The project failed to meet its August 7th revenue target that it committed to when it borrowed the almost 1 billion dollars to start the project.
Abu Dhabi media outlet The National reports yesterday that BCC1 management confirmed that Blue City sales receipts were only $31mln, well short of the $101 commitment, and despite new CEO Richard Russell previously expressing confidence that they would meet the target.
The next challenge will be making November's revenue target, with BCC1 needing another $155m in revenue to meet the next target of $186m by Nov 7. And in a local (and global) real estate market hit by falling prices, tightening credit and a glut of similar opportunities that are much further down the track of completion (like the Wave), thats a hill to climb with 1 month taken out by Ramadan. That's 5 times the revenue raised in the last 6 months to get in the next 3 months. The CEO is already talking of promotions and discounts, but with much of the original money already spent on redesign and rapidly rising costs for construction, he'll have his work cut out. I'd expect the only option he has will be to offer discounted blocks of villas and apartments to some big players, perhaps in exchange for a much higher upfront deposit. Which will hardly help profitability but may get him past the important November hurdle.
Mr Russell's problems aren't restricted to a slow summer in Muscat either. My sources tell me that the experienced international management company hired by BCC1 to manage the development, Bovis Lend Lease, are (allegedly) heading for the exit and making plans to pull out of the job. Another horse change in mid-stream will not help, with the CEO being replaced only a couple of months ago. And it begs the question who will step into the breach? I predict a move 'downmarket' to a possibly less western company.
The disfunctional relationship between the owners Cyclone LLC and AAJ Holdings, who are still only talking through their lawyers as they battle for control and ownership in the Omani courts, also means the Board of Directors of BCC1 is certainly not running at full speed. And this is the sort of time when firm and steady governance at the most senior levels would be most wanted by the CEO and investors.
In June, sources close to the project told me that W.J. Towell, who had been asked to design the 1 million rials fit-out of the new headquarters office for BCC1, were kicked to the curb and new Contractors had to be hired. There are additional reports I can't confirm of other contractor change outs too.
It would seem contractor management is not a strong suit for the BCC1 team, headed of course by Said Anees Issa Al Zadjali, Chairman of the Board at Blue City Company 1.
Oh dear. Don't expect to read this in the Times of Oman, nats.
The big question is: when will the Government be forced to move in and do a rescue? I don't think there's anything fundamentally wrong with the concept or the location, but doesn't such a strategic project need to be in the hands of the professionals?
Watch this space.
Blue City misses yet more revenue targets
Bradley Hope
August 13. 2008
ABU DHABI // Blue City, a US$20 billion (Dh73.4bn) development that could put the Sultanate of Oman on the global property map, has fallen further behind in meeting its revenue targets in the wake of a Fitch Ratings warning that identified financial threats to the project.
The project has been consistently short of its revenue targets since it began sales earlier this year because of delays caused by a redesign of the master plan, legal disputes over the ownership of the parent company and a management shake-up.
In the past three months, Blue City has booked revenue of $3 million from home sales, taking its total revenue to $31m – far short of its Aug 7 target of $101m, said Richard Russell, the chief executive of Blue City Company 1, which is in charge of the first phase of construction of the project.
“We’ve had progress on collections, but there is still more to go,” he said of the development, located about 45 minutes northwest of Muscat.
The shortfalls led Fitch Ratings last month to put the project on “ratings watch negative” for $526m worth of debt it had raised for the first phase of the project as part of a $925m bond.
The Fitch report warned that while missing the targets would not likely lead to immediate sanctions by investors, it could mean problems on the horizon.
“If sales performance does not improve significantly over the coming months and quarters, the borrower may eventually struggle to continue funding the construction costs of the project,” the report said. Another report from Fitch is expected in the coming weeks.
Mr Russell said those concerns were premature and that the project would be finished on time, in 2012. In the coming months, more than 3,000 units, including 200 golf-course villas, will go on sale. There are also negotiations to sell large blocks of apartments to investors, which Mr Russell said “were getting very close” to completion.
Another $155m in revenue is needed to meet the next target of $186m by Nov 7. “We want to be on target by that date,” Mr Russell said. “In the summertime things slow down here, so we haven’t really been pushing new launches. Those are very much on track now. You’ll start to see some promotions.”
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