Behind the Latest Gulf Real Estate Crisis

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Christof Koepsel / FIFA / Getty Images

Skyline view of Abu Dhabi

With banks reluctant to lend and a property market remaining pervasively weak, a major real estate developer in the United Arab Emirates said it needed a cash lifeline to keep operations going. Oh, no, is Dubai in more trouble?

Not exactly. The developer is not in Dubai, the emirate that has attracted as much attention for its debt woes in recent years as for the iconic real estate projects it no longer can afford, but in neighboring Abu Dhabi, and the developer feeling the squeeze is Aldar, the biggest real estate development company in the U.A.E. And Abu Dhabi is why the Aldar crisis, while massive, isn't really catastrophic.

Abu Dhabi agreed last week to purchase about $5.2 billion in assets to help Aldar repay its debt. Aldar is behind many of Abu Dhabi's signature projects, including the Yas Marina F1 circuit and the Ferrari World theme park, both of which it has sold back to Abu Dhabi. As the global credit crunch drove down values of the emirate's real estate by about a third, the developer found it couldn't pay its bills.

While most of the world paid attention to the boom and bust of Dubai, its sister city-state in the U.A.E., Abu Dhabi embarked on its own string of ambitious projects. "In Abu Dhabi, there was the same kind of crowd that wanted the big, grandiose status-symbol projects," says Christopher Davidson, a professor of Middle East politics at Durham University in England, who has written books on Dubai and Abu Dhabi. "They did get carried away, just not on the same scale."

In addition to commissioning nearly two dozen new hotels — including the 844-room Millennium Al Wahda hotel, the largest — Abu Dhabi began carving out new residential and commercial areas of empty sandscape, Dubai-style. The emirate also developed two formerly barren islands: Yas, the home of Abu Dhabi's Formula One track and the Ferrari World theme park; and Saadiyat, which is slated to become its cultural district, with local branches of the Guggenheim and Louvre museums.

While Yas Island opened to global fanfare, developer Aldar has posted four straight quarterly losses and has nearly $4 billion in debt due this year. "Some of the other [developers] are in exactly the same financial and developing cycle," says Chet Riley, a research analyst with Nomura Investment Bank in Dubai. "2011 is really the pinch point for all of these companies." Another prominent Abu Dhabi developer, Al Jaber Group, is seeking to delay payment of about $1.6 billion in debt. The family-owned conglomerate has projects worth about $4 billion in the pipeline and has hired KPMG to help reorganize its debt.

But Riley and other analysts agree that there is a key difference between Abu Dhabi and Dubai: cash.

"Dubai dreamed big without the means," says Jean-François Seznec, a former commercial banker who worked in the Gulf and now teaches at Georgetown University in Washington. "Abu Dhabi is dreaming big, and they have made some mistakes, but they have the money." That's because Abu Dhabi is the world's eighth largest oil producer and holds a sovereign wealth fund estimated to be worth about $500 billion. Such wealth gives it considerable means to prop up cash-poor developers. Its agreement to fund Aldar will help boost its stake in the company to about 60% this year, up from a 38% stake in 2010. "Aldar is heavily involved in government-sponsored projects. These projects represent half of their order book," Riley says. "You can't have a company like that undercapitalized or with liquidity concerns."

Another difference between the two emirates' situations is that Dubai's building boom depended on an "if you build it, they will come" approach that faltered once easy money from banks dried up, Seznec says. That led to a contraction in the financial and property sectors, two areas that had driven much of Dubai's growth. Over the past decade, the International Monetary Fund estimates, Dubai amassed $109 billion in debt. Abu Dhabi's projects, on the other hand, are spurred from demand that already exists. "They're desperate for buildings. Finding an apartment two years ago was a nightmare," Seznec says. "Abu Dhabi really was building according to real demand, not to create demand in the future."

So if there was demand, what caused the problems? Some Abu Dhabi developments were started on overly optimistic timelines. The economic downturn caused delays and even some redesigns of projects, making companies like Aldar short on cash when their bills came due. In the long run, analysts say, Abu Dhabi's building spree makes sense, because it largely adheres to its ambitious "Plan Abu Dhabi 2030" vision, which outlines how the emirate will diversify its economy away from oil and into tourism and heavy industry.

The Advanced Technology Investment Co., owned by Abu Dhabi, plans to spend as much as $7 billion to build a chipmaking plant that could open in 2014. In 2009, the government-owned company bought Chartered Semiconductor of Singapore for $1.8 billion, and it has a joint-venture arrangement with Advanced Micro Devices Inc. in Globalfoundries Inc., a semiconductor-manufacturing company. Last week, the emirate welcomed world leaders to the World Future Energy summit, which is sponsored by Masdar, the government's green-energy firm. "Abu Dhabi is investing in the right places — new sectors where they can have a competitive advantage," says Shady Shaher, a economist with Standard Chartered Bank in Dubai.

And as Abu Dhabi works towards those goals, its current economy remains stable. "The world still needs oil," Davidson says, "and Abu Dhabi is well placed for that."