Summers in the UAE are typically languid affairs, with empty roads, deserted shopping malls and company executives taking off for the cooler climates of Morocco or the south of France. This summer, however, many property executives will probably be spending long hours in their offices planning how their companies will get through the next six months. "This summer is going to be the pinch point," says Chet Riley, an analyst at Nomura Securities in Dubai. "It will sort the men from the boys, with a whole lot of sub-developers defaulting, the bankruptcy laws getting tested, mega mergers and revolts from investors."
At the forefront of this evolving atmosphere are Emaar Properties and Nakheel, the two best known brands in Dubai that have been selected by the authorities to lead the way into a new reality of slower sales and more urbane projects. Emaar announced last month that it was in high-level merger talks with three other property developers under Dubai Holdings, a conglomerate owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai. Meanwhile, Nakheel has absorbed all the property development divisions of the government-controlled Dubai World companies, except for Limitless. This means that roughly 70 per cent of the emirate's property sector will be controlled by two companies.
Nakheel is said to be making a concerted drive to raise cash as the countdown to the due date for a US$3.5 billion (Dh12.85bn) Islamic bond ticks closer. It is courting investors to buy some of its projects or land, or to form a partnership with Nakheel to complete some of these developments, according to investors approached by the company. Dubai World has hired AlixPartners, a restructuring consultancy that helped General Motors (GM) to come out of bankruptcy, to help it consolidate during this period.
One example of the tough decisions being made was the news last week that Dubai World had applied to berth the Queen Elizabeth 2 in the commercial port of Cape Town in South Africa, near its Victoria and Alfred tourism project. Just months before, the company had feted its arrival in Dubai with pomp and circumstance. Executives told of ambitious plans to convert it into a floating hotel on the Palm Jumeirah. Now the ship is probably off to the tip of Africa, where it will serve as a luxury hotel during the FIFA World Cup next year.
Emaar faces the challenge of arranging a merger with the Dubai Holding property companies without upsetting its own investor base, who have been selling its shares heavily since the announcement. A key concern is the dilution of value for minority shareholders. Another worry is the debt load of the newly merged company: when the announcement was made, Emaar said the new company would have assets of Dh194bn and Dh13.4bn of debt. But most of those assets are in the form of land, which has declined in value since last year and is not easily sold in the current market.
A spokeswoman for Emaar said the company still had not conducted a final valuation of its assets. "The combination process is still at the preliminary stages and final valuations will be subject to detailed due diligence, formal valuation and regulatory approval processes," she said. One issue for Nakheel and Emaar is the fact that some companies owned and controlled by the Government did not have to adhere to the escrow law, which required developers to create trust accounts for each project in which to deposit all money paid by investors.
According to a Nakheel bond prospectus last year: "Dubai World has entered into a co-operation agreement with the Dubai Lands Department, which provides that none of the Dubai World property development companies [including Nakheel] are required to enter into escrow account arrangements." This could unsettle purchasers of off-plan properties from the two developers who may have been unaware of the exemption, especially as some projects such as the Trump Tower on Palm Jumeirah have been delayed indefinitely.
They are only the largest; scores of small and medium-sized property developers have already ceased operations, cancelled projects or are facing more dour conditions.. In the wake of these failures come hundreds of lawsuits from investors who want their money back. These, too, will likely play out in the months ahead. Dubai government organisations face the challenge of restoring confidence in the economy while increasing transparency. But this has been hampered by leadership changes.
Nasser al Shaikh, who was leading the distribution of $20bn in funds raised from a bond offering to the Central Bank, was abruptly terminated from his position as director general of the Department of Finance in May and replaced by a veteran of the Customs Department. Since then, there have been few new public declarations on the funds and how they are being used. Population decline could make matters worse, says John McGaw, the chief executive of Killik and Company in Dubai, adding that the strategy so far in Dubai has been to "do things quietly".
"Something has to give," he says. "Dubai has been built on the premise of a fast-growing population. Loads of people are being made redundant. They can consolidate and sell off bits and pieces, but I'm not sure what they are going to do over a longer period of time." So far, the answers have been largely hidden from view. But with each change in strategy, such as the hiring by Dubai World of AlixPartners and announcements of consolidations, the behind the scenes details of Dubai's new corporate structure are starting to become clearer.
There is also an increasing sense that the entire Dubai business model is being refined to prevent such a quick reversal of fortunes in the future. A credit agency is being formed, new laws are being written to protect investors, and companies without a sustainable plan are disappearing. However one thing is for sure, analysts say: it's hot in the boardrooms this summer and the pressure on some of the largest companies in Dubai is mounting. Whatever solution they come up with, the outcome is likely to lead to a dramatic shake-up of the industry, but that may be for the best for everyone.
bhope@thenational.ae