Identifier
Created
Classification
Origin
09DUBAI354
2009-08-30 07:31:00
CONFIDENTIAL
Consulate Dubai
Cable title:  

DUBAI SEEKS BOTTOM FOR ITS REAL ESTATE MARKET THROUGH

Tags:  ETRD KIPR EFIN ECON PREL AE 
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VZCZCXRO4352
RR RUEHDH RUEHDIR
DE RUEHDE #0354/01 2420731
ZNY CCCCC ZZH
R 300731Z AUG 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC 6608
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 9898
C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000354 

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN

E.O. 12958: DECL: 8/30/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI SEEKS BOTTOM FOR ITS REAL ESTATE MARKET THROUGH
CONSOLIDATION

DUBAI 00000354 001.2 OF 003


CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)
C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000354

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN

E.O. 12958: DECL: 8/30/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI SEEKS BOTTOM FOR ITS REAL ESTATE MARKET THROUGH
CONSOLIDATION

DUBAI 00000354 001.2 OF 003


CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)

1. (C) SUMMARY: Dubai Holding, the Dubai Inc. entity
representing the personal property holdings of Dubai Ruler
Sheikh Mohammed bin Rashid al Maktoum (MbR),plans to
consolidate several of its largest property developers into one
mega-sized integrated unit. Although news of the consolidation
was announced in June and is part of a larger economic
restructuring effort by the Government of Dubai, the details of
the deal and implications on the broader real estate market have
been slow to emerge and continue to stoke media intrigue. Along
with measures to remove distressed property from the current
market, consolidation of Dubai Inc's real estate holdings is
also a key part of the government's attempt to put a floor on
falling prices across the real estate sector. Meanwhile,
external and internal investors continue to look for clear signs
of a bottoming in Dubai's flagging real estate sector since
consumer and residential property prices have fallen as much as
50 percent over the last year. END SUMMARY.



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MAMMOTH CONSOLIDATION GOBBLES MARKET SHARE

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2. (C) The plan by Dubai Holding, the parastatal run by Minister
of Cabinet Affairs and key MbR advisor Mohammed Gergawi, to
consolidate its real estate interests into to one mega-sized
company has created an enormous market force, according to
Martin Kohlhase, an Assistant Vice President at Moody's Investor
Service. Kohlhase says the newly formed company will control
close to 70 percent of the real estate market in Dubai and will
have unrivaled access to Dubai's vast land bank once the deal
closes by the end of 2009. Dubai Holding's consolidation of its
Dubai Properties Group, Sama Dubai, Tatweer and upcoming merger
with the government-owned Emaar Properties will create a company
with a combined asset value of USD 53 billion. MbR personally

owns 97.5 percent of Dubai Holding.




3. (C) The new company streamlines Dubai Holding's seven
seemingly independent businesses into four distinct units, which
will include a property unit, business parks, hospitality
franchise and an investment arm. (Comment: A slimmed down and
presumably more nibble Dubai Holding Properties unit would
facilitate a cleaner merger with Emaar Properties. End Comment.)
Kohlhase told econoff that the merger was also a sort of soft
landing for Emaar whose stock price has seen as much as an 80
percent decline since second half of 2008 and has undergone a
major bankruptcy of its major U.S. subsidiary, John Laing Homes.
Kohlhase said that with 13 years of property development
experience and 14 thousand homes built in Dubai, Emaar
properties has likely seen the last of its bull days as a stand
alone company and would not see new large scale development
projects down the pike, such as its current Burj Dubai
development. Although the consolidation and merger attempts to
streamline business units and retire many redundancies, the
merger also leaves the new mega unit with presumably an enormous
inherited debt load. Accurate figures on the exact value remain
difficult to obtain.



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CONSOLIDATION: AN ANSWER TO FALLING PRICES?

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4. (C) In an August 25 meeting with econoff, Kohlhase suggested
that the consolidation of Dubai Holding's real estate interests
with Emaar Properties may be the Dubai government's attempt to
create an artificial floor for prices in the real estate sector.
Even if supply of properties continues to outstrip demand, he
explained, developers can continue to charge high rents
especially in their most expensive units if they no longer have
to fear undercutting from rival developers within the Dubai Inc
empire. The consolidation of Dubai's top real estate firms is a
necessary thing for the market says Colliers International's
Middle East CEO John Davis, especially in light of the severe
price drops in rents and asset values over the last year. Davis
told econoff that there continues to be a real oversupply of
residential and commercial properties in the market (as much as

DUBAI 00000354 002.2 OF 003


38,000 by years end, according to Paul Koster, Chief Executive
of Dubai Financial Services Authority),which have led to
declines in real estate values up to 50 percent across Dubai
compared to this time last year.




