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Tuesday / November 20.

There is money to be made out of distressed projects


Dubai’s investors play the waiting game in turning around cash-strapped ventures

Dubai: There is still money to be made from distressed projects in Dubai’s property market. And quite significant amounts.

Aqua Properties is going full steam ahead on a high-rise project — called the Limelight — at Dubai Sports City scheduled for completion by December. “It was a project that had gotten nowhere because the original developer had left the country and the apartment owners were left stranded,” said Ali Tumbi, CEO at Aqua. “When we came on board, we took up the whole business of reviving it and pumped in Dh60 million initially. Now, the project — which will cost about Dh500 million — is at the 70 per cent mark.”

But the real good news for Aqua will come closer to the completion date. Of the 730 apartments, 690 units were sold by the original developer before he skipped town. Since taking over, Aqua initiated contact with these buyers first.

“But of the 690 buyers, we found that 30-35 per cent were not reachable … and that’s not a bad thing as far as we are concerned,” said Tumbi. “We would have been happy to retain 100 per cent, but if that’s not going to happen, we won’t be unduly worried.

“In fact, as a financial model, this investment will provide quite a good return for us. All the payment receivables related to the project are now at two times what it would cost us to complete it. That’s actually healthier than what I would have got on a project if one were launched today.” (Aqua expects to channel about another Dh30 million to Dh40 million before completion and meet the rest of the funding requirements through apartment owners.)

Meanwhile, at Jumeirah Village Circle (JVC), Global Capital Partners recently restarted work on a ground plus five-storey residential building (with a built-up area of 125,000 square feet). The likely completion date is set for late 2019.

“We already have a lease commitment for the entire building in place,” said Sameer Lakhani, Managing Director of Global Capital Partners. “The pre-lease ensures there is no pressure exerted to go in for off-plan sales. And that allows us to either retain the building or divest to an investor looking for long-term rental yields.

“All of the research we did indicated that at the mid-end of the market (commercial as well as residential), single strata (in other words, single owner) buildings command a higher premia given that they attract single tenants. That in turn offers stable longer term rental cash flows.”

Most of the distressed projects currently with new investor-developers had their origins from the “first boom-bust cycle”. Between 2012-14, quite a few of these had changed hands with the Dubai Land Department and Rera [Real Estate Regulatory Agency] overseeing the entire process. “It is a rigorous set of steps that Dubai’s regulators have in place for reviving such projects … and thus the time taken to make the transition can get quite lengthy,” said Lakhani. “Our JVC project was revived after the requisite approvals were taken from the Land Department, Rera and the Dubai Courts.

Weathering the price cycle

“In the current real estate cycle, there have been no distress projects that have been registered to date. This could indicate that developers for the most part have weathered the price cycle much better this time around. This is obviously due to a combination of factors — the regulatory oversight on the part of Rera as well as the better capitalisation on the part of developers.”

Aqua Properties, meanwhile, will keep its options open on whether to take up further distressed properties or not. “Left to me, I would definitely go for others, but it’s best to wait until the property market picks up momentum,” said Tumbi. “It’s not as if distressed projects will suddenly disappear completely. The way I see it, there will be some becoming available over the next decade. There’s always be that one or two developers stuck with a project they can’t take forward.

“Distress is a natural factor of every property market.”

For Aqua, getting into development and buying up distressed assets is a more recent foray. It had started off as a pure-play brokerage firm and in 2013-14 decided to take up projects directly.

As far as Tumbi is concerned, development is where the money is these days. “Our direct development portfolio is Dh650 million as of now. On a group level, the development operations make up 80 per cent of revenues. In a good year for the property market, a brokerage business could fetch Dh5 million to Dh10 million. But even in a bad year, development and sales can still fetch you Dh20 million. That explains why being a developer is so vital for our revenue mix.”

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via GN