Size Matters: Gulf's Builders Get Bigger to Face Property Slide

(Bloomberg) -- Some of the Persian Gulf’s biggest builders are scaling up to pool resources as they try to confront a property market slump that has lasted longer than most expected.

Aldar Properties PJSC ’s purchase of 3.7 billion dirhams ($1 billion) of real estate assets in Abu Dhabi is the latest in a series of recent acquisitions and joint ventures between large developers in the United Arab Emirates as values drop in the sheikhdom’s biggest city states.

“It was always expected that oil prices would recover quicker, allowing government spending to come back up, and so far that hasn’t happened,” said Faisal Durrani, head of research at broker Cluttons LLC. “So it makes sense that developers are looking to consolidate or are seeking efficiency through economies of scale.”

Aldar purchased assets including Cranleigh School Abu Dhabi, Westin Golf & Spa and the Eastern Mangroves Complex from state-controlled Tourism Development & Investment Co. The acquisition includes 14 properties in operation as well as land and projects under development on Saadiyat Island, home to Louvre Abu Dhabi museum, Aldar said.

Emaar Properties, the Dubai-based developer of the world’s tallest tower, and Aldar in March agreed on a partnership to develop 30 billion dirhams of real estate projects in the U.A.E. and abroad.

Tumbling Values

Real estate prices on Saadiyat Island have fallen 26 percent since 2015 as lower oil prices led to slower economic growth and sapped confidence among buyers, Durrani said. Across Abu Dhabi, prices fell by 7 percent last year, he said.

“Acquiring assets on Saadiyat Island presents Aldar with an unprecedented opportunity to add significant value to its portfolio,” Chief Executive Officer Talal Al Dhiyebi said in a statement on Monday. The deal will add about 120 million dirhams a year to the net operating income of Aldar’s asset-management unit after it’s completed at the end of June. Shares of Aldar, Abu Dhabi’s largest developer and the builder of a Ferrari theme park, fell 1.4 percent to 2.06 dirhams on Monday in Abu Dhabi.

The picture in Dubai hasn’t been much better. The value of real estate sales in the first quarter was 18.8 billion dirhams, about half of what it achieved in the same period a year earlier, according to data from the Dubai Land Department.

Residential rents fell 10 percent to 15 percent last year, according to various estimates, while selling prices declined at a slower pace. A recovery isn’t likely before 2020, when Dubai is set to host the World Expo, S&P Global Ratings said in a report in February.

In response to the slowdown, developers are increasingly cooperating on projects rather than competing. Emaar is developing Dubai Creek Harbour with Dubai Holding LLC, and the 11 million square-meter (118 million square-foot) Dubai Hills Estate with Meraas Holding LLC.

Lenders in the country are lobbying the central bank to change regulations that limit the amount of real estate lending they’re allowed to make, Abdul Aziz Al Ghurair, the chairman of the U.A.E. Banks Federation and CEO of Mashreqbank PSC, said this month. Many banks are close to reaching that limit or have already exceeded it, he said.

“Some consolidation was inevitable,” said Durrani of Cluttons. “If one developer has experience in hospitality and retail projects, and another in waterfront residential projects, it makes more sense to combine their assets and experience.”

To contact the reporter on this story: Matthew Martin in Dubai at mmartin128@bloomberg.net.

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Ross Larsen, Vernon Wessels

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