Developers take long-term view

Plans for Lulu Island have changed in recent years. Sorouh's latest masterplan opts for residential development.

The financial crisis has forced property developers to spread out the construction of super-projects that make up Plan Abu Dhabi 2030, and find new ways to finance them. Large-scale new developments including Lulu Island, Raha Beach, Reem Island and Masdar City have all been phased over longer periods than originally planned after the collapse in the off-plan sales models and tighter lending by banks.

"There are a lot of companies really looking hard at their plans and budgets," said James Pringle, the executive director of development at the Tourism Development and Investment Company (TDIC). "The market has changed." Developers are seeking loans from pension funds and to issue bonds. More flats and villas are being held for rental to boost cash flow and there is a greater reliance on the Government to stimulate sales. TDIC, the developer of Saadiyat Island and the destination hotels such as the Qasr Al Sarab Desert Resort in the dunes of Liwa, sold a US$1 billion (Dh3.67bn) bond last year to help fund its commercial ventures, which make up about one third of its Dh120bn worth of projects. The rest of its portfolio is considered "economic infrastructure" for Abu Dhabi and is funded primarily by government grants. Lee Tabler, the chief executive of TDIC, said the company would not need to issue more bonds this year but was in talks with international investors and local sovereign wealth funds about private placement of loans. "Bond financing is already an alternative financing method in the real estate world," Mr Tabler said. "We have entered into discussions with institutional investors about private placements. This could become a focus by the end of the year and in 2011." The talks come during a downturn in tourism that has cut hotel occupancy levels and room rates. Master plans for major projects in the capital are being rethought to accommodate the changing make-up of homebuyers. Sorouh Real Estate, for instance, is planning to build its Lulu Island project in 15 separate parts that can each be adjusted according to demand and be completed as a neighbourhood on its own. Masdar City has decided to go ahead with building a first phase covering one-15th of the final project size. Al Raha Beach and Mina Zayed are also under review by Aldar Properties to accommodate the change in the market, officials said. John Thomas, the executive director of Mubadala Real Estate and Hospitality, said last week the company was reviewing its strategy for residential sales after the downturn. The challenge now, Mr Thomas said, was to convince financial institutions to provide funds for buildings that have a cash flow several years down the line. "My philosophy is that the demand drivers are still there," he said. "There will be an undersupply for another four or five years." Developers are increasingly trying to prove to banks that their properties will begin generating significant cash on completion by signing pre-leasing contracts with tenants. "There is an ability by the developers to actually go out to the banks and impress upon them that there is security of income coming through this property when it's completed," said Gurjit Singh, the chief operating officer of Sorouh. "Pre-leasing is a route for project financing." Developers are "beginning to build for leasing, rather than for sales", Mr Singh said. "There are hardly any sales coming through, so for those that have already gone ahead and are completing their developments, they are shifting to leasing." The difficulty in the year ahead will be, in part, about transparency and regulations that lag behind more developed economies, such as Dubai. In Jones Lang LaSalle's recent investor sentiment survey, the consultancy found the largest factors influencing decisions to invest were regulation, risk, level of return and availability of financing. The Government has been increasing its role in the property sector. Abu Dhabi Finance (ADF), a mortgage provider part-owned by the Government, borrowed funds from the Department of Finance this year to be able to reduce rates on home loans to 5.75 per cent, compared with existing loan rates of about 8 per cent. Ali Eid al Mehairi, the company's chairman, said ADF was studying the possibility of expanding its role in the sector by lending to developers as well as homebuyers. [e-mail]