Aldar Sorouh Properties formed in $12.8bn mega merger with Abu Dhabi stake at 37% is it a buy?Posted on 21 January 2013 with 1 comment from readers
The boards of the state-dominated main Abu Dhabi property developers, Aldar Properties and Sorouh Real Estate have agreed a $12.8 billion merger of the two companies to create Aldar Sorouh Properties that they say will rival Emaar Properties in Dubai.
That might be true in terms of size but for recent performance their track records could not be more divergent. Emaar has successfully navigated its way through the global economic crisis and UAE real estate crash without incurring big losses or financial difficulties, while Aldar was bailed out by Abu Dhabi to the tune of $10 billion, around half the bailout arranged for Dubai World.
Private or state companies?
Sorouh was always a more conservatively run company and also did not have major uneconomic infrastructure projects like Yas Island thrust upon it by the Abu Dhabi authorities. That’s really always been the problem: are these really private sector companies or the development arm of the state?
True at 37 per cent the stake held by Abu Dhabi in Aldar Sorouh Properties is not so much bigger than the 32 per cent Dubai Government holds in Emaar Properties. And Emaar also benefits from its close relationship with the government, the Mohammed bin Rashid City joint venture being the latest example.
Sorouh also announced today that it is to sell $872 million of assets to Abu Dhabi half in infrastructure assets and the balance representing The Gate development on Reem Island.
It’s very difficult for analysts to assess the investment value of companies where the government plays such a major role. Abu Dhabi in particular has the financial muscle to make flowers blossom on the moon or to disrupt any venture that it dislikes. Major company appointments are also effectively in the hands of the governments.
That said if you want exposure as investor to the UAE property market without actually buying real estate then you have few other choices beyond contractors like Arabtec and Drake & Scull. In that case you need to be careful in appraising the recovery potential of Abu Dhabi which is lagging way behind Dubai and heading for overcapacity in many sectors.
Just because Abu Dhabi says Aldar Sorouh will be the equal to Emaar Properties does not necessarily make that so for investors.