VZCZCXRO4352
RR RUEHDH RUEHDIR
DE RUEHDE #0354/01 2420731
ZNY CCCCC ZZH
R 300731Z AUG 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC 6608
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 9898

C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000354 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN 
 
E.O. 12958: DECL:  8/30/2019 
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI SEEKS BOTTOM FOR ITS REAL ESTATE MARKET THROUGH 
CONSOLIDATION 
 
DUBAI 00000354  001.2 OF 003 
 
 
CLASSIFIED BY: Justin Siberell, Consul General. 
REASON: 1.4 (b), (d) 
¶1. (C) SUMMARY: Dubai Holding, the Dubai Inc. entity 
representing the personal property holdings of Dubai Ruler 
Sheikh Mohammed bin Rashid al Maktoum (MbR), plans to 
consolidate several of its largest property developers into one 
mega-sized integrated unit.  Although news of the consolidation 
was announced in June and is part of a larger economic 
restructuring effort by the Government of Dubai, the details of 
the deal and implications on the broader real estate market have 
been slow to emerge and continue to stoke media intrigue.  Along 
with measures to remove distressed property from the current 
market, consolidation of Dubai Inc's real estate holdings is 
also a key part of the government's attempt to put a floor on 
falling prices across the real estate sector.   Meanwhile, 
external and internal investors continue to look for clear signs 
of a bottoming in Dubai's flagging real estate sector since 
consumer and residential property prices have fallen as much as 
50 percent over the last year. END SUMMARY. 
 
 
 
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MAMMOTH CONSOLIDATION GOBBLES MARKET SHARE 
 
------------------------------------------ 
 
 
 
¶2. (C) The plan by Dubai Holding, the parastatal run by Minister 
of Cabinet Affairs and key MbR advisor Mohammed Gergawi, to 
consolidate its real estate interests into to one mega-sized 
company has created an enormous market force, according to 
Martin Kohlhase, an Assistant Vice President at Moody's Investor 
Service.  Kohlhase says the newly formed company will control 
close to 70 percent of the real estate market in Dubai and will 
have unrivaled access to Dubai's vast land bank once the deal 
closes by the end of 2009.  Dubai Holding's consolidation of its 
Dubai Properties Group, Sama Dubai, Tatweer and upcoming merger 
with the government-owned Emaar Properties will create a company 
with a combined asset value of USD 53 billion.  MbR personally 
owns 97.5 percent of Dubai Holding. 
 
 
 
¶3. (C) The new company streamlines Dubai Holding's seven 
seemingly independent businesses into four distinct units, which 
will include a property unit, business parks, hospitality 
franchise and an investment arm.  (Comment: A slimmed down and 
presumably more nibble Dubai Holding Properties unit would 
facilitate a cleaner merger with Emaar Properties. End Comment.) 
 Kohlhase told econoff that the merger was also a sort of soft 
landing for Emaar whose stock price has seen as much as an 80 
percent decline since second half of 2008 and has undergone a 
major bankruptcy of its major U.S. subsidiary, John Laing Homes. 
 Kohlhase said that with 13 years of property development 
experience and 14 thousand homes built in Dubai, Emaar 
properties has likely seen the last of its bull days as a stand 
alone company and would not see new large scale development 
projects down the pike, such as its current Burj Dubai 
development.  Although the consolidation and merger attempts to 
streamline business units and retire many redundancies, the 
merger also leaves the new mega unit with presumably an enormous 
inherited debt load.  Accurate figures on the exact value remain 
difficult to obtain. 
 
 
 
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CONSOLIDATION: AN ANSWER TO FALLING PRICES? 
 
------------------------------------------- 
 
 
 
¶4. (C) In an August 25 meeting with econoff, Kohlhase suggested 
that the consolidation of Dubai Holding's real estate interests 
with Emaar Properties may be the Dubai government's attempt to 
create an artificial floor for prices in the real estate sector. 
 Even if supply of properties continues to outstrip demand, he 
explained, developers can continue to charge high rents 
especially in their most expensive units if they no longer have 
to fear undercutting from rival developers within the Dubai Inc 
empire.  The consolidation of Dubai's top real estate firms is a 
necessary thing for the market says Colliers International's 
Middle East CEO John Davis, especially in light of the severe 
price drops in rents and asset values over the last year.  Davis 
told econoff that there continues to be a real oversupply of 
residential and commercial properties in the market (as much as 
 
DUBAI 00000354  002.2 OF 003 
 
 
38,000 by years end, according to Paul Koster, Chief Executive 
of Dubai Financial Services Authority), which have led to 
declines in real estate values up to 50 percent  across Dubai 
compared to this time last year. 
 
