Finance 'needed to trigger property mergers'

Even though there are still opportunities for mergers and acquisitions (M&As) in the UAE's real estate sector, industry experts believe "absence of finance" and "lack of value creation" have hampered the initiative. In a round table discussion with Emirates Business, Andrew Charlesworth, Head of Capital Markets, Jones Lang LaSalle Mena; Ahmad Saidali, Vice-President, Investment & Fund Advisory CBRE Middle East; Sana Kapadia, Vice-President, Equity Research, EFG-Hermes, UAE; Mike Atwell, Head of Middle East Operations, Cushman & Wakefield and Andrew Goodwin, Director, DTZ, said there are good prospects of M&As, but these are likely to happen only when merger makes sense and the market is ready for it. Asked about the chances of cross border M&As, most of the experts said possibilities were limited since real estate was a local domain, in terms of supply-demand and other market dynamics. Excerpts: Where do you think companies have failed when it comes to mergers and acquisitions in the UAE's real estate sector? Charlesworth: Limited acquisitions can be partially attributed to lack of finance and buyers not willing to take a risk in stretching their company balance sheets in the current environment. Mergers will only succeed if there is a clear business case and proper corporate fit in terms of savings, efficiencies and value creation. Saidali: M&As are very complex operations which require many conditions to be fulfilled in order to make them. There was a lot of speculation about M&As in the UAE's real estate sector. However, so far we have not seen any high-profile M&A taking place. Many experts wonder why these talks failed. In most cases, these operations did not go through because either the numbers did not work or the market was not ready and ultimately there was not proven visible benefit from M&A of those companies. But even if these conditions are fulfilled, M&As can still fail after their conclusion. In reality, and the economic literature shows that most often the problems can arise from when it comes to the integration of cultures, staff, processes, best practices and philosophies. As a result, retention of key employees at all levels is compromised, and fear increases among staff and other stakeholders. And when communication becomes dysfunctional, internal conflicts grow while morale, and thus productivity within the new company/entity, decreases which can really jeopardise business continuity. Kapadia: It has been a mixture of waiting it out and letting natural market forces allow things to shape the fate of companies, and also recognising that companies that were being meant to be combined may have been less able to derive operational/financial synergies than first presumed. Atwell: The real estate sector in the UAE, and more specifically Dubai, has gone through well-documented changes over the past 12-18 months, facing in particular the challenge of significant oversupply and the saturation that continues to hamper the market. The softening of the real estate market, and access to financing, which has affected all the key players, has, therefore, meant that in reality nobody is really in a position to be doing deals – most are adopting a "wait and see" approach. Goodwin: The sudden impact of the financial crisis led to a significant shortfall of interim and end revenues for developers and the cutting off of the "exit" led to the failures. Unlike other downturns, the impact of the crises has been across all property sectors and development bodies, including government-related organisations. So there have not been any "winners" capable of taking advantage. Do you still believe there are opportunities for M&As within the UAE? Charlesworth: One would expect the real estate sector will need to rationalise but in the absence of development/development financing, simply merging entities with large land banks, for example, may not achieve much value creation as new construction generally is going to be constrained in the near term. We would expect some potential for the merger or the creation of spin-off businesses particularly where assets can be grouped that are revenue generating. Pooling income-generating assets into an asset management business and creating efficiencies around that would have some logic. Saidali: There are definitely opportunities for M&As within the UAE since the real estate sector needs to consolidate. It happened in many other sectors where after a boom market some adjustment is needed. However, I would stress once again that the main rationale behind any M&A activity is that one plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together should, therefore, have to be more valuable than two separate companies, at least from a theoretical point of vi