Sorouh is unfazed by drop in profits

Abu Dhabi's second-largest developer sees fourth-quarter profit fall by almost 40 per cent as it increased provisions and recognised losses from three associated companies.

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Sorouh Real Estate, Abu Dhabi's second-largest developer, saw fourth-quarter profit fall by almost 40 per cent as it increased provisions and recognised losses from three associated companies. Net profit fell to Dh28.1 million (US$7.6m) from Dh46.4m a year ago, worse than most analysts expected. Egypt's EFG-Hermes had expected the developer to report a net profit of Dh181m for the period.

The company increased provisions to Dh242m for the period because of "current economic conditions", and also absorbed a Dh51m loss from its stakes in Aseel Finance, Green Emirates Properties and Al Maabar International Investment. The biggest contributor to profits during the period was the sale of 643,000 square metres of land in Alghadeer, Sorouh's latest development, launched in 2008. "The key transaction was a land sale in Alghadeer, which is due for completion in 2012," Richard Amos, the chief financial officer said yesterday. "It created a liquid asset from an illiquid asset and helps us to de-risk because we now have additional partners in the transaction and obviously they will make future cash calls in order to complete the development."

The land plot on which the first phase of the project will be built was sold to Al Sdeirah Real Estate Investment, a new joint venture company which is owned by four private investors and 30 per cent by Sorouh, said Mr Amos, who declined to identify the private investors. The rapid decline in house prices in the emirate has prompted Sorouh to switch focus to retaining properties for the rental market, which remains strong as a result of a limited supply of homes and a continuing influx of expatriates. The decline in profits failed to dampen investor appetite for the stock, which closed 3.6 per cent higher on Wednesday.

"I really am quite impressed with the deal to sell the land to this joint venture," said Chet Riley, an analyst at Nomura Capital. "More of these companies should actually seek that sort of third party equity capital, rather than look to fund developments continuously from the banking sector. This is clearly what these guys have done and in that respect they are leading a cycle." Sorouh said that 900 rental units at its Sas Al Nakhl, Khalidiya Village and Al Oyoun Village developments were fully leased. Further rental income will be derived this year from the investment portfolios in Sun and Sky Towers at the entrance to Shams Abu Dhabi on Al Reem Island - scheduled for delivery in the summer.

"We still have nearly $3 billion of cash on the balance sheet. That is a good position to be in at this stage of the cycle," said Mr Amos. "We have got a very underleveraged balance sheet at this point, almost no debt at all. The most obvious thing to do would therefore be to raise bank debt." Sorouh will launch two further developments dedicated to Emirati housing at this year's Cityscape property exhibition in Abu Dhabi in April.