Fast-tracking revival of stalled real estate projects
With the Schon episode, the Dubai Lands Department has boldly — and effectively — stated its intention of not tolerating errant developers. This evolution of regulation is in line with the city’s vision of becoming proactive in every sector of the economy to protect the individual with respect to his economic rights.
Dubai is also known not only in the Middle East but throughout the world as a centre of innovation in every economic sphere. In that sense, it is the spirit of innovation that the public and private sector converge towards a Resolution Trust Corporation (RTC) type structure to accelerate the revival of stalled projects.
In 1989, the US government established the RTC to bail out the savings and loans (S&L) companies by effectively stripping away the liabilities from underlying assets and then offering the assets (predominantly land and real estate developments) to private sector developers. Before the formation of this, the government had been attempting to settle each project on an individual basis.
Subsequently, the emphasis became one where there were attempts for bulk sale. Neither of these approaches were successful. The shift in thinking occurred when there was a realisation that the liabilities would need to be effectively “equitised”.
The RTC retained a stake in each of the projects for the amount equivalent to the loan such that it would retain an upside potential in each of the projects. Over the next decade, this proved to be a shot in the arm, as more than 70 per cent of the liabilities ended up being monetised at profitable rates for the government. Subsequent case studies have been taught in business schools highlighting the RTC as one of the models for public-private sector collaboration.
In the same way, a potential solution for the stalled projects in freehold Dubai would be to form a similar RTC-type structure, where the government could take all of the customer/contractual and bank liabilities into one entity. And thereby cleaning up the liabilities that are in each of the projects, especially the larger ones.
This would then allow a new breed of developers to bid for the assets, with the liabilities being equitised across each of the projects such that the investors would have an across the board participation in the upside potential of these projects. Stripping these stalled projects from their liabilities would similarly embolden both the developers to bid for these assets, as well as allow them to approach banks for fresh funding.
The latter would be more willing to lend against such projects given that the liabilities have been removed. Of course, this structure would need to be mutated to allow for perhaps different types of structures dependent on different projects being in different stages of their project life cycle.
The ones that are at preliminary stages would have a different holding company as opposed to those that have been more than 50 per cent complete. The overall thrust would however be the same — a jolt in the arm that would act as a catalyst for the revival of projects across the board.
Given the dynamism that has been embedded in the city of Dubai from its very inception, it is not difficult to forecast a relatively quick turnaround for the success of the scheme in completing projects that were a casualty of the first boom-bust cycle. It would further buttress the position of the city as being the centre of financial and regulatory innovation simultaneously and serve as a stimulus as well as a model for public-private sector cooperation.
Real estate forms the backbone of the economy and this will continue for the decades to come. The RTC model provides a framework where the public and private entities could jointly participate in a collaborative enterprise for the acceleration of growth in this vital sector.
■ Nasser Malalla Ghanem is Senior Partner at NM Associates, which has a joint venture with GCP Group.
Stripping these stalled projects from their liabilities would similarly embolden both the developers to bid for these assets, as well as allow them to approach banks for fresh funding It is not difficult to forecast a relatively quick turnaround for the success of the scheme in completing projects that were a casualty of the first boombust cycle.