Aldar Properties bailout poses FDI problem for UAE and local bourses

Abu Dhabi is putting the finishing touches on a bailout package for the emirate’s largest developer, Aldar Properties, which would otherwise go bankrupt.

However this is likely to raise the state shareholding in Aldar from 38 per cent to above 50 per cent, effectively nationalizing the company. The US did very much the same in bailing out General Motors and Citibank.

Abu Dhabi’s realty bust

The reason for Aldar’s financial problems are well understood. Abu Dhabi started its property boom several years after Dubai and so missed out on a major part of the 2003-8 boom in the emirates. Property was sold at prices benchmarked to inflated Dubai prices and the whole market never enjoyed the initial phase of the boom.

Thus Aldar sold property at prices that subsequently fell putting off-plan buyers into negative equity and encouraging defaults, while the developer paid top prices for construction work.

But the scale of Aldar’s projects have ultimately been its downfall as they have left too much capital tied up in large schemes of dubious economic value. That is to say difficult to sell or rent or operate profitably in the current market at prices that will deliver a reasonable return on the investment.

So Aldar is forced back into the arms of its largest shareholder, thankfully the infinitely wealthy emirate of Abu Dhabi. But this process dilutes the investment of the original shareholders. They are the losers. True they risked their capital in buying Aldar shares. But this does rather undermine the myth that any investment backed by Abu Dhabi is a no brainer for commercial success.

FDI precedent

Future foreign investors offered what look to be instant profits by Abu Dhabi will therefore look much harder. If you cannot be sure when buying stock in a state-backed property concern then how wise will it be to invest in alternative technologies in the world’s first carbon neutral city, or even tourism related projects like Aldar’s Yas Island and Ferrari World?

Certainly you will look a little further than the glossy packaging and sales people. That said letting Aldar fail would be even worse, and to be fair investors have been given the downside protection they expected from Abu Dhabi to some extent.

On the other hand, local stock markets are unlikely to win investor confidence back until all the skeletons in the cupboards of local companies are put to rest. There is always the fear that more of the same lurk in the shadows, and often in financial markets such fears prove justified.

The markets will be watching closely this week to see how Abu Dhabi handles the interests of Aldar shareholders, and how this is balanced with the wider interests of the nation.