$10bn Aldar bailout mirrors Abu Dhabi’s $20 billion rescue of Dubai two years ago

The second part of a $10 billion bailout of property developer Aldar by Abu Dhabi is very much a re-run of the $20 billion rescue of Dubai two years ago. In both cases a property boom went bust leaving huge debts, half-built projects and an oversupply of real estate.

The aftermath is debts that have to be rescheduled, consolidated and assets sold down. There is also a period of cutbacks and austerity that follows a period characterized by easy money and rapid growth.

Abu Dhabi’s cutbacks

This is very painful for those directly exposed. The austerity of Abu Dhabi and absence of new construction contracts has come as a shock in the UAE that has otherwise enjoyed a year of high oil revenues and an influx of human and financial capital from the countries affected by the Arab Spring.

Abu Dhabi is the new Dubai bemoan contractors now waiting to be paid. Well, they waited 18 months for Dubai World to reschedule its $25 billion debt mountain, Abu Dhabi looks to be sorting things out quicker than that.

In January Abu Dhabi bought Aldar’s spectacularly expensive Yas Island complex including the Ferrari World theme park for $3 billion and paid $1.5 billion for housing and land. It also issued a $760 million convertible bond to state-owned Mubadala Development.

Yesterday came what looks to be the final clean-up of the balance sheet. This included the unfinished Norman Foster-designed Central Market sold for $1.5 billion, and 760 residential units as a part of infrastructure assets valued at $1.4 billion.

Aldar has downsized its staff over the past year. Like many of the broken Dubai developers Aldar now has to concentrate on facilities management and completing parts of its former portfolio such as the impressive Central Market.

What went wrong will doubtless be a business school case study in years to come. Did Aldar build too much, too late in the business cycle? Spend too much on obviously uncommercial projects like Ferrari World? Or simply misunderstand the nature of Abu Dhabi as a national capital rather than a commercial city?

This controversy is unlikely to be quickly or ever adequately resolved. The more immediate impact has been a reassessment in Abu Dhabi of the viability of all its construction plans.

Museums on hold

The first casualty has been the ambitious $15 billion museum island project, now suspended. Is this another Ferrari World with very limited financial payback and huge expense?

Abu Dhabi is of course very wealthy but is this a good investment? The one-third stake in Air Berlin acquired last week offers a solid and quantifiable return. Just what do you get from these prestige projects?

The Aldar bailout certainly suggests that you end up with very big bills to pay. Only Abu Dhabi can decide if it thinks this is value-for-money.