Sorouh Real Estate, the second-largest developer in Abu Dhabi, suffered a 66 per cent decline in profits to Dh63 million (US$17.15m) in the third quarter as it made provisions for delayed payments from land buyers and paid fees relating to a sukuk that it redeemed this year.
The company was buoyed by a one-off land sale on Reem Island and the beginning of a government contract to build public housing in Abu Dhabi.
"Deal flow and land sales are not easy in this market," said Gurjit Singh, the chief operating officer of Sorouh. "You have to go out there and find the right kind of buyer."
The Abu Dhabi property market is coming back from a protracted slump that started in late 2008 when sales fell and developers encountered financing difficulties.
Jones Lang LaSalle said in its third-quarter report the crisis had "forced developers to reassess their schemes, scale back more ambitious projects, seek alternative means of funding and plan product more aligned to the end-user". Future supply is likely to be cut by about 60 per cent, compared with projects announced in 2008, Jones Lang LaSalle said, adding that residential prices and rental prices declined again in the third quarter.
Sorouh has sought to lessen the impact of the crisis with government contracts to build housing for Emiratis and restructuring its debts. This year, the company paid off a Dh4 billion sukuk that was mostly becoming due next year and secured a club loan from banks that will be paid off over four years.
Richard Amos, the chief financial officer of Sorouh, said it was not easy to get financing from banks because they were already at their limit for lending to the property sector. "Even though the Central Bank has put liquidity into the system by recapitalising the banks and putting deposits in the banks, they don't have room to lend to real estate because of these caps," he said.
As a result, most of the banks involved with the club loan were the same lenders that had bought its sukuk. In the third quarter, Sorouh included Dh42m of fees associated with redeeming the sukuk on top of another Dh38m as a provision for "doubtful debts".
Mr Amos said the provision came because some of its sub-developers were late in paying but he was confident they would not default because they had already paid an average of 62 per cent of the value of the land.
More profits will be recognised over the next year, as Sorouh begins handing over more property, the Sorouh executives said. The Sun and Sky Towers on Reem Island were supposed to be delivered starting in July but handovers have been delayed by building certification problems.
Sorouh is also weighed down in part by obligations to its subsidiaries. The company has been obliged to lend a significant amount of money to a joint venture with Tabreed to build a district cooling plant on Reem Island. As a result, the amount the company lists as due from related parties rose to Dh228.3m in the third quarter from Dh73.3m at the end of last year.
"We are actually having to fund the joint venture," said Mr Amos. "It's absolutely essential to have this in place and there isn't a lot of appetite in the market for lending, so we lent the money to the project."
Sorouh also managed to re-calibrate its work with the Abu Dhabi Urban Planning Council to build thousands of homes for Emiratis so it could begin recognising revenue on a quarterly basis.
In the third quarter it was able to report Dh87m in revenue from the Watani project, the master-planned community for UAE nationals. This will allow the company to report more revenue in future quarters that it would previously have reported at the end of the contract, when the homes were completed.
Still, the challenges appeared stiff in the short term. Not a single apartment was sold in the third quarter, according to Sorouh.
Mr Singh said he still held a positive view of the market, especially as Abu Dhabi continues to invest in the local economy and brings in more people to work at its companies.
