Meanwhile, the impact of the 'global liquidity crisis' continues to reach inexorably towards Oman. The problems:
- Low oil prices lately (and most importantly lower than budgeted by Government for next year),
- Falling demand & low global prices for exports such as copper and aggregate, Aluminium and refined oil products, shipping, LNG, methanol,
- Likely reduced demand from high paying tourists (although that is yet to be confirmed, I think it's likely that intense competition will take place between classical tourist destinations, like Far East, Mediterranean, Caribbean, and ME, lowering profit margins and growth).
- The acknowledged significant reduction in expected future growth, which effects lower NPV for businesses
- Low share prices
On the upside, import prices are plummeting, helped by the stronger dollar, for steel, cement, food, cars, heavy machinery, and oil field services. International contractors will be searching for deals, and skilled expats for jobs. The Free Trade Agreement with the US might help too. Bulk shipping charges have collapsed, making transportation of imports and exports much cheaper (~80% cheaper).
One big question at present is:
what is the status and implications for real estate developments in Oman, especially given the continuing and surprisingly rapid meltdown of the Dubai property bubble?
Obviously, the news is going to be biased to the downside in the short to medium term for all real estate in Oman, but especially the high-end, away from industry, semi-tourism mega-projects.
In fact, the whole "buy off-plan" business model is probably busted. The idea was that by buying off-plan (ie not yet built), purchasers took on some of the development's risk, significantly lowering financing costs and developer risk, enabling them to - in exchange - get a lower than market purchasing price, locked in, and effectively buying a cheaper call option on the future real estate market, which had been so buoyant for so long as to seem a one-way bet. At the Wave recently, people were even fighting for the right just to make a deposit. The greed was palpable.
If I had a house being built right now, I'd be very careful to make sure original specifications are being adhered to. The temptation to cut costs on these pre-partially paid deals must be hard to resist. Contractual minimum will be the rule, and any variations sharply priced, so make sure you have regular independent inspections during construction. I wouldn't rely on the local building inspector to make sure you got the right tiles, kitchen, wall thickness, fittings, water system, etc etc.
And if you haven't yet bought an off plan Middle East house, ...... why, pat your self on the back for a fantastic investment decision successfully completed!! Your foresight has saved you 100,000s of thousands of dollars!
Of course, the bottom line for Oman will mean in the short term, less investment spending (and the total being put on hold right now must be at least 6 billion rials worth, over several years mind you). That's a big hit on the economy, especially when then taking account of the multiplier effect on all the money invested, plus the jobs for people, especially Omanis, that will at best be delayed... Not good. No wonder Galfar shares are down.
As for the specific developments, what's the latest?
The Wave.
Always the most organised and professional of the lot, The Wave has had the advantage of getting in early and having thus completed many houses that are paid for (phase 1), and probably getting reasonable contracts for construction. Secondary sales have collapsed, but perhaps mainly because the prices being asked are still overinflated compared to what they originally cost just a few years ago, and this is exposing those who bought only to sell on. The Wave have probably locked in decent project finance too from Bank Muscat.
I don't have any detailed intel yet on their inner-financing status, but as the Wave is owned primarily by the Government of Oman and so much cost is sunk, they will survive. A problem in the short-term would be if houses already sold/constructed come onto the market at lower prices than are profitable for subsequent new phases. They may take this opportunity to renegotiate contracts for construction & fitting, and share the pain a little. Long term I think the Wave will be fine, if you want to live in an expensive house on the Muscat Airport flight path surrounded by construction for several years to come with little upside in investment value. At least you can commute to Muscat to work.Muscat Hills
The villa/golf course project near Boucher that is already well underway. Recently relaunched, and allegedly refinanced by HM himself, it seems to be progressing too. (Only after purchasers threatened legal action over an attempt by developers to extract more cash from them post-contract, allegedly after someone embezzeled a load of the project cash). As long as they have now locked down construction and financing (which they should have done ages ago) this project should complete OK, although the market prices will might mean a short-term loss on paper for the purchasers and not much profit for the developers. Again, at least you can commute easily.
