real estate consult dubai

Impact of Global Recession on

Real Estate in the United Arab Emirates

Eric P Stoclet

The Global Environment

Global Environment - Economy Global Recession?

o The World Bank expects the global economy will contract between 1 and 2% in 2009. Drop in trade to be “worst in 80 years” with global exports declining 2.1%, first drop since 1982

o International Labor Organization (UN) estimates 50 million jobs could be lost in 2009 Driven by over-leverage in many asset classes, in particular real estate De-leveraging to be long and painful and will re-shape global financial systems US estimated by many economists to start recovering only in 2010

o Q4 2008 GDP -6.2%, Warren Buffett: US economy has “fallen off a cliff”o March unemployment rate hits 8.5%, unemployment expected by many to reach double-digitso Case-Schiller housing index has dropped 28% from its peak and is still droppingo Some signs of “bottoming out”

Bank earnings for Q1 have beaten expectations though mostly on trading/fixed income generated revenues. Core businesses still show signs of stress

DJIA up 21.7% at 21/4/2009 from 03/09 low of 6,547, though still in negative territory for 2009 April University of Michigan Confidence Index: 61.9, up from 57.3 in March and better than

expectations of 58.5o IMF forecasts US to contract 2.6% in 2009

EU tends to lag the US by 6-12 monthso Q4 2008 GDP -1.5%;o January unemployment rate hits 8.2%o IMF expects EU economy to shrink 3.2% in 2009o Few signs of bottoming with possible exception UK seeing some glimmers of hope on real estate

front

Monday, April 27, 2009 3

Global Environment - Economy China slowing down, but there are positive signs

o Q4 2008 GDP +6.8%, slowest pace in 7 years, Q1 2009 saw even slower growth at 6.1%o December 2008 official urban unemployment rate rises to 4.2% (Chinese Academy of Social

Scientists estimates 9.4%) for the first time in 5 yearso March exports drop 17.1%, imports drop 25.1% year-on-year though this was better than

February‘s export drop of 25.7%o Signs of improvement on the back of USD 585 billion stimulus package implemented 11/2008:

Industrial output expanded 5.1% Q1 2009 and was up 8.3% year-on-year in March, against 3.8% in January and February

Fixed asset investment was up 28.6% in March from 26.5% in February. Spending on property development grew by 4.1% Q1 Retail sales remain strong, up 14.7% in March

o World Bank forecasts growth of 6.5% for 2009, Macquarie 7.5% - 8% India not faring well either

o Q4 2008 GDP +5.3%, down from average of 9% in last three years; Q4 growth essentially on the back of government spending Barcap sees 2009 growth of 4%, ADB 5%

o Official unemployment stands at 8.2% but statistics is believed to cover only organized sector of the economy which employs only 10% of the workforce

General view that recovery timing hard to predict and generally anemic


Global Environment - Economy


US Residential RE

US residentialo At 12/2008, down 28% from June 2006 peako Further drops likely through end of 2009, potentially 10-20%


US Commercial RE

Signs of distress are appearing in the US on the commercial real estate fronto Delinquencies have “rocketed”,…o as banks are tightening lending criteria across the boardo General Growth, 2nd largest mall owner in the US, files for bankruptcy in April 2009, one of

largest real estate failures ever in the US While delinquency rates are still much lower than in the early ‘90’s,outstanding loans are

more than 4X higher As a result, banks are already grappling with larger delinquent portfolios than in 1991


US RE When the Recovery?

For indicators to recover to pre-recession levels in 1990 it took:o from S&P/Case Schiller housing index high in 10/89, 8.3 years to recover (01/98)o from University of Michigan confidence index high in 09/88, 8.3 years to recovero from unemployment 03/89 low of 5%, 8.2 years to recover (05/97)

…and 1990 was a much milder recessiono Unemployment levels have already exceeded those seen in 1990s: 06/90 peak of 10.0 million

(7.8%); 03/09: 13.2 million (8.5%) With asset prices –in particular housing- fuelled by massive liquidity availability and all-

time low rates post 2000 internet bubble, will real estate prices ever see 2006/2007 highs again?


EU Residential RE

Housing prices in the US peaked several quarters before Europe though both followed very similar growth patterns

Comparisons between European countries inaccurate as data lacks consistency across countries (what is measured, timeliness, etc.)

Regardless, available data clearly shows EU housing market under severe stress:o Most markets show significant drop in priceso Data lag probably accounts for those markets that still showed positive growth in 2008


Source: RICS, Financial Times

EU Commercial RE

As the recession bites, values are dropping across all real estate asset classes and… generally across all EU geographies although prime locations are relatively less affected


The GCC

GCC Economic Forecast


467.

