Developing the developer

Eshraq Properties is boldly going ahead with a public stock offering at a time when sales are slow and the future of the sector is in question.

Billboards of projects by Eshraq Properties are displayed between the Maqta and Sheikh Zayed bridges in Abu Dhabi where the Gateway Toweres are planned.

It felt like a flashback to the boom times of early 2008.

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A buffet lunch at the luxurious Fairmont Hotel, complimentary silver Dior pens for the audience and a rosy outlook for the property market in the region.

This was the scene at the presentation by Eshraq Properties last week for its initial public offering (IPO) of stock that officially began on Sunday. The company is trying to raise Dh825 million (US$224.6m).

Saleh Mohammed bin Nasrah, the chairman of Eshraq, stood before his audience and said he was unfazed by the slowdown in sales that has afflicted the region since late 2008.

"The area is having difficulty but it doesn't mean there is no money," Mr bin Nasrah said. "Many investors are looking for opportunities."

Eshraq had its beginnings in 2006, when a group of Saudi and Emirati businessmen came together to form a property company. It built up a land bank and got into the business of reselling land in the secondary market - a process known as "flipping".

So far, it has three projects in the preliminary stages of development: Marina Rise on Reem Island; the Gateway development on Zayed Bay in Abu Dhabi; and Jumeirah Rise in Dubai. The cost of these projects has yet to be announced but it will run into billions of dirhams.

The shareholders include at least one local property developer, Tamouh Investments, but the rest are mainly wealthy individuals from Saudi Arabia, such as Prince Faisal bin Abdul Majeed bin Abdul Aziz Al Saud, a businessman and son of the former governor of the Makkah province of Saudi Arabia.

In those first years of business Eshraq turned a tidy profit. A prospectus obtained by The National shows profits of Dh349.5m in 2009 and Dh109.6m last year.

A feasibility study for the IPO, carried out by Deloitte, suggests the company could begin hitting annual profits of more than Dh100m in 2013 after a bumper year next year, when it expects to earn about Dh800m in profit after delivering its first project.

But analysts say Eshraq has yet to reflect the fall in land prices on its books. For instance, its 2008 profits came in large part from the rising value of its land bank, according to market surveys. Of the Dh349.5m of profit, Dh283.4m was "fair value gain on investment property".

Property developers across the Emirates have been cutting the value of the property on their books to better reflect the depressed prices that continue to slide downwards.

In Dubai and Abu Dhabi, the price of homes has fallen by half since the peaks of 2008. Rental rates have dropped steeply and sales have slowed to a trickle, except for certain high-quality assets.

Companies such as Aldar Properties and Sorouh Real Estate, the two largest developers in Abu Dhabi, have written down the value of their property by hundreds of millions of dirhams since 2008.

Eshraq will have to take similar losses in the quarters to come because of the unique part-payment system it is using to attract investors.

The developer will sell 55 per cent of the company in the offering, with shares initially priced at Dh1 and a minimum purchase of 10,000.

But under the arrangement offered by Eshraq, investors are able to buy shares for a 25 per cent down payment, plus a fee of 0.02 fils a share. The balance will be due within two years, at the direction of the company's board of directors.

Elias Kawar, an investment banker at Royal Capital who is involved with the transaction, says the set-up is ideal for property developers because they do not need all the capital they raise at one time.

The risk, analysts say, is that the IPO is pulled off without a hitch but the price of the shares falls by 25 per cent. If that happened, there would be a strong disincentive to keep making payments for them.

This was a problem that played out in Australia in 2004. Investors in ConnectEast, a consortium that was raising money to build a 40km toll road, were given an offer that allowed them to pay for the shares in instalments.

In 2008, the road was complete but far fewer people were using it than expected and shares in ConnectEast fell to 0.1 cents each. Investors were stuck in a situation in which they had already paid 10 times the value of the shares and were required to pay another A$2 (Dh8) to keep them. Many defaulted.

What is more, ConnectEast was not delivering a product into a market characterised as oversupplied and sluggish, as is the case with property in Abu Dhabi.

Last month at the Cityscape Abu Dhabi conference, the barometer of the market, leading property executives and analysts said this would be a cautious time for developers.

David Dudley, the head of Jones Lang LaSalle's Abu Dhabi office, reported the market would come back "but it won't be this year". More than 16,000 homes are expected to be delivered this year, a glut of supply that is likely to push rents down even further.

But that is not stopping Eshraq. Dr Sulaiman Mohammed al Dhalaan, the general manager of the company, said this was "the starting point in a line-up of projects that we are working on".

Dr al Dhalaan added these developments would eventually include projects in Sharjah, Dubai, Abu Dhabi and Saudi Arabia.