OHI Qurm/Burhan Heights/Shanfari villas redevelopment
Announced just before the shit hit the fan, and with demolition started of the old houses, this project seems to be in trouble. The sales office is substandard and amateurish, no deal has been concluded on the proposed 4**** hotel, and talk is that the project will be suspended. If you have shit-loads of cash right now, and perhaps own a construction company, this would make a killer purchase right now, BTW. Galfar Developments anyone?
Blue City
Ah, Blue City. If you don't know the history, you've got some reading to do. IMHO, this project was in big trouble even before the crisis. Right now, Blue City is in the worst position for a real estate development to find themselves when cash is tight, with a lot of their seed capital sunk or committed, and the likelihood of further off-plan sales (needed to finance construction) now much lower, if not zero.
The borrowed money (via $925 million in bonds) has been substantially spent on a complete re-design, salaries, commissions to the financiers, marketing junkets around the world, advertising, plus building the construction camp and bulldozing some roads. The planned 27 hole golf course had already been pared back to 18 holes, and sales are well below target and apparently in breach of bond covenants. The construction managing company Bovis has quit, claiming non-payment. Lots of churn in other contractors and in senior management. The shareholders [AAJH and Cyclone LLC] continue to battle in the courts for ownership, and as a result of that dispute I'm not aware of an official Board meeting being held lately, thus allowing the development company executive to run independently of formal company Governance. The mega-hospital/medical village sponsers have pulled out. There has always been a lot of silly gossip alleging fishy dealings with money being siphoned off and even reports of a $1 miilion hush payment made to the ex-CEO, all of which I have no evidence for and is almost certainly not true. Not at all.
There has been a long and rather tedious exchange of essentially fact free opinions over the past few days on Sue Hutton's News Briefs Oman site, Blue City Comments, with someone calling themselves 'stakeholder' trying to say everything is fine, despite all the available facts, insider comments and common sense showing is it far from fine. He/She has been commenting on an earlier post here too.
I expect this project will be significantly scaled back to cut losses and rescue what they can. Bonds will be renegotiated, and the project will in the immediate short term turn into a smaller villa-style luxury hotel development combined with a few villas, golf course and an apartment block or two. I predict the principals will now use the crisis as an excuse for the greater project's collapse and seek Government support to fill all the holes. They will claim if it wasn't for the crisis that everything was fine and certainly nothing wrong with the original concept or management. Which I guess if you snort enough PCP-laced Andean marching powder and/or have your own money invested in the project might seem believable.
Salaam Yeti
Now that the village is moved, land reclaimed, mountains leveled and the breakwater built, those in the know say the project is on indefinite hold for now as things continue to develop in Dubai. Developer Sama Dubai have apparently placed all their projects on hold while they reevaluate, but I would expect, given the early stage of the development, that Dubai may have priority in the short-term. However, in the medium term, who knows, perhaps Oman will become a safer bet. Yeti was tipped by some Senior real estate contacts of mine some time ago as 'the one to buy' because of its proximity to Muscat, Shangri La type setting, and the significantly higher total area/number of houses ratio compared to the Wave.
Sama Dubai, which is part of the Dubai Holding conglomerate owned by Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s ruler, has had a few problems of late, with 4 senior executives arrested in the UAE Real Estate corruption probes.
A'Sifa
Unknown.
Omagine
The development company recently claimed (see prev post) "...There is at any rate no shortage of qualified and willing investors in Oman and its surrounding countries (the "Gulf Region") who are ready, willing and able to invest in the Project Company ...money simply isn't an issue..."
I guess we'll see! They claim to have $110 mln in the kitty, less than 10% of the projected project cost, but as no significant capital has been sunk in the ground, and they seem to be using a recycled design, they should have enough cash to wait a few years.
PDO Camp Redevelopment by MoT
The timing of the crisis, and the contraints of both project financing, real estate market, hotel demand and Government budgets, will almost certainly mean this project will be deferred indefinitely until conditions improve. PDO's residents have gotten a stay of execution for quite some time.
Other small retail/residence developments in Muscat: Qurm Wadi, Ghubra, ...
Construction is so far along that if local bank support continues to be available, these should be completed OK, as they are relatively small developments, aimed at the local market which is still significant. Whether they will sell, and at what price, is a different matter. But cashed up local big boys may well be in for a few bargains.
