Property investors clash with Nakheel in Dubai

If you were starting to doubt the veracity of the press releases being issued by Dubai, the latest news should settle the matter once and for all. Back in March this year, the major developers in Dubai started canceling projects and refusing to repay deposits. Nakheel, which canceled the Trump Tower in Dubai offered - nay insisted - that investors accept a unit in other developments. This has been argued about since that time, but they are holding out against the suggestion that a unit in a different development is not the same thing - financially or otherwise. Apparently any protests have fallen on deaf ears, and Nakheel have been issuing credit notes on other canceled projects, rather than refund any money.

Dubai Waterfront and Palm Jebel Ali, are now also canceled or delayed and investors are being forced to accept consolation units in other developments. Quite how this is an acceptable practice is beyond me, but when the developer is owned by the government, and runs the law courts, I suspect you can do as you please. Personally - I think this is a huge mistake, and is generating so much ill-will, many will never return to Dubai. There is apparently brisk trade in these "credit notes," as would-be investors seek some damage limitation.

According to a recent article in the Financial Times, which has now mysteriously been taken off line:

The growing use of these transactions comes as the developer, arguably the most high-profile victim of the Dubai property crash, seeks to raise $4bn needed to settle a $3.5bn Islamic bond, plus profits, due in December, and to meet invoices from contractors and suppliers. Thousands of “credit notes” have been issued since April, as the developer seeks to shrink its $80bn project portfolio and to cut expenditure, the brokers say.

Hossam, who asked that his full name not be used, last year put down Dh1m ($272,330) for a villa in Veneto, billed as the most exclusive residential district in the Waterfront project. Veneto has since been deferred by Nakheel. Two months ago Hossam managed to sell his investment to another Nakheel investor – but only at a 50 per cent discount. The buyer used this “credit note”, plus an extra injection of cash, towards another company property.

“Of course I am angry that I lose money, but what am I going to do? Sue the government?” he asks. “At least the notes have created some liquidity, the larger problem lies with the private developers.”

Hossam is more troubled by the millions of dirhams he ploughed into a private developer which has gone bust during the recession, leaving his family living hand-to-mouth.

The trade in these “credit notes” is helping lubricate the clogged property market in Dubai, where volumes have declined as prices halved since the peak last year. “It’s been a very busy market,” says one broker, who declined to be named. Emaar, the listed property company, has also offered consolidation deals to customers, he says.

Nakheel confirmed that it was consolidating properties – it declines to use the term “credit notes” – but would not say how many it has approved.

“Investors in projects that have been deferred have the option of consolidation if they own other properties within the Nakheel portfolio,” the company said. “The advantage to the investor is that Nakheel is able to hand over property to the owner sooner than it might on a deferred project and help investors reduce their financial exposure.”

The consolidations also show the painful measures the company is taking to secure money.

Last week Nakheel raised more than $170m by selling its stake in Mirvac, an Australian developer. The company’s parent, Dubai World, the guarantor of Nakheel’s 2009 bond, is considering other ways of raising cash as refinancing looms. This year it asked contractors and suppliers to take “haircuts” of about 25-35 per cent on unpaid invoices.

But bankers say the company is losing future profits since the cash payments made as part of these consolidations are a fraction of what the company could expect to gain at a later date, but they do at least cover construction costs.

“Forget profits, it’s all about the balance sheet right now,” says one banker.

On the other side of the deal sits James, who has taken advantage of another investor’s woes to shave $50,000 off the $800,000 price of his off-plan villa. Legally, James, who works in financial services, has bought his counterparty’s property outright, but in effect he is paying a 50 per cent discount on the value of his counterparty’s down payment, in this case a villa in part of the Waterfront.

James has agreed with Nakheel to transfer his counterparty’s down payment into James’s last instalment payment due on another Nakheel development. His counterparty has walked away with about half of his original investment, but the full face value goes into James’s villa. The contract for the deferred Waterfront property has been cancelled.

Crucially, Nakheel asked James to inject cash worth 25 per cent of the value of the “credit note”. Brokers say the cash percentage sought by Nakheel is increasing, but the company says it averages 30 per cent.

Before sealing the deal, James clambered over the fence of his new property to check progress. Based on what he saw, he believes the building will be ready next year and so he is willing to gamble on the developer meeting its schedule.

“It’s a good for me, but I feel sorry for the other guy,” he says. “The government is not honouring a contract with him.

Where this article disappeared to is a mystery, the why is fairly obvious, and a little scary as to just how manipulated the information being provided by so-called impartial news sources is. Emaar has been offering credit notes also, and a google group was set up where investors who have paid for investment property in Dubai, but are now being faced with this issue can discuss the matter. Dubai property investors group. The problem facing small investors is the insane cost of attempting legal action individually. Most "lawyers" in Dubai require an up-front fee in the order of 10% of the money invested and have very little chance of winning a battle.