 
 
¶5. (C) Davis suggested that the supply-demand balance in the 
property market will remain uneven in the near term, especially 
since many investors traditionally sit on their cash through the 
summer months, historically a slower period for real estate 
deals.  Additionally, Kohlhase told EconOff in an earlier 
meeting that the supply in both commercial and residential 
properties is expected to double by 2011, without a similar 
increase in demand expected.  The weakened demand also coincides 
with predicted declines of eight to 17 percent in Dubai's 
population in 2009 (resulting primarily from the departures of 
third country laborers), as noted by UBS and EFG Hermes banks, 
respectively.  (Comment:  Standard supply-demand models do not 
necessarily provide an accurate predictive tool in Dubai's case. 
 Many real estate investors -- particularly Gulf Arabs and other 
wealthy individuals -- would rather remove a unit from the 
property market than rent or sell at a low price, and can afford 
to do so.  Similarly, if the Dubai Government is the owner of 
much of the new real estate coming on the market, it can 
--presuming consolidated decision-making in this area -- 
regulate the number of units it chooses to put on the market in 
order to artificially maintain a desired supply-demand ratio. 
End comment.) 
 
 
 
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IN COME INVESTORS, OUT GO SPECULATORS 
 
------------------------------------- 
 
 
 
¶6. (C) Collier's International assesses that Dubai's real estate 
sector is undergoing a natural evolution from the largely 
speculator-end user driven market that made headlines in recent 
years to a more stable value investor driven market, where the 
price-to-yield gap continues to narrow from previously wide 
margins.  According to Colliers, there has to be a necessary 
convergence of buyers and sellers in order for the 
price-to-yield gap on properties to achieve a reasonable margin 
to facilitate growth in deals, especially investor driven deals. 
 Value investors, who now make up an increasing percentage of 
Dubai's real estate market, look for deals with depressed unit 
prices or average returns of between 25 and 40 percent in order 
to mitigate the still-outstanding risks in the market.  It is 
not clear whether prices have fallen to a level that would 
guarantee those significant double-digit returns, especially 
with rents continuing to be depressed.  Also, it remains to be 
seen what price point these value investors will eventually 
reach with the newly-consolidated Dubai Holding real estate 
venture that clearly would like to see prices stabilize and 
begin to move up. 
 
 
 
----------------------------------- 
 
DUBAI'S NEIGHBORS SEE OPPORTUNITIES 
 
----------------------------------- 
 
 
 
¶7. (C) The local and regional press report almost daily about 
investors from neighboring Gulf countries eyeing deals in 
Dubai's beleaguered real estate sector.  However, the latest 
report that Kuwaiti-based investment fund, Al Mazaya Holding, 
announced plans to deploy as much as USD 100 million 
specifically to target distressed Dubai properties remains 
unverified.  As Moody's and Colliers International suggested, 
the bulk of the real estate investors, most of whom are Dubai 
based, remain on the sidelines during the summer months and 
especially in light of the recent consolidations.  Also, the 
speculation surrounding the potential high profile government 
bailout of Nakheel property development company has flamed the 
fires of uncertainty and complicated the prospects of a quick 
recovery.  Nevertheless, in its press statements, Al Mazaya 
Holding insists that it sees this period of market depression as 
a real bottom for Dubai, especially in many of the high end 
property markets.  Al Mazaya is planning investments in the Palm 
Jumeira, Burj Dubai and Dubai Investment Financial Center 
 
DUBAI 00000354  003.2 OF 003 
 
 
(DIFC); entry into the distressed property market therefore may 
make sense for the company, as a depressed lower end of the 
market would likely delay eventual increases in the higher end 
properties it intends to target. 
 
 
 
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COMMENT 
 
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¶8. (C) The consolidation of Dubai Holding's property interests 
and the upcoming merger with Emaar Properties is welcomed by 
many market participants as an overdue "re-centralization" 
within Dubai Inc.  The competition that developed over the past 
several years between rival real estate and development firms 
(and their ambitious CEO's) within the Dubai Inc empire may have 
served the Dubai leadership's desire for "firing on all pistons" 
development, but came at the cost of coherence and, ultimately, 
sustainability.  The market is very clearly over supplied, with 
thousands of additional commercial and residential units nearing 
completion.  The consolidation is also therefore a measure 
intended by the Government to stabilize and locate bottom for a 
real estate sector that has been in freefall since the last 
quarter of 2008.  END COMMENT. 
SIBERELL