Large number of properties or mortgages are now on hold, rescheduled for completion, defaulted or awaiting reposition globally. Reports of problem loans and distressed properties are coming from all parts of the Emirates, but most of the trouble has surfaced only recently. At this point, nothing has been repossessed by lenders and according the Dubai Land Department contracts have not been canceled yet.
In most cases of troubled assets, which are mortgages and properties that are in default, the project or its owner has no liquidity. It is believed that much of the current defaults will eventually end up as master developer or bank/lender repossession, in a similar to the Plantation and Dubai Islamic Bank arrangement. However, it is expected more and more assets to become distressed soon.
It is impossible to calculate the value of the potentially troubled assets, but some statistics and reports from researchers and analysts help to illustrate its magnitude. A list of project cancellations and delays of properties has caused a stir among UAE residents recently. If the list is accurate, then approximately $72.563 billion worth of projects are on hold, and $3.275 billion have been canceled.
Distress spreads well beyond development
No property type is immune from the wave of distress, although most of the situations are associated with development of some kind. It is natural for failed developments along with associated land deals to be the first to falter, as these generate no revenue. This cycle includes quite a few projects where the lender faces liquidity shortage, leaving the developer in the lurch.
Apart from new developments, office and industrial properties have the greatest volume of distress.
However, if scaled to size by property type, distress in the office and industrial sector is low compared to others, particularly the apartment sector, which is experiencing more than its fair share of distress, although it is mostly concentrated in Dubai.
Troubled hotel and retail sector assets have seen its fair share of distress so far, but it could face far more in the coming months.
Distressed commercial properties have been identified in all of the Emirates. However, Dubai seem to host the vast majority of the current known distress. Few troubled situations have been reported from the newer property markets of Abu Dhabi, Ajman and Ras Al Khaima at this stage, but all have suffered a dramatic fall in investment.
Types of Trouble
A vast array of troubles at the property, ownership, or financing level can cause a property to become distressed, but three factors appear to be at the root of much of the distressed assets chronicled to date:
1. failed development;
2. inability to finance;
3. over-leveraged entities.
None of the property, ownership or financing issues are mutually exclusive, and often some combination of issues is present in a distressed situation.
Property issues can occur when the sole investor or tenant can’t keep with the payments any longer or the development falls behind or fails to achieve leasing or sales goals. At the ownership level, the lack of liquidity of the general partner, partnership disputes or other financial pressures of an over-levered owner often leads to distressed situations. Financing issues occur when the mortgage holder is facing job loss, hiked interest rates and reduced value. In this tough credit environment, many borrowers are having difficulty obtaining mortgages approvals even though the the property has no problems.
From Dubai to Ras Al Khaima and Abu Dhabi to Ajman, properties and projects are tumbling into default as borrowers and lenders alike struggle with today’s constrained markets. These assets from all over the Emirates, including office towers, services apartments, hotels and resorts have encountered distress caused by squeezed credit, withdrawn financing and the larger troubles of lenders.
Lawsuits, corruption investigations, bankrupt or disappearing owners and falling loan-to-value ratios have also pushed some of these projects up to and over the edge.
By Gergana Mineva at Editor@DubaiChronicle.com
