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Impact of Global Recession on
Real Estate in the United Arab Emirates
Eric P Stoclet
The Global Environment
Global Environment - Economy Global Recession?
o The World Bank expects the global economy will contract between 1 and 2% in 2009. Drop in trade to be “worst in 80 years” with global exports declining 2.1%, first drop since 1982
o International Labor Organization (UN) estimates 50 million jobs could be lost in 2009 Driven by over-leverage in many asset classes, in particular real estate De-leveraging to be long and painful and will re-shape global financial systems US estimated by many economists to start recovering only in 2010
o Q4 2008 GDP -6.2%, Warren Buffett: US economy has “fallen off a cliff”o March unemployment rate hits 8.5%, unemployment expected by many to reach double-digitso Case-Schiller housing index has dropped 28% from its peak and is still droppingo Some signs of “bottoming out”
Bank earnings for Q1 have beaten expectations though mostly on trading/fixed income generated revenues. Core businesses still show signs of stress
DJIA up 21.7% at 21/4/2009 from 03/09 low of 6,547, though still in negative territory for 2009 April University of Michigan Confidence Index: 61.9, up from 57.3 in March and better than
expectations of 58.5o IMF forecasts US to contract 2.6% in 2009
EU tends to lag the US by 6-12 monthso Q4 2008 GDP -1.5%;o January unemployment rate hits 8.2%o IMF expects EU economy to shrink 3.2% in 2009o Few signs of bottoming with possible exception UK seeing some glimmers of hope on real estate
front
Monday, April 27, 2009 3
Global Environment - Economy China slowing down, but there are positive signs
o Q4 2008 GDP +6.8%, slowest pace in 7 years, Q1 2009 saw even slower growth at 6.1%o December 2008 official urban unemployment rate rises to 4.2% (Chinese Academy of Social
Scientists estimates 9.4%) for the first time in 5 yearso March exports drop 17.1%, imports drop 25.1% year-on-year though this was better than
February‘s export drop of 25.7%o Signs of improvement on the back of USD 585 billion stimulus package implemented 11/2008:
Industrial output expanded 5.1% Q1 2009 and was up 8.3% year-on-year in March, against 3.8% in January and February
Fixed asset investment was up 28.6% in March from 26.5% in February. Spending on property development grew by 4.1% Q1 Retail sales remain strong, up 14.7% in March
o World Bank forecasts growth of 6.5% for 2009, Macquarie 7.5% - 8% India not faring well either
o Q4 2008 GDP +5.3%, down from average of 9% in last three years; Q4 growth essentially on the back of government spending Barcap sees 2009 growth of 4%, ADB 5%
o Official unemployment stands at 8.2% but statistics is believed to cover only organized sector of the economy which employs only 10% of the workforce
General view that recovery timing hard to predict and generally anemic
Monday, April 27, 2009 4
Global Environment - Economy
Monday, April 27, 2009 5
US Residential RE
US residentialo At 12/2008, down 28% from June 2006 peako Further drops likely through end of 2009, potentially 10-20%
Monday, April 27, 2009 6
US Commercial RE
Signs of distress are appearing in the US on the commercial real estate fronto Delinquencies have “rocketed”,…o as banks are tightening lending criteria across the boardo General Growth, 2nd largest mall owner in the US, files for bankruptcy in April 2009, one of
largest real estate failures ever in the US While delinquency rates are still much lower than in the early ‘90’s,outstanding loans are
more than 4X higher As a result, banks are already grappling with larger delinquent portfolios than in 1991
Monday, April 27, 2009 7
US RE When the Recovery?
For indicators to recover to pre-recession levels in 1990 it took:o from S&P/Case Schiller housing index high in 10/89, 8.3 years to recover (01/98)o from University of Michigan confidence index high in 09/88, 8.3 years to recovero from unemployment 03/89 low of 5%, 8.2 years to recover (05/97)
…and 1990 was a much milder recessiono Unemployment levels have already exceeded those seen in 1990s: 06/90 peak of 10.0 million
(7.8%); 03/09: 13.2 million (8.5%) With asset prices –in particular housing- fuelled by massive liquidity availability and all-
time low rates post 2000 internet bubble, will real estate prices ever see 2006/2007 highs again?
Monday, April 27, 2009 8
EU Residential RE
Housing prices in the US peaked several quarters before Europe though both followed very similar growth patterns
Comparisons between European countries inaccurate as data lacks consistency across countries (what is measured, timeliness, etc.)
Regardless, available data clearly shows EU housing market under severe stress:o Most markets show significant drop in priceso Data lag probably accounts for those markets that still showed positive growth in 2008
Monday, April 27, 2009 9
Source: RICS, Financial Times
EU Commercial RE
As the recession bites, values are dropping across all real estate asset classes and… generally across all EU geographies although prime locations are relatively less affected
Monday, April 27, 2009 10
The GCC
GCC Economic Forecast
Monday, April 27, 2009 12
467.
7
270
159.
7
116.
