Money in the market

source Arabian Business

How some big players are keeping cash flows positive?

A question on any developer's mind will be ‘where is the money coming from? Answers need to be found at all stages of the development process, from foundation to finish. Some involve the intricacies of project finance agreements, others just take a cash-up-front approach with any potential investors or buyers.

But in the season of the global credit crunch, international cash flow may be on the verge of drying up, so how can aspiring developments keep the money flowing in the right direction?
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Appetite for Islamic debt has been remarkably resilient to the credit crunch and shows just how low-risk investing in Gulf corporates is now seen by Western institutions.

Some reports suggest foreign investment may wane as a result of financial constraints in key economies, such as the US and UK. This, combined with rapidly rising prices in cities like Dubai, may encourage foreign buyers to look elsewhere or keep their money in their home markets - where property prices have been taking a battering.

Although it may only be a micro-trend, figures from REIDIN, a real estate research company indicate that less than 20% of purchases in Dubai in 2008 so far have been made by European or US investors.

This figure stands in contrast to the investments being made from overseas. Industry insiders suggest that developer spending in the GCC has reached around US $1.45 trillion, with 55% of investment in Gulf real estate projects coming from outside of the region.

There are methods to boost interest. Developers in the Gulf do continue to attract foreign investment, with newer firms now stretching further afield in search of funding.

Recently formed developer Azizi Investments is one outfit looking to overseas investment, announcing plans to tap into Russian investors with a stand at the International Property Show in Moscow in November.

"We are ready to take the next big step forward - to take our brand out to the wider international audience of new customers," said Merwiss Azizi, founder and chairman of Azizi. "We are ready for the international stage."

The company has already announced projects to develop 12 plots of land within Nakheel's Al Furjan development, to develop a five-star hotel within Emirates City in the emirate of Ajman and to develop 850000 ft² worth of land on the Palm Jebel Ali in Dubai.

It plans to acquire and develop an estimated 15 million ft² worth of land by the end of the year, and by 2010 to have acquired 165 million ft².

Azizi joins several other developers who have made concerted efforts to attract overseas investment, including Aldar and Nakheel, who are exhibiting in the US in October, and the UAE's GSS Holding and DaR Real Estate, who will also be in Moscow in November.

Other funding options, at least for the bigger players, include share offers. Unconfirmed reports suggest Damac Properties is preparing to launch an initial public offering (IPO), planning to list on the Dubai Financial Market (DFM) by early 2009.

A spokesman at Damac Holding would not confirm or deny if an IPO is in the works, saying that any claims of a Damac Properties listing were ‘purely market speculation'. The company has announced plans to deliver more than 2300 units in 2008, followed by 7100 in 2009-10.

The company's Kuwait arm, Damac Kuwaiti Holding, is also keeping quiet about selling bonds and sukuk worth US $67 million. A statement issued on the web suggested the board would meet on September 1 to discuss the issue.

Though an IPO can bring a cash windfall for investment and expansion, things can also get rough in the markets. Just ask Emaar. The largest publicly traded developer in the Middle East took a pounding for several days in a row on the Dubai exchange after talk of the Dubai government moving to limit property speculation. The company was not alone. Aldar, Deyaar, Sorouh and Union Properties also suffered pricing setbacks during the same period.

Although the credit crunch may be discouraging individual investors, corporate money is still moving. Research by London-based law firm Trowers & Hamlins has shown that sukuk issuance in the Gulf jumped 17% in the last year to US $17 billion.

The research showed that Western institutions were the majority purchasers of Islamic debt, now accounting for around 60% of take up.

"Appetite for Islamic debt has been remarkably resilient to the credit crunch and shows just how low-risk investing in Gulf corporates is now seen by Western institutions," said Neale Downes, a partner with Trowers & Hamlins, in an interview with Arabian Business.

"A few banks in the region have taken sub-prime write downs, but there is so much liquidity in the Gulf with the high price of oil, that recapitalising these institutions has not been a major challenge," he said.
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While real estate once dominated sukuk issuance, the company's research indicated increasing diversification. Just 37.5% of Islamic bonds issued were by corporate entities in the real estate sector, compared with 60% last year.

Large development companies are not running shy of asking for cash from banks either. Union Properties is in the market for US $1 billion of finance to pay for projects. It has approached both local and international banks in an effort to arrange a loan. The company is reportedly happy to consider both conventional and Islamic finance options.

And it seems international banks appear keen to get a slice of the Gulf action. Cagamas, a Malaysian mortgage firm is looking to set up secondary Islamic mortgage companies in the Middle East according to reports from Reuters. The move has been driven by what the company perceives as rising demand for a range of Islamic products in the region.

All these activities point to plenty of money being on the move and a keenness on the part of finance institutions to make cash available to Gulf developers. Project finance structures are also being employed to release funds.

If an asset can generate revenue, then funding through project finance is a viable option. The revenue generation aspect of project finance structures also makes it favourable for Islamic finance transactions, since return comes from revenue not interest.

As a system of funding, project finance has been born out of methods to pay for large infrastructure projects, such as power stations, telecommunications infrastructure, refineries, petrochemical complexes and pipelines. But it is also being used to fund the large-scale property development projects so common in the Middle East.

As funding needs to be found to take advantage of the opportunities available throughout the Gulf, more innovative financing methods are bound to develop. These methods may amount to developers finding new ways to get money from the end user, or attracting more buy in from the big banks.