Bloomberg News

Abu Dhabi Economic Vision Dims in Dubai-Like Property Slump

November 15, 2011

(Add’s Sorouh cost cuts in second-to-last paragraph.)

Nov. 3 (Bloomberg) -- Abu Dhabi, the emirate that bailed out Dubai in 2009, set out to avoid the pitfalls suffered by its Persian Gulf neighbor with a decades-long plan to replace oil revenue with industry and tourism as drivers of growth.

Now those plans need to be scaled back as companies behind some of the sheikhdom’s biggest developments cut jobs and postpone projects, said Ghassan Chehayeb, associate director of research at Dubai-based Exotix Ltd. Delays include beach-front apartments, the first office building that makes more energy than it uses and branches of the Louvre and Guggenheim museums.

“Abu Dhabi has to face the economic realities,” Chehayeb said. The emirate’s plan “was a little too ambitious and they’re realizing now that many of those projects might not make as much economic sense as they initially thought.”

Abu Dhabi, the United Arab Emirates capital and the holder of 7 percent of the world’s oil reserves, plans to invest $500 billion in industry, tourism and culture to increase non-oil revenue to 64 percent of the economy from 41 percent from 2005 to 2007. In Dubai, debt-fueled property speculation drove up prices and spurred development until the global credit crunch in 2008 caused the market to crash.

The Abu Dhabi government hasn’t announced any changes to the development blueprint, called Vision 2030, since it was first published in 2008. The emirate’s Urban Planning Council wouldn’t say whether the plan is on track when contacted by Bloomberg.

Job Cuts, Delays

Aldar Properties PJSC, Abu Dhabi’s biggest developer, plans to cut its workforce by 24 percent as it focuses on existing projects and properties that generate steady income, the company said this week. Government-owned Tourism Development & Investment Co. said on Oct. 29 that it would delay the Zayed National Museum’s completion as well as the Louvre and Guggenheim branches due to the “magnitude of work.”

TDIC, which also develops hotels, cut its 2011 budget by 28 percent to 13.4 billion dirhams ($3.6 billion), according the prospectus for a $3 billion bond sale in July. The sale was postponed.

Masdar, a $22 billion state-owned renewable energy company, shelved plans for a 100,000 square-meter (1.1 million square- foot) headquarters building that would produce more energy than it uses, it said in September. A year earlier, the company scaled back the zero-carbon ambition for its purpose-built city and delayed the city’s first phase by two years to 2015.

‘Liquidity Problem’

“They are downscaling to reality,” said Saud Masud, an analyst at Dubai-based Rasmala Investment Bank Ltd. “You don’t have ample liquidity today to finish projects. Abu Dhabi as a sovereign state is solvent, but there is a liquidity problem in sectors like real estate.”

While Dubai took a more high-profile approach to its growth, constructing the world’s tallest building and palm tree- shaped islands, its more conservative neighbor developed beaches and seaside promenades and used natural and man-made islands to serve as centers for culture and entertainment.

Both markets have been hurt by a drop in private investment in the region that has persisted since the global economic slump. For Abu Dhabi, that meant the state taking on a bigger share of development financing.

“When these projects were announced and the government- related entities established, the government was told that most of the funding could be raised privately,” said Mohammed Ali Yasin, chief investment officer at Abu Dhabi-based CapM Investment PJSC. After succeeding up to 2009, the companies failed to raise additional money and the state had to step in, he said.

Slower Fall

Abu Dhabi opened its property market to foreign buyers in 2005, three years after Dubai, and the full effect of the property slump there didn’t appear until about two years after its neighbor.

The Abu Dhabi Securities Market Real Estate index has dropped 47 percent this year, while the Dubai Financial Market Real Estate and Construction Index has slumped 22 percent.

Planning Council member Michael White said last year that Vision 2030 was on target overall, though there would be “more tempered economic growth” and slower population growth. The plan estimates a population of 3 million in 2030. It was 1.6 million in mid-2010, according to government statistics.

Ferrari Park

Aldar, which is building thousands of homes and offices across Abu Dhabi, will cut 105 jobs, the company said in a statement on Oct. 31. The government agreed in January to buy assets from the developer including a Ferrari theme park and convertible bonds for 19.2 billion dirhams to help it pay creditors.

Both residential and office prices and rents in the U.A.E. are expected to fall over the next two years as new properties are added to a glutted market.

Abu Dhabi, home to one of the world’s largest sovereign wealth funds, spent $20 billion in 2009 to shore up Dubai’s state investment companies, which were struggling to repay debt. It also provides support for the poorer northern emirates.

“The scale of debt that Abu Dhabi government-related entities built up was the slightly untold story of the Dubai debt crisis,” Rachel Ziemba, a senior analyst with Roubini Global Economics LLC, said in a telephone interview. “At this point, they’re more worried about 2014 and 2015 than about 2030. The fact that they’re adapting and rationalizing and looking at some of the projects and entities is a good sign.”

Museum Delays

The delayed museum projects are part of the emirate’s planned cultural district on Saadiyat Island, which state tourism company TDIC calls the Island of Happiness. The museums were originally due for completion in 2013 and 2014. New dates will be announced after a review, TDIC said on Oct. 29.

TDIC also postponed Saadiyat Beach 20 and Saadiyat Beach 21 apartments and Saadiyat Marina Tower on the island, according to the bond prospectus.

“The government has a massive war chest, but they don’t want to keep throwing good money after bad,” Exotix’s Chehayeb said in a telephone interview. “Aldar is strategically important for the government, but its business model is focused on third-party developers who don’t have the appetite anymore.”

Sorouh Real Estate Co., the emirate’s second-biggest developer by market value, reduced its sales, general and administrative costs by half since 2008, mainly through a reduction in headcount, the company said today by e-mail.

“It would have been naive for people to expect plans not to change and be amended, given all the events that have occurred in the world since 2008,” CapM’s Yasin said.

--Editors: Ross Larsen, Andrew Blackman

To contact the reporter on this story: Vivian Salama in Abu Dhabi at vsalama@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net. Andrew Blackman at ablackman@bloomberg.net.


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