Falling land prices in Dubai and Abu Dhabi hit developers

Developers have been slow to write down the loss of value of their land holdings.

DUBAI // Land banks held by developers have lost as much as 30 per cent of their value from their peak last year, as projects across the Emirates fall victim to the global property downturn. Developers have been slow to write down the losses, meaning that the real value of land on the books of publicly traded developers may be overstated, according to analysts.
"I have seen nobody take a negative impairment charge on land," said Bobby Sarkar, a property analyst at Al Mal Capital. "None of these guys put their land banks through some kind of stress test every quarter." Land values have fallen by up to 30 per cent in Dubai and up to 20 per cent in Abu Dhabi, according to CB Richard Ellis, the world's largest commercial property consultant. However, even greater falls in land values have been seen on specific developments such as Dubai Waterfront, owned by Nakheel, Tatweer's Dubailand and Business Bay, owned by Dubai Properties.
Noura Yassin, the head of valuation and consultancy at CB Richard Ellis, said establishing a fair value for development land was complicated by uncertainty over whether developments would go ahead. "Almost 80 per cent of developers are reviewing their projects and raw land to see if they make sense," she said. Property companies with large partially developed masterplans, such as the Waterfront and Palm Deira, are expected to be most affected by declines in land values, while Emaar Properties is predicted to suffer least because most of its local projects are under construction.
The property company Colliers International estimates that some projects have suffered even larger falls in the valuations of underlying land. Land within the Dubailand leisure and theme park development peaked at between Dh400 (US$108.90] and Dh450 per square foot last August, but has since fallen to between Dh100 and Dh150, according to Ian Albert, a regional director at Colliers. Business Bay land was valued at between Dh500 and Dh700 last August, but has since fallen back to between Dh175 and Dh250. The biggest falls were at the Waterfront project, priced at between Dh450 and Dh600 per sq ft at the peak and now available for between Dh70 and Dh80 per sq ft.
"While these are the value ranges, it's very difficult to pin them down right now because there are so few transactions," Mr Albert said. Analysts say some developers whose shares are publicly traded may now be overstating their land bank values. "Theoretically land must be valued to reflect any fair value change every quarter, but it is a very flexible environment and companies are typically aware of the potential of incurring a loss," said Roy Cherry, a property analyst at Shuaa Capital.
Smaller privately owned developers that acquired their land on the open market, rather than having it allocated to them free of charge, may be in a worse position. "It would definitely be helpful to have more detail or a better breakdown of the land value on property companies' books," Mr Sarkar said. "They have so much land on their books but essentially nobody knows what that value is." Analysts say that this may change dramatically once property developers start writing down stalled projects in their accounts, or face handing over finished projects but find that buyers have defaulted.
"Give this six months," Mr Sarkar said. "The real test comes when developers are ready to hand over property but their buyers have defaulted, or when projects get called off. Then we may see more hits on their books." This may have implications for publicly traded property developers such as Aldar, Deyaar and Union Properties, which write up their land banks at fair value once they allocate it for an investment, develop a master plan or start building infrastructure.
Emaar and Sorouh, in contrast, book their land at cost. According to its annual report, Emaar's land was worth Dh10.1 billion at cost and Dh42.3bn at fair value at the end of last year. Emaar said in a statement in April that its global land bank stood at 516 million squares metres and was valued at Dh79bn. The nominal value of land tends to be extremely low for many developers who received it from the Government for free. Israr Liaqat, the financial controller at Aldar, said: "Everything of the 50 million square metres we own is given to us by the Government."
Regular revaluations of land banks would have an impact on developers who report the fair value of their books and pay market prices for their land, such as Deyaar or Union Properties. "For them it is far harder to realise gains and easier to realise potential losses," Mr Cherry said. Aldar Properties, the largest developer in Abu Dhabi, realises fair-value gains on a quarterly basis, writing up land values in its books when it starts developing projects. It wrote up about Dh1.5bn in fair-value gains last year and Dh920 million in the first quarter of this year alone.
But it has never written down land values. "That is extremely difficult to understand in a market where prices have plummeted about 40 per cent," Mr Sarkar said.
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