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Amidst the flurry of announcements by Rera (Real Estate Regulatory Agency) updating the list of cancelled projects, the question on every vested party’s mind was: When will the monies be finally recovered?
Ever since the freehold bust in 2008, a number of projects have stalled, and Rera and the Dubai Land Department have worked with developers and investors to revive a number of these successfully. However, their numbers are still considerable and investor funds remain stuck in them. The process of recovery remains a long winded one and investors, more likely than not, will have to wait further as the projects await liquidation.
Given the construction boom the city is undergoing at present, looking abroad may offer some solutions as to expedite the process, as well as allowing for these projects to be revived.
In other countries (notably the US, UK and, in some cases, India), resorting to capital markets has proven to be a more effective and timely way for the revival of such projects. In the US, an asset management company under the supervision of the government was formed, known as the RTC (Resolution Trust Corporation). It channelled existing investors (individual as well as institutional) as equity trust holders in the new holding company, which was subdivided into a land fund and a partially built property fund.
After initially emphasising individual sales (which proved tenuous), the RTC pioneered the use of equity partnerships to help liquidate such assets, by inviting private equity and institutional investors to own partial interests in a pool of assets thereby allowing the latter to diversify their risks. At the same time, this enabled the RTC (and by extension the government as well as existing investors) to participate in the upside of the portfolios.
The individual asset divestiture programme proved disappointing as potential purchasers were heavily discounting these assets given the uncertain nature of off-balance-sheet liabilities. The pooling of interest method allowed for an alignment of incentives between existing investors and new participants.
It was the most successful example of a public-private sector partnership that allowed for divestitures in a transparent and efficient manner, and later using the capital markets for residual divestitures. Most importantly, the RTC had the authority to mimic land payment plans being offered to developers elsewhere, thereby allowing it to invite a wider pool of investors and ensuring a higher pricing of the land.
In many cases, RTC’s shareholders decided to retain an interest in some of these developments through to completion, as many realised seeing the project through as being the most optimal to recover not only their capital but also enjoy profitability in later years. This model was used in the UK and in India, for the revival of certain infrastructure projects in Delhi.
It is apparent that in Dubai, potential new developers are discounting any asset acquisitions of stalled/cancelled projects for exactly the same reasons. New developments allow for staggered land payments and provide for the certainty of no litigation lurking in the form of off-balance-sheet liabilities.
For these reasons, earlier investors in stalled projects are being forced to either wait or having to accept a small fraction of their investments as recovery. An RTC type structure allows not only the capital markets to play its role of providing the most efficient form of pricing of such assets, it allows for new investors to diversify their risks by taking an interest in a diversified pool of assets. This makes them more amenable to taking on such opportunistic investments. More importantly it allows the existing “stuck” investors to participate in the upside of the real estate market.
To be sure, Rera and the Land Department have done a commendable job in making the process of cancellation as transparent and value maximising for investors as possible. It was never an easy task considering that many of the developers may have already left the country.
However, such a holding structure could possibly add impetus to the process, thereby bolstering confidence and allowing for value maximisation and upside to such investors.
Source: Sameer Lakhani, Special to Gulf News
The writer is the Managing Director of Global Capital Partners.