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159.

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116.

919.6

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56.3

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2008 GDP in USD billions at official exchange rate - Source: The World Factbook – CIAReal GDP Growth and Average Inflation from poll of 14 economists' forecasts - Source: Reuters

Consensus forecast for 2009 is for a substantial slowdown across all GCC economies with contraction in Kuwait and risk of contraction in some of the other GCC member countries

UAE Economic Forecast

Select drivers of the UAE economy and global prospects for 2009o Oil prices, which topped USD 140 pb in 2008 are currently trading around USD 50 pb

March poll of 30 analysts by Reuters indicates an average price of USD 49.73 pb for 2009o WTO forecasts of drop of 9% by volume in global trade for 2009

Among 45 countries for which World Bank has January trade data, average fall in exports from a year ago was 32%

o United Nations World Tourism Organization expects global tourism to drop by up to 2%o Financial services industry is contracting worldwide o Population in Dubai expected to drop (8% UBS, 17% EFG Hermes) in 2009o Substantial real estate oversupply in certain areas of the country and for certain asset classes, in

particular given global environment


Source: Reuters Source: US Energy Information Administration

UAE Economic Forecast


Some signs are pointing to a bottoming out:o Lending slowly coming back to the marketo DFM and ADX are up substantially from their February lowso Dubai USD 10 billion issuance has stabilized the marketo Abu Dhabi’s USD 3 billion bond issue was oversubscribed by more than 2 x by international

investors though it is still too early to tell when the bottom will be…

o Strong likelihood of further population decrease in Dubai with impact felt in September/Octobero Impact on Northern Emirates has so far not been evident but with Dubai becoming cheaper it is

bound to hurt

UAE Residential Real Estate – Abu Dhabi


Abu Dhabi residential prices started falling in Q4 2008 and continue to do so in 2009 (average listing prices down 20-25% for villas and 15-20% for apartments). Further drops (+/- 10%) are likely through year end

Rents have remained pretty stable from Q3 2008 through February 2009 after having registered substantial increases in H1 2008, and are likely to remain relatively stable through 2009

Source: Landmark Advisory



UAE Residential Real Estate - Dubai


Source: Collier’s International

Dubai residential peaked in October Dropped 8% through December and continues falling Apartment and villa rents topped out in Q4 and Q3 2008 respectively Forecast for 2009 is for further, fairly substantial, drops both in sales prices (apartments to be

more severely impacted than villas) and rents There appears to be a consensus that villa prices will remain stable though it is hard to justify

this given prospect of population decrease and dearth of financing


UAE Commercial Real Estate – Office Abu Dhabi


Abu Dhabio Office rental rates dropped on average 25% in Q4 2008 with Grade B and C office space

worst affectedo Nonetheless, Q4 2007 – Q4 2008 rent growth was 30%o Market to remain weak as big Abu Dhabi companies move into their purpose built offices


Source: Collier’s International, Asteco

UAE Commercial Real Estate – Office Dubai


Dubaio Office prices hit their high Q3 2008 and are estimated to have lost 30% sinceo Vacancy rate now exceeds 15%o Downward trend expected to continue through 2009


Source: Collier’s International, Asteco

UAE Commercial Real Estate - Retail


Average retail lease rates in Abu Dhabi dropped 10 – 14% Q4 2008 to Q1 2009

Yields remain relatively stable as capital values have decreased in line with lease rates

Corniche area has highest average lease rates at AED 3,300 psqm

Average rental rates range from USD 1,760 psqm to USD 2,346 psqm



Drop in tourism and population will continue putting significant pressure on rental rates

Current average rental rates are USD 1,615 psqm

UAE Commercial Real Estate - Hotel


Source: Collier’s International, STR Global, Emirates Business 24/7

Weakness in tourism given global economic situation and substantial number of rooms which came on line in 2008 and are scheduled to come on lin in 2009 does not bode well for the sector

By 2011, Abu Dhabi is expected to add 13,000 rooms with Dubai looking to add 9,000 rooms over the next three years

Dubai occupancy rates could drop below 70% for 2009 Because of its lack of supply, Abu Dhabi should be better able to retain high occupancy

levels

When the recovery?


De-leveraging is far from over Financing is key to the real estate market

Banks need to clean out existing portfolio, recapitalize and regain access to international debt markets, and believe that the worst is over

Equity investors will be looking at a number of opportunities in the “distressed” real estate arena worldwide and gauging where their investment risk/return is optimized; non-core markets are likely to be put on the backburner for 2-3 years

Job losses and businesses contracting will result in less demand and/or additional supply of real estate product in the markets

Existing oversupply has to work its way out of the system

2009 will be a difficult year for real estate in the UAERe-testing pre-crisis peaks in Dubai is unlikely for quite a while, if everReal estate will return to a more balanced pricing model with prices driven by real supply and demand dynamics and not pure speculation

All the pain has not yet been taken…

What Does It Mean For Your Institution?

