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02 March 2024

Call to set up real estate special purpose vehicle


By VM Sathish

Financial experts and consultants have suggested setting up a realty special purpose vehicle (SPV) as part of UAE Government initiatives to prevent a total stoppage of construction activity in the UAE and tide over the tight liquidity situation caused by banks' reluctance to refinance $20 billion (Dh73.4bn) short-term loans.

A special purpose vehicle, started with the initial funding of the government, and participation of high networth GCC nationals and institutional investors like the Abu Dhabi Investment Authority, banks and foreign investors, can solve the liquidity problem.

Dr TP Ghosh, former Director of Studies at the Institute of Chartered Accountants of India and Professor, Institute of Management Technology, said in a presentation that the major factor affecting liquidity scenario in the UAE has been the $20bn short-term debt refinancing worry in Dubai and the UAE has the ability to refinance and ride out the liquidity crisis.

An SPV is a company formed for specific purposes, in this case, to buy completed or under-development property. Using pass-through securities (PTS), the SPV can buy illiquid assets from developers and their customers, who will continue to pay their monthly installments to the SPV. Investors get a principal and interest every month and pay a small fee to the SPV.

"There is an urgent need to set up a special purpose vehicle for dealing in realty so that developers have an alternative to offload the completed or under-construction property to the SPV. The SPV, a government company that has to be backed by government funding with its initial investment, will ease liquidity crisis in the construction sector. The expert also suggested that the Abu Dhabi Investment Authority, the sovereign wealth fund of the UAE, could play a crucial role in setting up the SPV with the help of other banks and high net-worth GCC individuals, institutional and foreign investors. The government-sponsored SPV should have the capacity to hold illiquid assets for two to three years. Property developers can sell the completed or undergoing projects to the SPV with a low return on investment. Dr Ghosh was one of the participants in a recent conference organised by Howard Mak, a leading financial consultant in Dubai, about the credit crisis in Dubai.

According to Dr Ghosh, banks and other investors will be comfortable to participate in the pass-through securities of the realty SPV as it will be government sponsored as against direct lending to individuals.

Unlike the US mortgage-backed securities, the PTS should be a five-year deep discount inflation adjusted bond – say issued at seven per cent yield but adjusted to inflation factor on maturity.

As the investors lost confidence over equity, gold and currency futures, and realty is in its downturn, there should be overwhelming response to this product that will provide continuous liquidity to the proposed realty SPV and thereby to the realty companies, he said.

Speaking to Emirates Business, he said the stoppage of construction business would cause cascading effects on other sectors like retail, gold sales and other businesses that drive the UAE economy and cause a contraction of UAE's gross domestic product.

He said the UAE has the ability to tide over the crisis in the long term because it enjoyed five years of high oil revenues and the Abu Dhabi Investment Authority can take a lead role in establishing the realty SPV.

Such a step will also help in consolidating existing property stocks, and steps like delaying introduction of value-added taxation and stabilisation of the stock market will also help improve the situation.