Union Properties record loss leaves questions for Dubai banks and real estate
Posted on 16 November 2011 with 2 comments from readers
How big is the hole that remains in the balance sheets of the UAE banking sector after the real estate crash of three years ago? Just how much empty property is left from that boom and how long will it take to fill up?
These are just a few of the unanswered questions posed by the record loss at Dubai’s third largest developer Union Properties. The group posted a $272 million loss for the third quarter, bringing total losses for the first three quarters to $409 million, double the losses of the same period last year.
Financial performance
This reflected some aggressive write-downs. Revenues in the past nine months were up 50 per cent to $872 million, so it is not as though cash flow has dried up, the normal indicator of a property firm in terminal condition. Union is a big Dubai landlord with strong rental income.
Total bank debt is also down from $1.78 billion to $1.58 billion of which $463 billion is repayable over the next 12 months. However, Union Properties is more than 60 per cent owned by its major banking creditor Emirates NBD, indeed it might be considered as the development division of that bank.
Now Emirates NBD is hardly likely to pull the plug on its own development arm. That would mean a fire-sale of assets that would fetch a fraction of their worth in better markets. By far the better option is to support Union Properties, albeit with some asset disposals if the price is OK, such as the Dubai Financial Centre Ritz-Carlton it sold for $300 million a year ago.
Premium assets
Union Properties has some fine slabs of premium Dubai real estate like the 80-storey Index skyscraper and the Dubai Motor City. Unfortunately that also means the company has its share of empty property in Dubai, particularly office space.
For empty property to fill up business activity must grow. That is happening in retail and hospitality but not the financial services sector. Union Properties will therefore have to stagger on, rolling over its debts but no recession lasts forever.
That said a long recession courtesy of the eurozone sovereign debt crisis would likely mean another refinancing for Dubai along the lines of the bailout by Abu Dhabi two years ago as the UAE’s lender of last resort.
2 Comments posted by readers:
My guess is that more bailouts will be inevitable. We must remember that this is definitely not a recession….it’s a correction!
Recessions are when markets take a breather for a while to re-adjust and refuel for further growth. This was a massive property bubble that will be correcting for at least another 2-3 decades.
I think Mr Paul King has encapsulated the current situation precisely and the long term looks bleak. I t seems to me that to construct an infra-structure that relies on attracting foreign business and workers at the expense of developing local talent is bound to fail in the long run. Furthermore,I cannot forsee locals taking up residence in the numerous empty high rise developments which are totallly at odds with their culture and upbringing.
Ed Note: Completely the wrong way around! If you were to depend only on ‘developing local talent’ failure would be absolutely assured – the expats will fill up the property as they already comprise 95% of the Dubai population. There are very few actual ‘locals’ – Dubai’s success is because it is an expat city and knocks the socks off any other place in this region for business efficiency. That leaves the locals immensely rich by the way… they have done pretty well developing their own talent!