Crumbling Block

Some experts opine that it was evident that Dubai s real-estate market was not sustainable in the long term,since it was not driven by end-user demand. For a long time now,a large number of apartments there have been standing unsold,held largely by speculators or investors who had bought them to sell them at higher prices. The big question now is how many of these investors have the ability to service their mortgages, says Devinder Gupta,country head of Century 21.

Deepali Bhargava of ING Vysya Bank describes the debacle as another credit scare in the market.

According to data from Emirates Bank Association,western European nations hold the bulk of loan exposures in the UAE and these borrowers are well capitalised. Thus the problem may not be as big as the sub-prime crisis but its likely to raise risk aversion in the equity and bond markets,especially in emerging economies.

INSULATED?

Some experts strongly feel that the Indian market would remain largely unaffected. Ashish Balla,MD of Millennium Spire,a global investment management company,says,The impact of the crisis will not be major on the Indian real-estate market,which is largely driven by domestic fundamentals. But the debt crisis may drive banks to tighten their credit policy,a move that could jeopardise credit flow into the realty sector.

Anuj Puri,country head of Jones Lang Lasalle Meghraj,explains that there are two real-estate markets to consider in this situation the one in India and the other in Dubai . The Indian real-estate market hinges on four factors demand,supply,finance and sentiment. At this stage,sentiment is vulnerable and may get hit,while demand,supply and finance would remain untouched. What is happening in Dubai is a corporate default situation. However,the sovereign has not defaulted,so the condition is presently restricted only to the real estate. This would not have a major direct impact on India s real-estate market,which is largely locally driven.

Some experts say that there would be a negative impact on Indian developers in Dubai ,since this is a situation where prices are expected to come down in Dubai . These players would have acquired projects to sell them at a particular price. With pricing taking a beating,the profitability of these projects is likely to decline. Construction companies that had gone to Dubai to carry out contract jobs would also be affected. Payments would get delayed and project sizes would be curtailed,thereby affecting their bottom line. Many projects will get delayed or scrapped,meaning decrease in business. Commitments from Dubai-based companies into India will also reduce, says Puri.

THE DISTRSSED LOT

Sobha Developer is building two residential towers in Dubai and is planning to build two hotels in Dubai and one in Oman.

Indian realty firm Omaxe has an exposure of over 9.6 million through a joint venture which it now wants to exit. The company has made payments to the tune of about Rs 40 crore and had plans to invest about Rs 2,850 crore in Dubai . However,the company is now exploring exit options from these projects.

BSEL Infrastructure is another company that is building a waterfront project and six towers in the Emirates City at a cost of Rs 1,762 crore. It has a total investment of 375 million in the UAE. The management believes that its turnover could decline by

10-15 per cent.

CRUMBLING PROPERTIES

The fall in Dubai property prices has gained momentum over the past two weeks with rates going back to pre-2006 levels. According to a local real-estate analyst,the property market in Dubai could fall by up to 30 per cent from current levels its already down 50 per cent from last years levels and may take more than a decade to recover.

For Dubai-based affluent non-resident Indians,the investments in leveraged assets may be depressing with the collapse of real-estate prices. They will need additional funds as margin calls may force them to sell some Indian assets.

Till now they had made good use of easy credit lines in the past two years. Some of them even made investments using leveraged money,investing in India-focused funds,buying freehold property and Indian shares through participatory notes. The situation is now so bad that many of these people will have to sell their leveraged assets,may be at a loss,to meet margin calls or to retire debt, says a Dubai-based real-estate analyst.

A CLOSE SHAVE

Meanwhile,some Indian developers have got away unscathed even after making some initial moves for joint ventures with Dubai-based developers. One example is DLF. Its ambitious joint venture with the UAE-based real-estate firm Nakheel for two mega township projects that would have seen the two firms pump in 10 billion in India was recently shelved. These ventures would have marked Nakheels entry into the Indian real-estate market. The deal was inked in August 2007.

DLF executive director Rajeev Talwar says they have no existing projects with Nakheel. Another DLF official said that due to the non-availability of land,the DLF-Nakheel memorandum of understanding turned into a dead letter. Since there is no land,where is the question of any development? he said,adding,The deal between DLF and Nakheel has been off for some time now. Its an old story.

Nakheel,part of the debt-laden Dubai World conglomerate,has to its credit renowned projects such as The Palms,Dubai Waterfront and The World. When at crisis occurred,it was working on various other projects amounting to more than 30 billion.

Nakheel had stiff competition back in Dubai in the residential sector from Emaar Properties,which has a 50:50 joint venture with Indian company MGF.

According to a spokesperson of Emaar MGF,the company has operations only in India and the developments in Dubai have no impact on Emaar MGFs business or operations.

Our business and funding plans are on track. The recently announced plans in respect of debt of Dubai World have no impact on Emaar Properties financial position or operations or its ability to meet any obligations. The company has a strong balance sheet of 17 billion approximately and in comparison has a very low debt obligation net debt to net worth of 18 per cent. Significant stable stream of rental revenue,unlevered operating assets and superior cash flows enable the Emaar Properties to meet all its obligations. Emaar has not asked for any external support and maintains good financial strength, the company said in a statement.

THE FINANCIAL IMPACT

Dubai World,which accounts for about half of the 80 billion of debt of the Dubai government,could impact portfolio inflows into the country if investors get scared of investing in emerging markets,thereby impacting liquidity in countries such as India if investors withdraw to safer havens.

The global rating agencies Samp;P and Moodys have downgraded the credit ratings of several government-related entities in Dubai . The implications are likely to keep the market on tenterhooks.

In terms of the exposure of Indian banks to the UAE,except for a couple of banks,others are unlikely to be having significant direct exposures. Even in the case of the former,the principal payments of their loans start only in 2010-2011.

THE CONSEQUENCES

Nevertheless,it is conceivable that the RBI may take a cautious approach in terms of liquidity in the real-estate sector,which would not be good news in light of the fact that FDI norms for Indian real estate are on the verge of being relaxed, says Puri. It is also fairly likely that for some time to come the Indian companies that had planned to expand into Dubai will prefer to consolidate their operations within India.

For Dubai-based institutional and other investors,Dubai will now become more attractive because of the reduced pricing. Hence,they will focus their investments within Dubai rather than look at India for investments. Finally,there would be real danger on global scale if the sovereign defaults,in which case everyone India included would face issues, says Puri.

THE FUTURE

Some experts say any kind of specific predictions would be premature at this time. The next few weeks will reveal whether the Dubai situation will stay at the corporate default level or escalate into sovereign default, says one investment banker. l

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