Friday, November 07, 2008

Dubious about Dubai


OCTOBER 7, 2008
In Dubai, Show Goes On for Property

DUBAI -- Housing crisis? Mortgage meltdown? Credit crunch?

After spending a few hours at Cityscape, this Mideast boom-town's annual real-estate trade show, you just might forget about the financial crisis gripping much of the rest of the world.

—The Wall Street Journal


It seems like only a month ago that real estate speculators in Dubai were patiently explaining why their Real Estate Bubble was different from our Real Estate Bubble.

In fact, it was just a month ago!

On Sunday evening before the show, Nakheel, a Dubai-government-backed property developer, invited guests including the acting couple Catherine Zeta-Jones and Michael Douglas to the pink Atlantis hotel at the tip of its man-made, palm-shaped archipelago.

The occasion was the launch of Nakheel's latest project: a kilometer-tall skyscraper. The $38 billion project is supposed to someday tower above the world's current tallest building, Burj Dubai, itself nearing completion here.

Hey, with a government-backed developer and Catherine Zeta-Jones on board, what could go wrong with a kilometer-tall skyscraper?

"I'm sure most of you are asking why we're launching this, and you'd be mad not to question it," Nakheel's chief executive Chris O'Donnell said. He added, "The project will be built over 10 years, and we'll have many more [economic] cycles before then...the world will be a different place by the time it's built."

"Mad" is, we think, the exact word for
O’Donnell's assurances, as reported by the Wall Street Journal, that the speculation in Dubai will survive whatever cycles the world will throw at it.

In fact, O'Donnell's words bring back memories of summer, 2007, when an investment banker stood at a podium in New York City and confidently explained to a group of investors why Bubble-era multiples on peak-cycle EBITDA numbers for deep-cycle, capital intensive businesses like Freescale Semiconductor made sense.

The key, he said with a straight face, was the lack of restrictive covenants on the leveraged loans, which would help Freescale and others survive whatever economic cycles might be thrown their way.

Still, now that the leveraged loans of Freescale and others are going begging, we find that Perini Corp, a builder of mega-casinos among other things, wants to go to Dubai and get in on the game, as management explained on yesterday’s earnings call:

“The current economic climate involving the credit markets has caused some customers delay in certain new project starts, primarily in the hospitality and gaming markets. Some customers have decided to postpone preconstruction activity until financial markets regain their footing and open up credit capacity….

“Overall, we continue to see many opportunities to secure new business in each of our business segments, both domestic and international. Bob will share more details of our prospects in a few minutes, including our strategy to become a significant contractor in both Dubai and Abu Dhabi in the Middle East.

“In Dubai, we have agreements in principle with substantial local and international partners to participate in construction joint ventures which may be awarded within 90 days. These are for large hospitality and mixed-use projects for which we have participated in several design workshops to date….”

Call us cynics, but if we were building “large hospitality and mixed-use projects” in an overbuilt, Bubble-ridden market like Dubai, we’d want the cash up front, in the bank.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

2 comments:

Rich said...

FWIW,in the Commercial Metals call a week ago, they mentioned that rebar, which had been going for $1500/ton in the Arabian Gulf 3 months ago, can now be had for $500/ton. The bankers for the smaller traders that operate in the steel markets there apparently aren't keen on owning a boatload of steel.

Anonymous said...

interesting how the quote you took from that company was from their 2nd quarter results conference call, considering they just had their 3rd quarter conference call the day before you wrote your post. You might want to look into that. Just saying. Your point about Dubai is not unfounded. Lots of questions.