Dubai Property meltdown commences...

In a worrying sign for Dubai and perhaps for other nearby countries with big real estate ambitions, London and Dubai-based property wealth manager MiNC, developer of Prodigy 1 in Dubai's Jumeirah Village South, with almost 80% of the money collected up front on a property development that is underway, is now effectively blackmailing purchasers to either immediately pay an extra AED313,000, almost doubing the original price to AED688,000, or they won't finish the building and purchasers will loose 30% of what they've already paid. Ouch.

Photo: Generic Dubai hi-rise buildings now



Photo: Is this Dubai's hi-rise future?

Wow. The Developers blame the situation on all sorts of things, excluding their own project management incompetence and greed. IE: Apparently 2 banks have withdrawn project financing that they had agreed to provide. Oh really? Without penalty? I guess the original credit line agreement was drawn up on the back of a swarma wrapper. Oh, and the property was handed over late, and costs have gone up, and the cat ate his homework, and its not fair because they were supposed to be the ones coining serious money, not loosing it. So meanwhile they've stopped paying the builder, who naturally has now stopped building. And there is no cash.

This is just a taste of what is to come. The banks have simply stopped providing finance, to builders, developers and to most purchasers. In fact, apparently UAE banks now won't even give you a credit card if you work for a developer. The problems may well destroy the whole business model throughout the region, of selling off plan and funding construction through pre-payments, and get us back to where it actually takes a company with some serious financial muscle and project mamangement skills to do a big development. In the current situation, anyone buying 'off plan' IMHO need their head examined.

Its also nice to see some of these young, Expat (esp British), and terribly loud and annoying Dubai real estate swindlers getting laid off too. Getting space at the bar in the pubs in the Irish Village and Jumeirah may soon be a little easier.

I wonder when we'll start seeing similar letters from some of Oman's real estate developments... (In fact, a bond & Trading Update from Blue City is about due I seem to recall...)

Here's the letter. Note how long it takes to get to the important part! See www.propertycommunity.com/forum for the full discussion.

Letter
RE: Prodigy 1/Jumeirah Executive, Jumeirah Village South
Given the current economic climate and the impact on the property sector, including MiNC, I am writing to provide an update on our strategy and plans going forward in relation to the Prodigy 1 building. The purpose of this letter is to highlight the issues we face in completing this building and proposed solutions. We need your assistance in achieving these plans.

As you will be aware, we have been experiencing delays in completing this project. I would like to assure you that the successful completion of this project has been, and remains, our most critical business priority. We are absolutely committed to making sure we deliver on our promise. However, we have faced a number of challenges since the start of the project, and we are being further challenged by the fall-out from the economic crisis in the region. There follows a summary of the challenges and our proposal for overcoming these:
• We launched the Prodigy 1 project in October 2006, following the purchase of land from Nakheel. Having been promised immediate hand-over of the land, Nakheel actually delivered the land for construction in May 2008. Even though the apartments in Prodigy 1 had substantially been sold, the delay in receiving the land from Nakheel had a significant negative impact on the project;
• Construction prices doubled during the time we waited for the land to be handed over, with a significant negative effect on the viability of the project;
• We also witnessed a doubling of construction-related professional fees and a large increase in government-imposed costs during this period;
• The introduction of new regulations by the Government of Dubai, although welcome in concept, made it extremely difficult for us to proceed with the project. This was because our financial model was different to that imposed by the Government of Dubai; whereas we had envisaged funding the construction of Prodigy 1 with cash flow from the overall Prodigy project cash flow (six buildings), this was no longer allowed;
• The arrival of the global financial crisis has had a severe impact on the monies MiNC has available to build Prodigy 1. We are no longer able to subsidise construction of the project; the project needs to be self-funded as originally intended;
• Additionally, the liquidity squeeze in local banks has recently caused two of our local banks to withdraw project finance for Prodigy 1, having originally agreed to provide this funding.

The following is the status of the project as a result of the above:
• The vast majority of apartments in the project have been sold.
• The project is no longer financially viable; costs have increased to the extent that MiNC would make a significant and material loss if it were to build this project. MiNC can no longer afford to subsidise this loss;
• Construction had commenced on the project; however, progress has been halted, as the contractor has not been paid due to the withdrawal of project funding by the bank. The project has a severe cash flow shortage.

In short the project has stalled and we do not see it progressing any further in the current economic climate unless we are able to inject cash in to this project as a matter of urgency. We are determined to see this project through to the finish despite these uncontrollable events.

Our proposal
In order to ensure that we are able to construct the Prodigy 1 building and deliver your unit to you, we need you to pay an additional AED 313,000 for your apartment. Given current trading conditions, we believe that this is the only viable option available. We will need all of this additional payment up-front in order to continue with construction. The other installments will remain as per the original schedule.
Your new price would be AED 688,000. This equates to AED 1,000 per square foot.
In exchange for this, we will be able to instruct our contractors to re-commence construction of this building immediately. Clearly this will be dependent on all buyers accepting this offer, otherwise your money will not be utilised. We recognise that our valued customers will not be pleased with an increase in the cost of the unit. We hope that some of your displeasure will be mitigated by the fact that the ultimate price you will have paid for your unit will ultimately be significantly below market value at time of completion. We estimate that your revised cost will be at least 25% below market value. We also believe that rental yields will remain firm at 8-10% of current values and much higher than this on purchase price. Should you agree to our proposal, we will of course increase our rental guarantee to 8% of your increased purchase price.

Summary
I would like to assure you that we have seriously considered every option to arrive at the proposal presented above, and that we sincerely regret the changes to our original agreement.

The current economic climate and the impact on the property sector are certainly 'unique' and thus require 'unique' thinking, analysis and action. The proposal outlined above is something that MiNC would never consider under normal circumstances. Events outside of our control have forced us to make difficult decisions such as these. In light of the current market dynamics in Dubai, we believe that this is a positive step in achieving a successful completion of this project. We hope that you feel the same way, remaining enthusiastic and positive in achieving this goal with us.

We sincerely apologise for the inconvenience this communication and subsequent actions required of you have caused.

To reiterate my sentiments above, I and everyone at MiNC is absolutely committed to building Prodigy 1 so that we can deliver your unit no later than June 2010. We believe that our proposed course of action will ensure we meet this target. Failing this, we fear that the project will be suspended, possibly permanently.
A sales representative from our office will be contacting you imminently to discuss this further and address any concerns you may have. In the meantime, if you have any questions in regard to the above, please do not hesitate to contact:
Sales Customer Service
Mr. Muawia Khalil | Tel: +971 50 453 8652 Ms. Pooja Lal | Tel: +971 50 658 7667
If you agree to the proposal outlined above, could you please signify your acceptance by signing and dating the Appendix attached, returning it to this office by fax or scanned copy via email at your earliest possible convenience. I look forward to providing you more updates following the positive outcome of this proposal.

Yours sincerely,
Haroon Mahmood
Chief Executive Officer, Dubai