Thursday, August 14, 2008

Woes continue at Blue City. Poor sales and Bovis heads for the exit

In the on-going saga that is, supposedly, Oman's biggest single investment project, Blue City or Al Madina A'zarqa, the woes continue. The grand design is struggling to move forward on plan.

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.”
...

15 comments:

  1. I guess this just shows that 'Vitamin W' is just a placebo after all.

    Bobindubai

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  2. Thanks for this informative one on Blue City. As you have correctly said there is nothing conceptually wrong with the project, but as is the case with many other project failures in Oman, it is unprofessional management that is the cause of failure in stark contrast to huge success in UAE. You might have read about heads rolling in Nakheel project. Will that happen over here?

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  3. Bob

    Well, we'll see... Vitamin W may still be in play. As far as I know the courts are still ongoing.

    Anon
    PICK a nickname will you? (you're still anonymous)...
    Project Management is of variable quality the world over. But you'd think a country level strategic project of $20bln would be crawling with both high-level international heavyweight experienced project managers and have lots of Government oversight.

    Its hard to see evidence for either in this case...

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  4. Great article by Matt Ross about the Blue City in Time Out. "the majority of apartments and villas have already been sold...only a handful still available...". Seems he knows something the CEO doesn't.

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  5. Great concept indeed but a project of this nature requires critical mass to attract additional investment - it appears that BCC1 is closer to meltdown than ever.

    When are we going to see the holding company stop their penny wise pound foolish attitude and hire some top level property professionals to bail their project out of the poo or will they continue to bury their collective heads in the sand until the project is beyond recovery and then look for a scapegoat?(not to say the new CEO is unqualified or lacks experience, but he is an island in the stream and needs the support of a good few strategic thinkers in his Board)

    Selling the family silver in a fire-sale is a kneejerk reaction to the pressures of the bond terms and not a remedy! Band aid broken leg fix .... make a sentence.

    White Knight

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  6. Great concept indeed but a project of this nature requires critical mass to attract additional investment - it appears that BCC1 is closer to meltdown than ever.

    When are we going to see the holding company stop their penny wise pound foolish attitude and hire some top level property professionals to bail their project out of the poo or will they continue to bury their collective heads in the sand until the project is beyond recovery and then look for a scapegoat?(not to say the new CEO is unqualified or lacks experience, but he is an island in the stream and needs the support of a good few strategic thinkers in his Board)

    Selling the family silver in a fire-sale is a kneejerk reaction to the pressures of the bond terms and not a remedy! Band aid broken leg fix .... make a sentence.

    White Knight

    ReplyDelete
  7. Are you referring to the same CEO who recently stated that sales levels were above expectations? At the same time that the contractor said that 95% of the design was completed? Seems to me that both are very qualified.... liers. Note: both statements were made at the 'signing ceremony' for a... catering contract. How sad is that?! Not the desperately awaited ground-breaking ceremony, a sales launch, sales-targets-achieved, handover of first property to the buyers, or whatever sensible celebration... but a ceremony with press-invitations for a simple site-catering deal!? This says it all: there is simply no other (positive) news on Blue City to share with the nation.

    The Greek

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  8. Still no resolution of the court case with AAJ...no design presentations...no construction activities...no sales launch...
    Is Blue City really dead now?

    Ibrahim

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  9. Found some new facts and unanswered queries regarding Blue City on NewsBriefs. Indeed strange that all has gone quiet when so many interesting things seem to be going on there (as listed on NewsBriefs): 'postponed court case, failing the 3rd sales test, the Fitch-visit, the resignation of the sales executive, the exit plans by the contractor, the departure of the project management company and the related potential legal actions against Blue City, the lack of new sales launches for many months'.
    Any further insights, anybody?

    ReplyDelete
  10. The insight is this - one way or another this project is going to be a great success.

    The fact that many out there believe the opposite just creates a huge opportunity for those who can see a little bit forward.

    This project has its angels...

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  11. HE and his high-level friends have to date not been able to get this project on track. I indeed don't see how they would be able to do this now after the global crisis has arrived in the region.
    Anyway, sweet dreams Mr. Stakeholder.

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  12. Stakeholder, right? Let me guess - working for Blue City; probably one of the many new executives appointed over the past few months? Hardly a reliable source of information I would think.

    The insight is that for a long time now, the only positive news regarding this project is coming from the project company itself. Whether it is in the newspapers, the blogs or elsewhere, no good news has come from buyers, investors, contractors, consultants, project managers, real estate agents, rating agency, banks, general public, etc.

    The only angels involved are probably those who's personal future (and financial gain!) directly depends on the continuation of this project.

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  13. My dear friend Oo… By using the name “stakeholder” I obviously do not hide as to where I stand…I am not a shareholder…I am a stakeholder…I am on the side of those who wish this project to be a success - as any Omani, expat, or anybody else working in the wider spectrum of the real estate development industry should be – tell us where you stand...so the reliability of your comments can also be judged accordingly...

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  14. I'm certainly not shareholder or buyer. I simply have nothing to gain or lose when it comes to the success of Blue City. I am just interested in what is really (not) happening, not in what Blue City wants us to believe. If you really wish this project to be a success, you (as one of Blue City executives) should start with providing factual and full information to the public. But that would be very inconvenient for Blue City, wouldn't it?

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  15. Dear Oo-> I do not have the time my friend to write in many blogs...
    All-> you will find true answers and some very interesting discussions with people that are not biased and are seeking the truth(e.g. Ahmed) and some not very interesting exchange of accusations with blinded critics/biased/fanatics who are not interested in facts and when facts are presented to them they are talking about "tortures" (this is my friend Oo) in the discussion that has taken place the last two thee days in newsbriefs...Enjoy!

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If you wish to post anonymously, please pick a nickname by selecting the Name/URL option, or at least sign off your comment with one! I will delete comments I find objectionable or needlessly inflammatory. Sorry for the word verification.... OMG the spam has gotten BAD these past 12 months... trying to avoid making one log in...