Blue City, the largest property development project in Oman, is being hit hard by the financial crisis and may need to make changes to survive, analysts say.
Blue City, the largest property development project in Oman, is being hit hard by the financial crisis and may need to make changes to survive, analysts say.

Oman's Blue City property development adapts to survive



ABU DHABI // Blue City, the largest property development project in Oman, is being hit hard by the financial crisis and may need to make changes to survive, analysts say. The developer behind the first phase of the US$20 billion (Dh73.46bn) project has missed sales targets since last summer, leading Fitch Ratings and Moody's Investors Service to downgrade its credit rating this week to reflect the project's vulnerability to the downturn.

Blue City issued bonds worth a total of $925 million in 2006 when markets were booming, but sales of $53.9m are far short of the $639m it expected to have by August. "Given the current environment they are really going to struggle to be able to try and address that shortfall," said Khalid Howladar, a vice president and senior credit officer for structured and Islamic finance at Moody's. "Blue City was being built in Oman in anticipation of the growth they thought would happen. Unfortunately, the timing of this wasn't really working in their favour."

With oil revenues declining, Oman has begun a campaign to capitalise on its cooler and mountainous terrain by becoming a high-end tourist destination. At the forefront of these efforts was Blue City, a 2.2 square kilometre piece of land that would bring five-star hotels to the coast near Muscat and create housing suitable for the growing Omani population and expatriates looking for holiday homes. The project was to include hospitals, schools and entertainment facilities for 200,000 residents by the end of its 20-year construction process.

Even before the economic crisis began having an impact on its sales, the project was facing challenges because of an ownership dispute between the two stakeholders, Bahrain's AAJ Holding and Oman's Cyclone. Then, just as the project's sales push began, the global credit crisis weakened interest in Middle East property. Speculative buyers, in particular, left the market. Blue City, also known as Al Madina A'zarqa, has tried to sell larger groups of units to investors to boost sales but it still has not been able to meet its obligations.

Moody's said it was lowering the credit rating on about $399m of senior notes from the company to "Ba1" from "Baa3" because of "worse-than-expected transaction performance and a less favourable macroeconomic environment". Fitch Ratings downgraded four other classes of notes, worth $526m, to "CCC" and "C" from "B plus" and "B minus", citing the deterioration of Oman's property market. "Demand for retail villa and apartment at integrated tourism resorts in Oman appears to have reduced significantly over the last 18 months and has collapsed entirely on the project itself, with no sign of recovery in the short or medium term," Fitch said in a statement.

"Fitch understands that only a handful of units have been sold at the Blue City development since the start of the year." Executives at Blue City declined to comment. In an interview last September, Richard Russell, the chief executive of a company in charge of the first phase of the development, said he would finish the initial phase "on time" by Dec 2012. Fitch said sales were so slow that there was not enough money to pay the construction contractor, AECO, and that if "revenues do not significantly increase in the short term, money remaining from the advance payment will likely allow the contractor to be paid for approximately three more months".

This could lead to construction stalling and would mean the company may have to restructure some of the debt. @Email:bhope@thenational.ae

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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