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April 2016

Manish Narayan, Senior Associate at Galadari Advocates & legal consultants, shares his view on how mega real estate projects can be carried out successfully in a climate of economic uncertainty, based on lessons learnt from 2008.

Dubai is already home to the tallest building in the world, and it has been recently announced that it will proceed with its ambitious Mall of the World project (MOTW). This is not only set to be the world’s first domed city, but once completed will be nine times larger than the Mall of America. It will house thousands of hotel rooms, the world’s largest indoor theme park, hundreds of buildings and its own fully functional transit system. The emirate has dubbed the project a “temperature-controlled pedestrian city.” Dubai has always had ambitious plans to be a year round tourism destination even in the height of summer, and this new mall will provide a completely climate-controlled environment, which will help in its aim of attracting approximately 180 million visitors a year. Dubai Holding COO Morgan Parker has said the development “sits at the heart of Dubai and will be critical to the emirate’s economic growth.”

A booming construction market

It has been estimated that there are USD 390 billion of construction projects underway in Dubai according to a recent Deloitte and Meed Projects report. The figures would be impressive for an established and mature economy, but they are remarkable for a growth market such as Dubai. They are also testament to Dubai’s ongoing success in attempts to diversify its economy. Growth in international visitors has risen by over 9% each year since 2010, according to Dubai’s Department of Tourism and Commerce Marketing and this is showing no signs of slowing. The Dubai construction market has proven itself to be more resilient than other nations despite challenges posed by low commodity prices. There have been indicators in the early stages of 2016 that developers are confident about the long term prospects of the region, with several constructions contracts awarded since the start of the new year, including the USD 380 million Palm Gateway Towers, the USD 370 million ICD Brookfield Place and the new USD 190 million Mandarin Oriental Hotel.

Risk versus opportunity

Dubai has weathered the current economic uncertainty better than other nations, but developers, investors and construction firms will still be wary of the economic headwinds. In the Middle East, emirates and countries find themselves in the midst of a sluggish real estate sector coupled with slow growth indicators in the global and regional economies. Falling oil prices have created a conundrum in the oil producing and dependent countries.

At any given point of time mega projects come with their inherent opportunities and risks. It is the balancing of the opportunity with the risk which determines the overall outcome. It is obviously the aim to limit the risk to whatever extent possible and towards which lessons learnt from similar projects and different timelines can be valuable resource. For instance, the lessons learnt from the real estate downturn of 2008, highlighted several factors which led to projects facing minor and major road blocks. There are certain key factors which any real estate project can take into account and more so for such a large and complex project such as the MOTW, spanning over 8,000,000 square feet.

It has been less than a decade since the downturn of 2008, which brought to light several real estate projects which were launched without any project specific feasibility studies. The decisions were made on unsubstantiated assumptions and influenced by the general market sentiment as opposed to fundamentals. Several projects did not take into account risks both internal and external and led to project delays and certain cases failure.

Success of mega projects

The success of a project will depend on several inter-related factors, that is, market demand, project feasibility, project finance, project management, as well as micro and macro-economic conditions. Therefore early stage project feasibility, which takes into account the variables and risks will allow for informed decision making by the project implementers, financiers and investors. It needs to be stressed that the feasibility takes into account the prevailing and predicted micro and macro-economic conditions and financial markets both at the local regional and global level.

Reports indicate that the MOTW will be implemented in phases, with only a quarter being completed in time for EXPO 2020. The fact that there will be phased project implementation indicates that the key stakeholders are aware of the impact that prevailing market conditions can have on the overall success of the project. It will also allow for re-evaluation of the project at different stages and adjustments in line with the market conditions.

Lessons learnt

During the downturn real estate projects were launched without sufficient project finances set in place. It was assumed, that the project cash flows will be sustained through the investor – buyer payments and no provisions was made for events of default by the investor – buyer. It has been reported that for the MOTW, 30% of the financing will be done by Dubai Holding and the balance financing shall be through a broad base of institutional investors and debt. Although having multiple stakeholders creates its own complexity, it in parallel puts into place checks and balances during the entire lifetime of such projects.

The role of effective project management cannot be underestimated in the implementation of such mega projects. It is critical that the planning of such projects be undertaken at an early stage with clear protocols and lines of communication between the different stakeholders. Further clear strategy for risk management is essential, the risk identified may be internal and external and effective strategies need to put in place to address them. Further the project delivery strategy would need to be determined, that is, traditional (design and build) or integrative (owner, designer and contractors have a stake in the project). During the downturn in 2008 several projects got delayed or stalled because of dispute between the owner and the contractors.

The lessons learned from the downturn in 2008, in synopsis are that projects face roadblocks if there is absence of early stage planning, comprehensive project feasibility report, project financing which can sustain defaults, project management and stakeholder participation in the decision making process.

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