As cash slows, developers face challenges

As sales of new homes and villas slow to a near-halt, developers are struggling with a lack of cash flow.

DUBAI // As sales of new homes and villas slow to a near-halt, developers are struggling with a situation that would have been unthinkable just a year ago: no cash flow. Without steady revenue from sales or access to credit from regional and international banks, developers would separate into the strong and the weak, analysts said. This could lead to developers being forced to consolidate, projects delayed and a potential shift toward middle-class housing.

"Things have changed dramatically in the past few months," said Grahame McCaig, the general manager of the construction firm Dutco Balfour Beatty. "Now it's about cash management, liquidity and making sure our people are working... Collection of cash is becoming the number one business concern, not just in Dubai and the UAE but in the rest of the world." The first signs of trouble have already emerged with layoffs threatened, some developers launching projects at lower prices than originally planned, softening land prices and reduced prices in the secondary market.

The tremors have made their way down the chain to the contractors and suppliers. Riad Kamal, the chairman of Arabtec, the largest construction company in the country, said he was ready for a major downturn. "We have plenty of projects over the next three to four years, but we're not sure whether all of them will go ahead or not and so we're preparing ourselves for the worst." Some developers have also started offering more relaxed payment plans to avoid having people default and to make the market more attractive for international investors. This strategy, along with lower fees for transfer of titles and other incentives, is considered a predecessor to price cuts.

"We are seeing investors behaving more cautiously," said Martin Seward-Case, the chairman of the UAE board of the Royal Institution of Chartered Surveyors (Rics). "This, coupled with an increase in the amount of property on the market, suggests that prices may well reduce in the short term." The market, in a sense, is becoming more reliant on what has been the backbone of property sales for generations: people who actually live in the homes they buy. The speculators looking to buy and sell quickly for a profit have mostly fled the market, leaving the thousands of units coming online to investors looking to earn revenue through rentals and those wanting to buy a place to live.

In the past several months, major developers and regulators have tried to reduce the number of speculators in the market to slow the unrealistic price gains of homes, which had begun to take on the form of a bubble. But those rapid-fire sales - often an entire building would be sold out in a day - was the fuel for the building boom. "Some of us are seriously wondering: Did we kill our own market with these restrictions on buyers?" said a Nakheel insider. Still, many analysts believe the transition to "end users" - as buyers of homes to live in are called in industry parlance - is healthy for the long-term.

"A much-awaited reality check has jolted the property market to adopt positive business principles," said Shuckri Bundakji, the managing director of DSL Exhibitions and R&R, a property company. "With speculators freezing their activity, developers today are more focused on the end-user segment, with service becoming a very important part of the product offering." The next six months to a year is likely be a defining period for the property market. If sales do not pick up, many developers will need to find creative solutions to survive unscathed. Analysts say there will be a wave of consolidations. This trend has already begun with merger talks between Amlak Finance and Tamweel, and the swallowing up of National Properties by Deyaar Development.

The country's largest developers, which are synonymous with "brand Dubai" and "brand Abu Dhabi", have implicit government support and analysts expect them to ride through the storm, albeit with some belt-tightening. Smaller, private developers will be the most vulnerable to the squeeze, especially those who have stretched themselves over a large number of projects. "Ultimately, if this credit squeeze is protracted we could see winners and losers emerging: those developers with strong balance sheets and annuity income will emerge over those relying on off-plan trading," said Mr Seward-Case.

Banks are not coming to the rescue. Andrew Greaves, a partner at Trowers and Hamlins, said lending remained tight. "There's a serious lack of liquidity in the market to privately fund property development. If you're a developer who depends on bank money and don't have a well-structured plan then you will struggle to get those projects off the ground," he said. The new property market is likely to be characterised not only by delayed projects, but by an increase in rental properties coming to the market as rental rates have stayed robust.

Wasim Saifi, the chief executive of home finance provider Tamweel, said last week that developers would focus on middle-class housing because it was the highest demand area for people moving to the region."Today you have a fair amount of supply coming in at a higher price and affordability level," Mr Saifi said. "But the real sustainable demand is going to be the middle-class housing." [e-mail] [e-mail]