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Wave of Property Mergers Expected

Mergers and buyouts could help real estate companies streamline their operations and trim payrolls and thus reduce their costs during the downturn, analysts said. “Consolidation is inevitable, whether for big or small companies,” said Charles Neil, Chief Executive Officer of Landmark Advisory, a property consultancy. “There are already so many developers in the market, and that was fine when there was demand. But with demand falling, consolidation is necessary to reduce costs as the absorptive capacity is also reduced.”

In particular, industry specialists forecast a thinning out among smaller and weaker developers in the so-called second and third tiers of the business.

“The net result of a shakeout should be an overall shrinkage of the real estate pie, with a larger portion of that being captured by the tier-one developers,” said Bobby Sarkar, Vice-President Equity Research of Al Mal Capital.

“Consolidation, if done properly, could prove beneficial in the longer-term for the overall real estate market,” Sarkar said. “Merged entities should, generally speaking, benefit from increased government support, which should help boost investor confidence.” He added, however, that he didn’t expect every merger to be “value-accretive” for the specific parties involved in it.

As a merger trend begins to take hold, Sarkar said, “I think you could see a resurgence of merger speculation between Union Properties and Deyaar.”

Sana Kapadia, Vice-President for Equity Research at EFG-Hermes, agreed that the proposed Emaar-Dubai Holding deal could trigger “speculative suggestions” about other mergers and said this would put short-term pressure on the share prices of some publicly listed real estate firms. “However, in the long-term, consolidation will create a tighter property market with better control over supply and greater ability to meet market needs,” Kapadia said.

“Our house view is that a full-fledged recovery is likely to occur in Dubai in 2010, which can be a function of liquidity being made available, demand picking up, better transparency and legal clarity being present and stronger confidence levels.”

Abid Junaid, Executive Director of ETA Star Property Developers, said he does not foresee smaller, independent developers to consolidate. “There would be no point for them to merge, as the idea of consolidation means adding value to each other,” he said. “The Emaar-Dubai Holding move, on the other hand, would open up moves by major players to consider joining their companies and forge strategic partnerships.”

Emaar’s planned tie-up with Dubai Properties, Tatweer and Sama Dubai would give the merged entity better control of new supply coming into the market, said Neil of Landmark Advisory.

“There could be more consolidations among property companies,” he said. ”The smaller ones would have the potential to save on costs and use their combined resources to finish projects. They may not have strong resources individually, but among partners, they could get stronger.”

· issacjohn@khaleejtimes.com