919.6
8
56.3
2
2008 GDP in USD billions at official exchange rate - Source: The World Factbook – CIAReal GDP Growth and Average Inflation from poll of 14 economists' forecasts - Source: Reuters
Consensus forecast for 2009 is for a substantial slowdown across all GCC economies with contraction in Kuwait and risk of contraction in some of the other GCC member countries
UAE Economic Forecast
Select drivers of the UAE economy and global prospects for 2009o Oil prices, which topped USD 140 pb in 2008 are currently trading around USD 50 pb
March poll of 30 analysts by Reuters indicates an average price of USD 49.73 pb for 2009o WTO forecasts of drop of 9% by volume in global trade for 2009
Among 45 countries for which World Bank has January trade data, average fall in exports from a year ago was 32%
o United Nations World Tourism Organization expects global tourism to drop by up to 2%o Financial services industry is contracting worldwide o Population in Dubai expected to drop (8% UBS, 17% EFG Hermes) in 2009o Substantial real estate oversupply in certain areas of the country and for certain asset classes, in
particular given global environment
Monday, April 27, 2009 13
Source: Reuters Source: US Energy Information Administration
UAE Economic Forecast
Monday, April 27, 2009 14
Some signs are pointing to a bottoming out:o Lending slowly coming back to the marketo DFM and ADX are up substantially from their February lowso Dubai USD 10 billion issuance has stabilized the marketo Abu Dhabi’s USD 3 billion bond issue was oversubscribed by more than 2 x by international
investors though it is still too early to tell when the bottom will be…
o Strong likelihood of further population decrease in Dubai with impact felt in September/Octobero Impact on Northern Emirates has so far not been evident but with Dubai becoming cheaper it is
bound to hurt
UAE Residential Real Estate – Abu Dhabi
Monday, April 27, 2009 15
Abu Dhabi residential prices started falling in Q4 2008 and continue to do so in 2009 (average listing prices down 20-25% for villas and 15-20% for apartments). Further drops (+/- 10%) are likely through year end
Rents have remained pretty stable from Q3 2008 through February 2009 after having registered substantial increases in H1 2008, and are likely to remain relatively stable through 2009
Source: Landmark Advisory
Source: Landmark Advisory
Source: Landmark Advisory
UAE Residential Real Estate - Dubai
Monday, April 27, 2009 16
Source: Collier’s International
Dubai residential peaked in October Dropped 8% through December and continues falling Apartment and villa rents topped out in Q4 and Q3 2008 respectively Forecast for 2009 is for further, fairly substantial, drops both in sales prices (apartments to be
more severely impacted than villas) and rents There appears to be a consensus that villa prices will remain stable though it is hard to justify
this given prospect of population decrease and dearth of financing
Source: Landmark Advisory
UAE Commercial Real Estate – Office Abu Dhabi
Monday, April 27, 2009 17
Abu Dhabio Office rental rates dropped on average 25% in Q4 2008 with Grade B and C office space
worst affectedo Nonetheless, Q4 2007 – Q4 2008 rent growth was 30%o Market to remain weak as big Abu Dhabi companies move into their purpose built offices
Source: Collier’s International
Source: Collier’s International, Asteco
UAE Commercial Real Estate – Office Dubai
Monday, April 27, 2009 18
Dubaio Office prices hit their high Q3 2008 and are estimated to have lost 30% sinceo Vacancy rate now exceeds 15%o Downward trend expected to continue through 2009
Source: Collier’s International
Source: Collier’s International, Asteco
UAE Commercial Real Estate - Retail
Monday, April 27, 2009 19
Average retail lease rates in Abu Dhabi dropped 10 – 14% Q4 2008 to Q1 2009
Yields remain relatively stable as capital values have decreased in line with lease rates
Corniche area has highest average lease rates at AED 3,300 psqm
Average rental rates range from USD 1,760 psqm to USD 2,346 psqm
Source: Collier’s International
Source: Collier’s International
Drop in tourism and population will continue putting significant pressure on rental rates
Current average rental rates are USD 1,615 psqm
UAE Commercial Real Estate - Hotel
Monday, April 27, 2009 20
Source: Collier’s International, STR Global, Emirates Business 24/7
Weakness in tourism given global economic situation and substantial number of rooms which came on line in 2008 and are scheduled to come on lin in 2009 does not bode well for the sector
By 2011, Abu Dhabi is expected to add 13,000 rooms with Dubai looking to add 9,000 rooms over the next three years
Dubai occupancy rates could drop below 70% for 2009 Because of its lack of supply, Abu Dhabi should be better able to retain high occupancy
levels
When the recovery?
Monday, April 27, 2009 22
De-leveraging is far from over Financing is key to the real estate market
Banks need to clean out existing portfolio, recapitalize and regain access to international debt markets, and believe that the worst is over
Equity investors will be looking at a number of opportunities in the “distressed” real estate arena worldwide and gauging where their investment risk/return is optimized; non-core markets are likely to be put on the backburner for 2-3 years
Job losses and businesses contracting will result in less demand and/or additional supply of real estate product in the markets
Existing oversupply has to work its way out of the system
2009 will be a difficult year for real estate in the UAERe-testing pre-crisis peaks in Dubai is unlikely for quite a while, if everReal estate will return to a more balanced pricing model with prices driven by real supply and demand dynamics and not pure speculation
All the pain has not yet been taken…
What Does It Mean For Your Institution?
