DUBAI (Reuters) - Aldar Properties ALDR.AD, Abu Dhabi’s biggest real estate developer, will focus on rental income and smaller projects instead of large developments in order to avoid the risk of becoming overstretched again, a senior executive said.
Majority state-owned Aldar piled on debt after being tasked with building trophy assets for the Abu Dhabi government, including a Formula One circuit, the Yas Island entertainment district and lavish waterfront developments.
Then the company and other developers were hit hard when a property bubble burst in 2008-2010, pushing real estate prices down by more than 50 percent. The government stepped in with a $10 billion rescue for Aldar and last year moved to merge Aldar with smaller rival Sorouh Real Estate to create a business with $13 billion of assets.
The post-merger firm will focus more on earning income from malls, hotels and other rental properties which it owns, along with building small phased developments, Gurjit Singh, the company’s Chief Development Officer, told the Reuters Middle East Investment Summit.
“We are looking at a larger and more expansionary recurring income theme,” Singh said.
“We have refocused ourselves on very small phased developments. Whatever Aldar did in the past, in terms of creating destinations, is now providing a multiplier effect by improving value of locations for us and the end user.”
Aldar’s strategy mirrors that of many other property firms in the wake of the UAE’s property market crash, which pushed Abu Dhabi’s neighbor Dubai close to defaulting on its debt. Dubai’s largest developer Emaar Properties (EMAR.DU), for example, has shifted some focus from residential projects to retail and hospitality sector business that generates rental income.
Executives hope the new approach, including the emphasis on phased developments which can be slowed or suspended in response to market conditions, will reduce the risk of another boom-and-bust cycle.
Aldar has seven hotels on Yas Island and is building the UAE’s second-largest shopping mall, Yas Mall, which is expected to bring in more rental income on opening next year.
“The old Aldar had a specific mandate to build up a strong destination infrastructure for Abu Dhabi. The new Aldar has a strong footing, it’s deleveraging well and whatever Aldar did well in terms of destination build-up for Abu Dhabi is helping the company now,” said Singh.
Post the merger, Aldar has a land bank of over 77 million square meters in Abu Dhabi, one of the largest in the region.
The company was upgraded three notches last week by debt rating agency Moody’s Investors Service, which cited its recurring rental income and large land bank.
Housing prices in Abu Dhabi have begun to recover in recent months, aided by a directive from the Abu Dhabi government for all state employees who wish to continue receiving housing allowances to live in the emirate by the end of last month.
But fears of oversupply continue to weigh as more units are due to come on the market before the end of the year.
Aldar will deliver another 3,500 housing units in the next three to six months, which will slow the increase in rents, Singh said.
“You won’t see a 15-20 percent increase in rents - you may see a single-digit increase in rents as supply is coming in.”
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Editing by Andrew Torchia and Tom Pfeiffer