Dubai Pearl to sell hotel assets

Dubai Pearl FZ LLC, a company owned by a consortium of investors led by the Al Fahim Group of Abu Dhabi, is looking at injecting more equity capital, selling hotel assets and tapping bank finance to fund its Dh13bn Dubai Pearl development.

The company plans to triple its equity and quasi-equity base from the current Dh1bn to Dh3bn over the next two years but downplays the idea of stakes dilution.

“We have not fixed the increase but over the next two years, we are looking at bringing in at least Dh2bn equity and quasi-equity,” Santhosh Joseph, the company’s president and CEO, said. “In terms of selling equity stakes, we have not thought about it. It is not something that we will rule out probably in the future. But we’re never entertained that thought today. If you show some signs then people will come to you and we have not done that.”

Dubai Pearl will, however, plans to sell some of its retail and leisure assets in 2012. About 16 per cent of the development comprises of hospitality components, which include seven branded five-star hotels such as Baccarat, Bellagio, MGM Grand Hotels and Skylofts.

“The valuation of these retail and entertainment assets is about Dh7bn to Dh8bn,” Joseph said. “There are interested parties coming to us to buy individual assets and hotels because of the large brands involved but we are not yet jumping into selling these assets at these stage. We are looking at 2012 to sell part of these assets.”

 “How much we can sell depends on the market appetite,” Joseph said. “If you look at our business strategy, we were not looking at selling hotel assets but post 2008, the market has changed so we have to leverage every asset we have. We believe the retail and hospitality is one of the prime assets in Dubai Pearl, which we can leverage in the near future.”

Institutional investors have been showing a revival of interest in the past few months, Joseph said, adding that a deal may be closed in the first half of next year.

Investors’ appetite in Dubai’s hospitality sector has been revived as of late. On Nov 8,Union Properties finalised the sale of Ritz Carlton Hotel at the DIFC for Dh1.1bn. The proceeds will be used to reduce UP’s debt and complete the remaining assets at its flagship development, the MotorCity.

“We are not in a hurry. We are waiting for the right time,” he said. “There are many people who have shown interest in bulk assets of Dubai Pearl and they have been approaching us for the last three to four months. These are private equity firms, large hedge funds and a few pension funds – this is the time they are looking at quality assets.

“We expect a lot of these people approaching Dubai Pearl because there are not many institution- friendly projects while we have created them. Dubai Pearl is very appetising for institutional investors.”

The zero-debt company is also looking at borrowing from the banks to fill in funding gaps. “We’ll look at the situation in 2011 and then we will decide,” Joseph said but noted that the banking sector is more likely to stabilise in 2012. “If those deals with institutional investors materialise, then the chance of leveraging is much less. We opt to have less debt but it is an option to fill the gap.”

Construction of Dubai Pearl – with a total built-up area of 20mn square feet – has begun on site and initial hand over is scheduled for 2013. Residential (1,490 units) comprises 40 per cent of the total mix, while offices comprises 34 per cent (1,499 units), retail 6 per cent and leisure 4 per cent.

The company has sold Dh5bn worth of property or half of the total cost of phase 1 development. Two-thirds of those sold are commercial properties. (Phase 2 is slated to cost another Dh3bn.)

Dubai Pearl on the other hand has sold more than 500 residences accounting for 25 per cent of the total residential assets.

“This project is not aimed that we just sell and go. It’s not like that,” Joseph said. “It’s a project where we will be a part forever. We are not looking at selling everything in one go. If that was the case in 2008, then we would have easily sold $10bn-$15bn but we said no. A sensible developer doesn’t do that. We have to do it in order of time because we want to create value for the stakeholders.”

In line of the liquidity crisis, the company has afforded its customers a payment restructuring programme. “Most of our customers have paid 30-35 per cent already. Problems are there but it depends how you deal with it. We’ve been sitting with them whether we can restructure payment terms. It’s not default, it’s agreed delayed. We allow them to delay,” he said.

“Previous construction cost was around Dh9bn but that has gone down to Dh7.5bn. So when we got the discount from the contractor, we passed it on to our customers. We already passed it. People who bought from peak had 25-35 per cent discount,” he added.

Just like other developments, disputes have been unavoidable. DIFC Investments (DIFCI) in 2008, for instance purchased 29 floors of a yet-to-be-constructed building at the development, but only Dhs50 million have been paid. DIFCI has an outstanding legal agreement with Dubai Pearl currently valued at Dh3 billion for the purchase of commercial space within phase 1.

But they have been manageable, Joseph said, adding that both parties have entered into formal discussions to review and potentially look at restructuring the original agreement.

“We have more than 550 customers. There may be single-digit number of customers who want to exit but it’s negligible,” Joseph said.

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