Assets are worth less…
Supply is increasing in all real estate asset classeso Slowdown in the economy, population decrease
Businesses contracting, reduced needs for office and industrial space Retailers downsize, close stores and reduce their footprint
o World economy shrinking tourism down hotel occupancy rates dropping
o Past excess building of residential + foreclosures more housing on the market
Funding (banks, funds, private equity,…) is still extremely hard to geto Commercial real estate: Little or no ability to finance new projects and difficulties in rolling-over
existing financingo Residential mortgages are seeing some signs of life but not enough to make a difference
Monday, April 27, 2009 24
… and harder to dispose of
Non-performing Loans & Non-performing Assets will increase substantially over the next two years
Marginal loans (high loan-to-value –LTV-, poor cash flow) will default Most at risk: real estate financed in 2006 – 2008 in Dubai, 2007 on in other Emirates
Real estate developers and investors will have to liquidate assets in a “bear” market to meet loan maturities or risk defaulting
Banks will have little ability to sell repossessed real estate
Monday, April 27, 2009 25
Risk Assessment & Solutions
Credit Cycle in a Bank – Credit Sourcing & Approval
Monday, April 27, 2009 27
Credit Cycle in a Bank – Credit Delivery & Monitoring
Monday, April 27, 2009 28
Credit Cycle in a Bank – Remedial Management
Monday, April 27, 2009 29
Issues for Financial Institutions
Problem loans Past-due/Non-Performing Loans (NPL) Restructuring Collateral legal issues & value Write-downs Foreclosure/Non-Performing Assets (NPA) Risk Issues
o Underwriting process Portfolio/Lending criteria Due diligence process Risk management process
o Credit Administration Legal documentation Disbursement/Loan monitoring Problem recognition Remedial management
o Early warning Portfolio analysis
• Distribution (asset class, geography,…)• Aging• Covenant (LTV,…) deterioration
/Exception tracking Economic analysis
Organizational issueso Location in organization’s structureo Target settingo Compensationo Annual budgeting process
Visib
l
e
Issue
s
Root
Caus
es
Monday, April 27, 2009 30
Addressing the Visible Issues
Diagnostic Assessment
Institution’s view on the economy? Asset growth & funding strategy? Capital & liquidity adequacy Review of existing credit policies Portfolio review
o Geographyo Asset classo Vintageo Level of NPLso Collateral valuation / coverageo Level of write-down / write-off
Review workout / restructuring strategies
o Loan modificationo Foreclosureo Liquidation
Staffing level & qualifications
Loan reviewso Significant portion of portfolioo Collateral and cash flow coverageo Covenant and covenant monitoringo Problem recognition
Review of non-performing / distressed assets
o Significant portion of portfolioo Collateral valuationo Legal review of documentso Action plans and effectiveness
Deliverables
One year/Five year asset/liability strategy for the business Recommendations:
o Portfolio monitoringo Loan monitoringo Early warning processo Problem recognition
Action Plans:o Write-downs / write-offso Reserveso Distressed / NPL workouts / restructuring / disposal strategies
Supporto Define strategy /approach with regulatory bodieso Dimension impact on stakeholders
Monday, April 27, 2009 31
Stage 2: Root causes
Diagnostic Assessment
As per Stage 1 In addition:
o In-depth review of credit policieso Full review of credit administration process, including regulatory reportingo In-depth review of staffing adequacy
Risk Managemento Credit Policies
Appropriateness Effectiveness Application Exception process & monitoring
o Approval process Independence Effectiveness
Credit Administrationo On-boarding new loanso Disbursement processo Loan monitoring (covenants, payments,…)o Collateral valuationo Legal process (documentation, amendments,…)
Organizational issueso Staffing adequacy and appropriatenesso Organization chart
Deliverables
Recommendations:o Credit Policieso Approval processo Credit Administration processo Appropriate organization structure
Action Plans:o Approval processo Credit administration
Supporto Define strategy /approach with regulatory bodieso Dimension impact on stakeholders
Monday, April 27, 2009 32
Thank you!
Thank you!
27 years banking experience, 25 with Citigroup
10+ years real estate financing; $3+ billion financing of commercial and residential real estate; mortgage portfolio purchases/sales; $2+ billion buy/sell-side advisory mandates; portfolio/asset management of $2+ billion investment in German non-performing mortgage loans
Workout/capital structuring skills gained restructuring exposure totaling $4+ billion during early ‘90’s US real estate crisis and 2002 Argentine crisis. Member of various creditor committees representing debt in excess of $20 billion
Senior Credit Officer of Citigroup with Real Estate initial
Hands-on experience in operations, financial controls, and risk management
Eric Stoclet
Monday, April 27, 2009 34