasim Kaan Aytogu, Executive Director, Tanmiyat; and Ian Powell, Business Development Manager, Bando; believed the UAE will need to have more regulated and monitored markets.

Do you believe as an international developer you find it more difficult to sustain in the local real estate market than others?

Malhas: No, as an international developer, it was not more difficult than other local developers. UAE's real estate legislation was set up to protect both local and international companies, and thus all property developers in the UAE, whether local or internationally based, were affected to a similar extent. The fact Al Mazaya is an international developer does not have a noticeable effect on our operations in the UAE.

Aytogu: As an international developer, it has not been more difficult for us to brave the downturn in the real estate sector in the past one year. We have diversified our investments to include mixed-use projects in Saudi Arabia, Istanbul, Jordan and an asset company in Singapore. This diversification within the real estate sector has helped our company hedge itself during global crisis.

Hiranandani: Our project in Dubai, 23 Marina, has a strong balance sheet. The number of defaulters in the project are 10 out of 275; so there has been no real issues. Collections are about 60 days behind schedule. Banks are not lending to international developers. The issue is, as an international developer whose project will be complete in less than nine months, there is no commercial debt available in the market from banks.

Powell: There is a benefit of being a locally-owned company, but this has never been an issue for us as an international developer to achieve our goals. Our expectations and the support we expected to receive have been equally matched. We are pleased to be in the UAE and still have a long-term strategy for growth.

How has your company fared in the past one year with the downturn in the real estate sector?

Malhas: Al Mazaya has a well-defined, low-risk business plan, which has helped minimise effects of the downturn on our operations and profits. As a result of the downturn in the real estate sector, we decided to divide our projects into two groups. The first type of properties were under development with more than 30 per cent of construction completed and 80 per cent of units unsold. We decided to proceed at full speed on these projects to ensure a smooth handover and delivery to our clients.

The second type of properties were those still in the design phase. There were two big projects at this stage in Down Town Jebel Ali and Dubai Waterfront. We have decided to extend the planning phase of these projects and scrutinise the business plans to re-package them for future launch. We have also slowed down the purchase of new properties until prices have stabilised and the overall market picture is clearer.

Aytogu: The downturn in the real estate sector was like a global monsoon that no one could escape from. It was felt everywhere from Canada to Australia and Russia to South Africa. The Middle East and North Africa (Mena) region and the UAE markets specifically may have felt it a little more than the rest simply because this region is still emerging.

Having said that, we were actually well prepared compared to many other competitors and also have been able to consider the need for a new investment paradigm. We have understood the importance of attracting long-term investors into the region and understood that such investors will consider selecting between alternative assets and highlighted which markets are best positioned in the race to attract a new breed of long-term investors. While we were doing well on that end, this isn't to say that we didn't experience some challenges, especially on the side of maintaining customers and minimising default.

Hiranandani: The company has fared well during this year. We have pulled away from the rigorous expansion mode that we were in and are focused on finishing projects that we have sold in the market. There was a lot of uncertainty during the first quarter of the year, but that has significantly improved.

Powell: Being a conservative company with about 40 years' history, we are always cautious. We have experienced market conditions reasonably well over the past year; our main focus now is that as a construction company we do have the capacity, resources and experience to undertake the right development.

With tight liquidity looming in the real estate sector in the local markets, have you been able to source financing easily from local banks and institutions last year?

Malhas: We have a good history of longstanding relationship with banks, which puts us in an excellent position when it comes to securing financing, regardless of the economic climate, and we have managed to secure a lot of facilities from banks. However, even for us there was often some difficulty involved, such as providing the required collateral and backup for the loans at a time when the valuation of real estate is vague and quoted investments had suffered from the drops in the financial markets.

Aytogu: We strongly believe in effective financial planning. Based on this fact, we were able to navigate the global crisis with a zero-debt status to banks and financial institutions. We have therefore been able to stretch the end-users' payment plan with an 'in-house mortgage model' by making smaller and equal payments over a longer period of time. Our easy payment options linked with the construction scheduling made the project financing work during the difficult times.

Being a Saudi-based company, we have received and will be receiving financing from our shareholders and investors. It is a long-term successful business relationship that we have established for the past 30 years with our shareholders and investors. Since we are a Shariah-compliant investment company, we do not deal with interest. Our investment criteria is based on profitability and rate-of-return measures.

Hiranandani: Fortunately, we did not have to source financing for our project. We didn't require any financing.

Powell: Our financial partner, Abu Dhabi Commercial Bank, has been and is continuing to be supportive. Finance is available, though so far we have not required any support. We have adequate financing for all current projects. The home market has returned to good levels as supply has been and will continue to be an issue. Interest rates have been reduced significantly over the past year and the recovery has been strong in the real estate sector with house prices rising for five consecutive months.

How do you view the situation in the local real estate sector in the past one year?

Malhas: Well, all the markets are interconnected, some more closely than others, although the real estate market was hit harder than others. We are starting to see signs of recovery now, and as things begin to pick up, this will impact all sectors and markets, not just real estate.

Aytogu: There is a very strong correlation between the global real estate sector and the local real estate market. The global financial crisis that started in late 2007 became more visible in the middle of last year, which has definitely affected almost all sectors within the real estate business. The UAE will need to have more regulated and more monitored markets. Property developers need to carefully identify cost-counting measures and apply very sophisticated methods for achieving more building efficiencies. The green and efficient buildings are the way forward for the real estate business. On the other hand, facilities management companies need to manage their businesses with better and optimised cost alternatives so that investors will have less service and maintenance fees. The physical infrastructure will need to be improved further and faster as this is the best time to build low-cost housing. Also, socio-economic development needs to go hand-in-hand with the physical development. In the end, the UAE markets will eventually mature with all these experiences and if all those involved make best use of their learned lessons.

Hiranandani: I think the market has bottomed out. Nobody expects prices to go any lower, the question now seems to be as to when it will recover.

Powell: The local market conditions have considerably changed, we look forward to market consolidation. We expect some significant changes in policy soon, which will benefit all involved in the UAE's diverse property market.

How has the currency exchange rates between your home country and the UAE affected your real estate development plans?

Malhas: All our UAE-based projects are financed from the sale and collection of funds within the UAE, so the changing exchange rate has had no appreciable effect on the first group of projects, which are under development or the second group of projects which are under design. Given the current economic situation and the fact that the markets and exchange rates are not yet fully stabilised, we will evaluate the situation and projects on a case-by-case basis in the future.

Aytogu: We are based in Saudi Arabia and our shareholders consist of investors from there itself. Because there has been no currency exchange problems between the UAE and Saudi Arabia, in monetary terms, our development plans have not been affected.

Hiranandani: We have not been affected by currency exchange factors.

Powell: We have funds available in both currencies, some benefit can be taken from exchange rate positions.

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