A catalyst for recovery: The government is working to restart stalled projects

The construction sector in Dubai was hit hard by the 2008-09 global economic downturn. Indeed, the constraints on financing slowed the pace of building work altogether and made many investors cautious about stumping up money before projects were completed. In mid-2011 and 2012 the market began to turn around slightly, buoyed by steady development activity at home and in a handful of nearby markets, such as Saudi Arabia and Qatar. At the time of writing, the UAE was on course to receive more than $15bn worth of construction contracts by year-end 2012. Following the downturn, Dubai’s government has introduced a series of new programmes designed to restart stalled real estate projects in the emirate, encouraging banks to lend to developers and boost foreign direct investment in the sector. These initiatives have played a key role in facilitating the turnaround currently under way, and they have the potential to jumpstart activity in the sector further in the coming years.

EARLY STAGES OF RECOVERY: The industry has suffered substantial losses in the wake of the crisis. As of April 2012 some 291 construction projects were on hold in Dubai, according to a report released by the Dubai Land Department (DLD), the emirate’s property management arm. The same report also notes that just 165 projects were completed in Dubai between 2009 and April 2012, which is indicative of the challenging finance situation locally in the region at large.

Of note, contractors are currently awaiting decision as to whether to restart development of the Dubai Towers and a number of infrastructure projects. Whereas, a number of other projects have been approved or completed, including the Burj Khalifa, Jumeirah Lake Towers, Dubai Marina and Palm Jumeirah, among others. Since 2011 developers have been largely optimistic about future growth, largely as a result of the government’s efforts to encourage recovery.

Bashar Kamal, the managing director at Actco, told OBG, “We anticipate 2013 will build upon the slight improvements we witnessed in terms of contract awards in 2012. Renewed government investment in infrastructure and a possible increase in confidence of the private sector are the factors contributing to this positive turnaround.” The Real Estate Regulatory Agency (RERA), which is under the DLD, announced in April 2012 that all of the 291 stalled projects will likely eventually be completed, albeit behind schedule, due largely to government-sponsored recovery programmes. As of early 2012 the construction market was also beginning to show signs of recovery. Land transactions, for example, made in the first quarter of 2012 were worth Dh63bn ($17.15bn), up by more than 20% year-on-year from 2011, according to the DLD.

GOVERNMENT BACKING: In late June 2010, when the market was being particularly hard hit, the DLD announced the creation of the Tayseer initiative, with the goal of linking “banks and banking institutions on the one hand, and high-feasibility and guaranteed real estate projects” on the other, according to the DLD. Since it was launched in mid-2010, the programme, which connects high-quality development projects already under way and in need of funding with banks and other financial institutions that are willing to lend, has had a significant impact on the sector.

The Tayseer initiative was started alongside a shortlist of 40 projects that were viewed as ideal candidates for assistance. The list of was made up of projects at least 60% completed, located in a handful of central neighbourhoods and that were being completed on schedule by an approved contractor. These projects which accounted for almost 30% of the total developments under way in Dubai at the time, all benefitted from their location in built-up areas, such as Dubai Marina, Jumeirah Lake Towers and Business Bay, all of which possess high-quality infrastructure and solid transport links to neighbouring areas. The initial shortlist involved those that were nearly finished and had a good chance of selling upon completion.

After pitching the Tayseer programme to a handful of the UAE’s leading developers, many of which were involved in projects on the shortlist, the DLD approached 15 local financial institutions in order to gauge interest in the new initiative. In early August 2010 Dubai-based Emirates Islamic Bank (EIB) became the first bank to sign on to the initiative.

By receiving accreditation under the new programme, EIB agreed to offer project and end-user financing at competitive rates (with government backing) in an effort to encourage developers to finish their projects and end-users to purchase property. As of the end March 2011, seven banks in total had signed on to the programme, including EIB, Dubai Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Noor Islamic Bank, Abu Dhabi Commercial Bank and Ajman Bank.

By mid-2011 the DLD’s list of approved properties had grown to 114 projects in the emirate. In late September 2012 the first project funded through the initiative was completed. The Dh300m ($81.66m) Lakeside Residence tower, located in the Jumeirah Lake Towers neighbourhood, was completed with the help of Dh65m ($17.69m) in funding from Mashreq Bank delivered via the Tayseer programme. Al Manal Development, a private firm that has been active in Dubai since 1991, was able to complete the 35-storey tower after it received funding through the new scheme in March 2011. As of the date of completion, around 80% of the 358 units in the Lakeside Residence property had been sold. Al Manal planned to lease the remaining 20% of the building.

THE DEVELOPMENT: In September 2011 the Real Estate Investment Promotion and Management Centre (REIPMC), which is under the DLD, launched the Tanmia (“development” in Arabic) initiative. Like Tayseer, Tanmia was designed to match up stalled projects with investors and developers looking to enter the market. Unlike Tayseer, the Tanmia initiative does not solely target local banks. Instead, the more recent programme serves as a clearinghouse for stalled projects. Under Tanmia, the REIPMC seeks to attract private developers, state-owned investment firms and any other local or foreign entity that has the capability to complete a stalled project.

According to the centre, the Tanmia initiative was developed to: energise the real estate sector in Dubai; reduce the number of incomplete projects in the emirate; settle any pending issues in the market; revitalise the sector in general; boost Dubai’s attractiveness as a destination for real estate investment; reactivate developers’ investment portfolios; and offer a broad set of options by building a portfolio of projects in varying sectors and geographical areas.

Both developers that control stalled projects and investors looking to move into the market can approach the REIPMC for access to the Tanmia initiative. The centre maintains a database of projects – much like Tayseer’s short list – that are in need of investment. Any stalled development can be nominated for inclusion by a developer, pending a review of the project by the REIPMC. Additionally, investors looking to launch a new project in the emirate have been encouraged to approach the centre for assistance under the initiative. As of late July 2012 the REIPMC was auditing approximately 100 projects for inclusion in the Tanmia programme, according to local news reports. The auditing process involves exploring all the financial and legal aspects surrounding a project and each company involved, including whether or not there are any claims against an existing developer; whether or not an existing developer has cancelled a project outright or simply put the project on hold; and whether or not escrow accounts or other similar financial arrangements are in place. Once the REIPMC has cleared a project to move forward, the centre will work with the developer and investors to draw up a development strategy. By the end of 2011 around 16 projects were undergoing auditing as part of the Tanmia initiative.

NEW PLAYERS: In late June 2012 Pacific Ventures, an Indian developer based in Pune, acquired two projects in Dubai under Tanmia, becoming the first company to do so. The group intends to spend Dh50m ($13.61m) to complete two projects – renamed the Pacific Residencia and the Pacific Edmonton Elm – in the Jumeirah Village Triangle area. The projects represent the firm’s first foray outside of India. According to Parvez Khan, the chairman of Pacific Ventures, the acquisition of the projects under Tanmia took around four months, and the company expects them to yield substantial revenues in the near future. “In the next four to five months prices will move up by 10-15% over today’s rate,” he told local media at the announcement of the acquisition.

As of mid-2012 construction work was under way at the Pacific Residencia project, and around 20% of the work on Pacific Edmonton Elm had been completed, according to the developer. Around 85% of the original investors in the latter project have agreed to stay on under the new payment plan introduced by Pacific Ventures. Meanwhile, around 40% of the units in Pacific Residencia had been sold when the firm took over. Most of these investors elected to continue with their participation in the project. At the time of writing, both projects were due for completino by 2014.