Dubai’s debt woes are well-known, especially once the declaration of Dubai World wanting a standstill on tens of billions in debt in late 2009 sent global stock markets to the floor. In the last 14 months or so, the government-affiliated developer has worked out a repayment plan with its banks
During this time, Abu Dhabi has accelerated its planned city-building. Nearly a dozen hotels have opened in the past two years and about a dozen more are scheduled to come online in the next year. Abu Dhabi, which does have a severe shortage of affordable, quality housing, sponsored the development of whole new neighborhoods on the mainland and on islands just off the main Abu Dhabi isle. I noticed, though, that most of these developments were pricey, very pricey. Everything was “luxury” just like you saw in Dubai. And I wondered at what point would Abu Dhabi be crossing the line into the excesses that now straps the Dubai economy.
So, it was interesting to see last month that Aldar, the U.A.E.’s largest developer and the firm behind many of Abu Dhabi’s signature developments, had to seek government assistance to repay its loans. Project delays and perhaps a mismatch of market demand had resulted in some cash flow problems for both Aldar and another major Abu Dhabi developer, Al Jaber Group.
While the family-owned Al Jaber seeks its own agreement with its creditors, the government did step in earlier this month and gave Aldar about $5.2 billion to tide it over. It has now bought back the Yas Marina F1 racecourse and Ferrari World as well as some infrastructure on Yas Island – all of which Aldar built for Abu Dhabi.
So is Abu Dhabi on the path of Dubai? Not exactly, said analysts I spoke to for the story.
Tuesday, Jan. 25, 2011
Behind the Latest Gulf Real Estate Crisis
By Angela Shah / Abu Dhabi
With banks reluctant to lend and a pervasively weak property market, a major real estate developer in the United Arab Emirates said it needed a cash lifeline to keep operations going. Oh no, is Dubai in more trouble?
Not exactly. The developer is not in Dubai, the emirate that has attracted as much attention for its debt woes in recent years as for the iconic real estate projects it no longer can afford. The emirate in question is neighboring Abu Dhabi and the developer feeling the squeeze is Aldar, the biggest real estate development company in the U.A.E. And Abu Dhabi is why the Aldar crisis, while massive, isn’t really catastrophic.
Abu Dhabi agreed last week to purchase about $5.2 billion in assets to help Aldar repay its debt. Aldar is behind many of Abu Dhabi’s signature projects, including the Yas Marina F1 circuit and the Ferrari World theme park, both of which it has now sold back to Abu Dhabi. As the global credit crunch drove down values of the emirate’s real estate by about a third, the developer found it couldn’t pay the bills. (See how rents are coming down in Dubai.)
While most of the world paid attention to the boom and bust of Dubai, its sister-city state in the UAE, Abu Dhabi, embarked on its own string of ambitious projects. “In Abu Dhabi there was the same kind of crowd that wanted the big, grandiose status-symbol projects,” says Christopher Davidson, a professor on Middle East politics at Durham University in England, who has written books on Dubai and Abu Dhabi. “They did get carried away, just not on the same scale.” (See pictures of the Burj Khalifa, the tallest building in the world.)
In addition to commissioning nearly two dozen new hotels — including the 844-room Millennium Al Wadha hotel, the largest — Abu Dhabi began carving out new residential and commercial areas of empty sandscape, Dubai-style. The emirate has also developed two former barren islands in the emirate: Yas, the home of Abu Dhabi’s F1 track and the Ferrari World theme park, and Saadiyat, which is slated to become its cultural district with local branches of the Guggenheim and Louvre museums.
While Yas Island opened to global fanfare, developer Aldar has posted four straight quarterly losses and has nearly $4 billion of debt due this year. “Some of the other [developers] are in exactly the same financial and developing cycle,” says Chet Riley, a research analyst with Nomura Investment Bank in Dubai. “2011 is really the pinch point for all of these companies.” Another prominent Abu Dhabi developer, Al Jaber Group, is seeking to delay payment of about $1.6 billion in debts. The family-owned conglomerate has projects worth about $4 billion in the pipeline and has hired KPMG to help reorganize its debt.
But Riley and other analysts agree that there is a key difference between Abu Dhabi and Dubai: cash.
“Dubai dreamed big without the means,” says Jean-Francois Seznec, a former commercial banker who worked in the Gulf and now teaches at Georgetown University in Washington, D.C. “Abu Dhabi is dreaming big, and they have made some mistakes, but they have the money.”
That’s because Abu Dhabi is the world’s eighth largest oil producer and holds a sovereign wealth fund estimated to be worth about $500 billion. Such wealth gives it considerable means to prop up cash-poor developers. Its agreement to fund Aldar will help to boost its stake in the company to about 60% this year, up from its 38% stake in 2010. “Aldar is heavily involved in government-sponsored projects. These projects represent half of their order book,” Riley says. “You can’t have a company like that under-capitalized or with liquidity concerns.”
Another difference between the two emirates’ situation is that Dubai’s building boom depended on a “if you build it, they will come” approach that faltered once easy money from banks dried up, Seznec says. That led to a contraction in the financial and property sectors, two areas that had driven much of Dubai’s growth. Over the past decade, the International Monetary Fund estimates Dubai amassed $109 billion in debt. Abu Dhabi’s projects, on the other hand, are spurred from demand that already exists. “They’re desperate for buildings. Finding an apartment two years ago was a nightmare,” Seznec says. “Abu Dhabi really was building according to real demand, not to create demand in the future.”
So, if there was demand, what caused the problems? Some Abu Dhabi developments were started on overly optimistic timelines. The economic downturn caused delays and even some re-designing of projects, making companies like Aldar short on cash when their debt was coming due. In the long run, analysts say that Abu Dhabi’s building spree makes sense, namely because it largely adheres to its ambitious “Plan Abu Dhabi 2030” vision, one that outlines how the emirate will diversify its economy away from oil and into tourism and heavy industry.
The Advanced Technology Investment Co., owned by Abu Dhabi, plans to spend as much as $7 billion to build a chip-making plant that could open in 2014. In 2009, the government-owned company bought Chartered Semiconductor of Singapore for $1.8 billion and it has a joint venture arrangement with Advanced Micro Devices Inc. in Globalfoundries Inc, a semiconductor manufacturing company. Last week, the emirate welcomed world leaders to the World Future Energy summit which is sponsored by Masdar, the government’s green energy firm. “Abu Dhabi is investing in the right places, new sectors where they can have a competitive advantage,” says Shady Shaher, a economist with Standard Chartered Bank in Dubai.
And as Abu Dhabi works towards those goals, its current economy remains stable. “The world still needs oil,” Davidson says, “and Abu Dhabi is well-placed for that.”