UAE real estate to make real progress
Having languished in the doldrums since the days of boom and build were dramatically slowed down by the global meltdown, the real estate sector in the UAE is on the brink of a revival with the prospect of a $15bn merger.
News of the government-back deal between Aldar Properties and Sorouh, both based in Abu Dhabi, sent their stocks soaring by 9.8% at the start of the week with investors reacting positively.
The restructuring of the real estate sector in the emirate comes after a spending review by the government which examined how state funds were being used among government-linked companies, and gave a green light to tens of billions of dollars worth of development projects.
The merger "can only be a positive move," Mohammed Kamal, a partner at real estate law firm Berwin Leighton Paisner in Abu Dhabi, told the FT.
"We all know that the two entities, along with everybody else, had difficulties, this move would not have been initiated if the end result wasn’t going to be a better product"
The companies will set up a working committee to analyse the feasibility of a merger over the coming months.
The Abu Dhabi government has a 49% stake in Aldar through Mubadala, one of its investment arms, and a minority stake in Sorouh, through Invest AD, and it has spent close to $10bn bailing out the indebted Aldar since early 2011.
Although the Abu Dhabi property market will be dominated by a single entity with huge control over the supply of new development, Tariq Qaqish, the deputy head of asset management at Al Mal Capital in Dubai, sees the merger as positive for the industry.
"It will take a long time as these things don’t just happen quickly, but we see lots of synergies, he says. "But fundamentally will you buy that story? The new entity will maintain a healthier balance sheet, an increase in backlog, and better cash flow. It’s a good story."
While the stock market reacted mainly through heavy buying of Aldar and Sorouh shares, Yazan Abdeen, a Dubai-based fund manager at ING Investment Management, thinks those who bought into the rally are missing a deeper story.
He says the best trade is not to invest in the real estate companies, but to understand the wider story, that UAE banks are the likely beneficiaries of such consolidation.