Several sharp small businessmen in the UAE have recently noticed that the opening up of the real estate sector to foreign ownership offers them the chance to load some valuable real estate on to their balance sheet free of charge.
How does it work? Simple. Instead of paying out rent for the accommodation of expatriate staff, the company buys property and uses the same money to pay a mortgage. The villas and apartments then become assets on the balance sheet of the company, balanced by the mortgage liability.
Overtime the mortgage will be paid down and the company will be able to borrow against its real estate to fund expansion.
Of course, any business has to be careful not to take on more debt than it can handle. But it is unlikely that any UAE mortgage company will lend more than a conservative amount in any case.
This sort of investment, and that is exactly what it is, is especially useful for companies in the service sector which otherwise do not have physical assets but may have a strong cash flow from their ongoing business.
There is also a 'rainy day' argument. If the business contracted in the future and staffing was reduced, then villas or apartments could be rented out as an alternative income stream, or sold to tide the business over.
Now given that many companies in the Dubai Tecom free zone are healthy service companies, it would seem to make a lot of sense to spend money that is currently wasted on rental payments on property, or existing staff could be offered accommodation at advantageous rates to secure a solid tenant.
For ultimately building up the balance sheet of a company will provide a more solid financial position, greater flexibility in financing and make the company more valuable to a prospective buyer.
Of course, some might argue that owning property in the UAE carries certain inherent risks, but then anyone owning a business in the UAE has already taken that risk and should be more concerned about maximizing the value of their company.
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Logical reasons to add real estate to a UAE balance sheet
- Wednesday, January 22 - 2003 at 10:44
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Peter J. CooperWednesday, January 22 - 2003 at 10:44 UAE local time (GMT+4)
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