5. (C) Davis suggested that the supply-demand balance in the
property market will remain uneven in the near term, especially
since many investors traditionally sit on their cash through the
summer months, historically a slower period for real estate
deals. Additionally, Kohlhase told EconOff in an earlier
meeting that the supply in both commercial and residential
properties is expected to double by 2011, without a similar
increase in demand expected. The weakened demand also coincides
with predicted declines of eight to 17 percent in Dubai's
population in 2009 (resulting primarily from the departures of
third country laborers),as noted by UBS and EFG Hermes banks,
respectively. (Comment: Standard supply-demand models do not
necessarily provide an accurate predictive tool in Dubai's case.
Many real estate investors -- particularly Gulf Arabs and other
wealthy individuals -- would rather remove a unit from the
property market than rent or sell at a low price, and can afford
to do so. Similarly, if the Dubai Government is the owner of
much of the new real estate coming on the market, it can
--presuming consolidated decision-making in this area --
regulate the number of units it chooses to put on the market in
order to artificially maintain a desired supply-demand ratio.
End comment.)



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IN COME INVESTORS, OUT GO SPECULATORS

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6. (C) Collier's International assesses that Dubai's real estate
sector is undergoing a natural evolution from the largely
speculator-end user driven market that made headlines in recent
years to a more stable value investor driven market, where the
price-to-yield gap continues to narrow from previously wide
margins. According to Colliers, there has to be a necessary
convergence of buyers and sellers in order for the
price-to-yield gap on properties to achieve a reasonable margin
to facilitate growth in deals, especially investor driven deals.
Value investors, who now make up an increasing percentage of
Dubai's real estate market, look for deals with depressed unit
prices or average returns of between 25 and 40 percent in order
to mitigate the still-outstanding risks in the market. It is
not clear whether prices have fallen to a level that would
guarantee those significant double-digit returns, especially
with rents continuing to be depressed. Also, it remains to be
seen what price point these value investors will eventually
reach with the newly-consolidated Dubai Holding real estate
venture that clearly would like to see prices stabilize and
begin to move up.



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DUBAI'S NEIGHBORS SEE OPPORTUNITIES

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7. (C) The local and regional press report almost daily about
investors from neighboring Gulf countries eyeing deals in
Dubai's beleaguered real estate sector. However, the latest
report that Kuwaiti-based investment fund, Al Mazaya Holding,
announced plans to deploy as much as USD 100 million
specifically to target distressed Dubai properties remains
unverified. As Moody's and Colliers International suggested,
the bulk of the real estate investors, most of whom are Dubai
based, remain on the sidelines during the summer months and
especially in light of the recent consolidations. Also, the
speculation surrounding the potential high profile government
bailout of Nakheel property development company has flamed the
fires of uncertainty and complicated the prospects of a quick
recovery. Nevertheless, in its press statements, Al Mazaya
Holding insists that it sees this period of market depression as
a real bottom for Dubai, especially in many of the high end
property markets. Al Mazaya is planning investments in the Palm
Jumeira, Burj Dubai and Dubai Investment Financial Center

DUBAI 00000354 003.2 OF 003


(DIFC); entry into the distressed property market therefore may
make sense for the company, as a depressed lower end of the
market would likely delay eventual increases in the higher end
properties it intends to target.



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COMMENT

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8. (C) The consolidation of Dubai Holding's property interests
and the upcoming merger with Emaar Properties is welcomed by
many market participants as an overdue "re-centralization"
within Dubai Inc. The competition that developed over the past
several years between rival real estate and development firms
(and their ambitious CEO's) within the Dubai Inc empire may have
served the Dubai leadership's desire for "firing on all pistons"
development, but came at the cost of coherence and, ultimately,
sustainability. The market is very clearly over supplied, with
thousands of additional commercial and residential units nearing
completion. The consolidation is also therefore a measure
intended by the Government to stabilize and locate bottom for a
real estate sector that has been in freefall since the last
quarter of 2008. END COMMENT.
SIBERELL