Assets are worth less…

Supply is increasing in all real estate asset classeso Slowdown in the economy, population decrease

Businesses contracting, reduced needs for office and industrial space Retailers downsize, close stores and reduce their footprint

o World economy shrinking tourism down hotel occupancy rates dropping

o Past excess building of residential + foreclosures more housing on the market

Funding (banks, funds, private equity,…) is still extremely hard to geto Commercial real estate: Little or no ability to finance new projects and difficulties in rolling-over

existing financingo Residential mortgages are seeing some signs of life but not enough to make a difference


… and harder to dispose of

Non-performing Loans & Non-performing Assets will increase substantially over the next two years

Marginal loans (high loan-to-value –LTV-, poor cash flow) will default Most at risk: real estate financed in 2006 – 2008 in Dubai, 2007 on in other Emirates

Real estate developers and investors will have to liquidate assets in a “bear” market to meet loan maturities or risk defaulting

Banks will have little ability to sell repossessed real estate


Risk Assessment & Solutions

Credit Cycle in a Bank – Credit Sourcing & Approval


Credit Cycle in a Bank – Credit Delivery & Monitoring


Credit Cycle in a Bank – Remedial Management


Issues for Financial Institutions

Problem loans Past-due/Non-Performing Loans (NPL) Restructuring Collateral legal issues & value Write-downs Foreclosure/Non-Performing Assets (NPA) Risk Issues

o Underwriting process Portfolio/Lending criteria Due diligence process Risk management process

o Credit Administration Legal documentation Disbursement/Loan monitoring Problem recognition Remedial management

o Early warning Portfolio analysis

• Distribution (asset class, geography,…)• Aging• Covenant (LTV,…) deterioration

/Exception tracking Economic analysis

Organizational issueso Location in organization’s structureo Target settingo Compensationo Annual budgeting process

Visib

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Issue

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Root

Caus

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Addressing the Visible Issues

Diagnostic Assessment

Institution’s view on the economy? Asset growth & funding strategy? Capital & liquidity adequacy Review of existing credit policies Portfolio review

o Geographyo Asset classo Vintageo Level of NPLso Collateral valuation / coverageo Level of write-down / write-off

Review workout / restructuring strategies

o Loan modificationo Foreclosureo Liquidation

Staffing level & qualifications

Loan reviewso Significant portion of portfolioo Collateral and cash flow coverageo Covenant and covenant monitoringo Problem recognition

Review of non-performing / distressed assets

o Significant portion of portfolioo Collateral valuationo Legal review of documentso Action plans and effectiveness

Deliverables

One year/Five year asset/liability strategy for the business Recommendations:

o Portfolio monitoringo Loan monitoringo Early warning processo Problem recognition

Action Plans:o Write-downs / write-offso Reserveso Distressed / NPL workouts / restructuring / disposal strategies

Supporto Define strategy /approach with regulatory bodieso Dimension impact on stakeholders


Stage 2: Root causes

Diagnostic Assessment

As per Stage 1 In addition:

o In-depth review of credit policieso Full review of credit administration process, including regulatory reportingo In-depth review of staffing adequacy

Risk Managemento Credit Policies

Appropriateness Effectiveness Application Exception process & monitoring

o Approval process Independence Effectiveness

Credit Administrationo On-boarding new loanso Disbursement processo Loan monitoring (covenants, payments,…)o Collateral valuationo Legal process (documentation, amendments,…)

Organizational issueso Staffing adequacy and appropriatenesso Organization chart

Deliverables

Recommendations:o Credit Policieso Approval processo Credit Administration processo Appropriate organization structure

Action Plans:o Approval processo Credit administration

Supporto Define strategy /approach with regulatory bodieso Dimension impact on stakeholders


Thank you!

Thank you!

27 years banking experience, 25 with Citigroup

10+ years real estate financing; $3+ billion financing of commercial and residential real estate; mortgage portfolio purchases/sales; $2+ billion buy/sell-side advisory mandates; portfolio/asset management of $2+ billion investment in German non-performing mortgage loans

Workout/capital structuring skills gained restructuring exposure totaling $4+ billion during early ‘90’s US real estate crisis and 2002 Argentine crisis. Member of various creditor committees representing debt in excess of $20 billion

Senior Credit Officer of Citigroup with Real Estate initial

Hands-on experience in operations, financial controls, and risk management

Eric Stoclet


real estate consult dubai

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