Emaar Properties PJSC, the sprawling Dubai real estate developer, had a near-death experience this past week when its chairman made remarks hinting that it might increase its stake in its troubled Amlak Finance unit, a move that would saddle Emaar’s balance sheet with huge debt.
Emaar quickly denied any move was afoot to boost its holding in Amlak, telling the Dubai Finance Market that it had considered converting part of the debt to equity but was now weighing “other better and viable options.” Emaar’s shares ended a decline of nearly two weeks on Sunday to close 0.6 percent higher at 3.57 dirhams ($0.97)
Emaar, whose projects include the El-Burj tower, the world’s tallest skyscraper, isn’t yet out of the hole. The debt at Amlak, in which it has a 48 percent interest, remains unresolved, and its MFG joint venture in India continues to weigh on Emaar’s cashflow. Emaar itself faces a potentially rocky transition from reliance on Dubai real estate to a more balanced international portfolio.
“To be very honest, when I saw the first release I was anxious,” Yazan Abdeen, Dubai-based fund manager for ING Investment Bank, told The Media Line.
Abdeen said that after discussions with Emaar management he was convinced Chairman Mohammed Ali Alabbar’s remarks were misinterpreted by local media. “As far as I am concerned the Emaar investment story is still solid.”
While its El-Barj Tower has come to symbolize the excesses of Dubai’s once red-hot property market, Emaar has succeeding in remaining profitable even as home and office valuations collapsed and Dubai’s biggest companies were forced to seek relief from debts. Emaar, the United Arab Emirates’ biggest property developer, posted a gross profit of 3.4 billion dirhams in the first nine months of this year, a 25 percent increase from the same period in 2009.
Unlike much of Dubai, where the government and state-owned companies amassed a combined debt of more than $110 billion, Emaar financed its vast construction projects with minimum leverage.
But if the company is forced to convert loans it made to Amlak – once one of the Gulf’s biggest Islamic home-finance companies — into shares, its stake would grow to 66 percent, Majed Azzam, a property analyst at HC Brokerage, estimated in a report December 16. That would force Emaar to list all of Amlak’s debt on its books, raising Emaar’s net debt to 17.6 billion dirhams from 6.7 billion dirhams. If Amlak ends up writing off part of its loan book, property portfolios and other assets, its total capitalization needs could reach 4.6 billion dirhams or more, Azzam estimated.
Emaar also has made a 1.3 billion dirhams loan to its Indian joint venture, Emaar MGF Land, which the latter is supposed to pay from the proceeds of a planned initial public offering. Three previous attempts to conduct an IPO have failed, and sentiment for new shares remains weak while Emaar MGF has suffered “reputational damage” from problems with the athletes’ village it constructed for the 2010 Commonwealth Games, Azzam said. If the loans aren’t repaid, Emaar may end up holding 51 percent of the joint venture and consolidating all its debt on its books as well, he said.
Emaar is counting on a successful diversification of its real estate portfolio, a move that would not only provide more varied income streams but also enable it to raise capital outside of the UAE.
Alabbar said in November that he expected the property surplus in Dubai to ease in another 20 months. But even with conditions improving, Emaar aims to reduce its exposure to the tiny city-state’s real estate market. He said the company aims to generate nearly half its revenue from outside in Dubai from projects it is developing in Syria, Lebanon, Algeria, Saudi Arabia and Egypt within the next few years. Today, 80 percent comes from Dubai.
“Emaar’s contribution from international revenues is increasing by the day,” said ING’s Abdeen. “Emaar will eventually be able to tap the Indian, Egyptian and Syrian markets. They can tap the market not only as real estate-building company but as a mall owner and operator. Their diversification of the business in Emaar, in addition to geographical diversification, is a major de-risking component of their future cash generation capabilities.”
HC’s Azzam, however, warned that international market will give Emaar lower volume and profit margins. Deliveries of new units will drop 44 percent in 2011. While they will pick up again in the next two years, revenue will remain much below what 2010 estimated levels. HC forecast Emaaar’s revenue at about 11.3 billion dirhams this year, falling to 6.6 billion in 2011 and 7.5 billion in 2012.