Complex Made Simple

House of cards: Arabtec saga exposes Dubai market is resting on shaky ground

Recent events prove that large real estate firms are more than capable of dragging the entire market down with them, despite positive IMF outlook.

By Philip P. Merrell

A turbulent week at Arabtec has contradicted an IMF forecast that Dubai is no longer a construction-driven economy.

Last week’s Country Report by the International Monetary Fund (IMF) highlights that Dubai’s “economic growth has become more broad-based” compared to crisis-stricken 2008. It points out that the real-estate sector’s share in the Dubai economy has dropped from 14 per cent in 2008 to 8 per cent in 2013.

However, throughout last week, construction giants Arabtec endured first turmoil, then a surge in shares with a profound effect on the Dubai Financial Market (DFM). As such, the controversy surrounding this saga has reignited the vulnerability of Dubai faces as a result of careless management within the real-estate sector.

In the past 12 months, Arabtec, backed by Abu Dhabi investment giants Aabar, announced a series of high profile ventures, from a $40 billion deal to build one million homes in Egypt, to intentions of expanding their activity into the oil and gas sectors. Consequently, the market value of the firm rocketed in the last year by 323 per cent.

However, trouble began looming in early June of this year when CEO Hasan Ismaik upped his stake in the firm from 8 per cent to 28 per cent, only to ‘resign’ two weeks later. Simultaneously, Aabar had decreased their shares in the company from 21.57 to 18.94 per cent.  Whether Ismaik’s departure was voluntary or not, investors began fearing the worst, and throughout June, shares at Arabtec began to plunge, eliminating $6.5 billion in market value.

Last Wednesday (June 2nd), the new leadership organised a press conference in which they categorically denied rumours that Aabar Investments would be deserting them, as well as confirming that no future projects would be cancelled or delayed. Buoyed by this stability, but also the low share price, which had dropped by 45 per cent throughout June, confidence was instantly restored as Arabtec shares began to soar once again. In the following four sessions, they climbed a staggering 55 percent to AED4.2, although this was still 46 per cent below their record peak in May.

Crucially, the extreme volatility surrounding Arabtec stock has had a profound effect on the construction sector and, more worryingly, the entire DFM. On June 30, when Arabtec shares dropped a maximum allowed 10 per cent to a record low of AED2.61, other Dubai real-estate powerhouses helplessly followed suit. Drake & Scull International also endured a maximum daily loss of 10 per cent of their value, Union Properties fell 9.55 per cent, and Dubai Investment Co dropped 8.16 per cent, whilst regional giants Emaar Properties fared slightly better losing 3.67 per cent in value. Moreover, the DFM, as a whole, recorded a loss of 4.41 per cent by the end of the day.

Unsurprisingly, the rapid surge in Arabtec stock that followed also transpired in a bullish rebound by the DFM, which has seen growth in consecutive sessions since the beginning of the month. Throughout July, the DFM has recorded a total gain of 15.7 per cent.

This saga has raised several concerns, which demand answers in order to prevent another property crash from occurring. Namely, why had regulators turned a blind eye to such irregular management activity in Arabtec? A CEO tripling his shares in a firm that aims to become one of the globe’s top 10 companies by 2018, and then stepping down within two weeks citing ‘personal reasons’, is nothing short of scandalous. How Ismaik financed this acquisition is equally puzzling and it is this sheer absence of transparency that prompted investors to push Arabtec into turmoil.

Secondly, how is it possible that such a crash within the construction sector has gone relatively unpunished? Despite losing $6.5 billion within days, Arabtec, like others in the sector, is back on the rise and showing no signs of slowdown.

Nonetheless, the positive rebound is no cause for celebration, as it exposes that Dubai’s real estate is more of an investors’ market than a homeowners’ one. Whilst steps have been taken to limit property flipping, such as increasing deposit and registration costs, in a city ever-engulfed by extravagant real estate projects, it will be difficult to curb this problem entirely.

Finally, the Arabtec saga contradicted, to a large extent, reports by the IMF that Dubai’s economy is no longer as susceptible to failures within the construction sector. The events of the past few weeks proved that large real estate firms are more than capable of dragging the entire market down with them, depending on internal activity.

Moreover, the report suggests, “the robust growth for Dubai in the coming years will be driven by big real estate projects and huge spend in preparation to host the Expo 2020”. This will mean grander and costlier projects, perhaps, than ever before as plans to build the world’s largest mall and the world’s busiest airport have already been launched (although, ironically, Dubai already holds these titles).

The IMF’s suggestion on how to ensure these mega-developments do not overrun on cost and overheat the market is to ensure that “careful macroeconomic management and appropriate strategic planning measures” are in place. Management, Arabtec has taught us, being the key word.