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Gulf developers will look more to banks for finance

Industry insiders are calling on the banks and other lenders to take a lead in helping the region's real estate markets recover from the downturn. They believe that developers will increasingly need to turn to banks to secure funds for project construction as the market moves away from its reliance on off-plan sales.

Many projects have been put on hold as developers struggle with cash flow due to an over-dependence on off-plan sales and a lack of liquidity in the market, while uncertainty over whether projects will be built has encouraged buyers to default on payments.

While banks may be reluctant to finance property developments, the funding basis where most of the construction is paid for by them, with a small percentage coming from pre-sales, is one that is needed especially in Dubai where projects are being cancelled and put on hold.

'I would say the majority of projects will have to be financed by banks rather than investors,' said Firoze Kapadia, the executive director of treasury and investments for Sorough Real Estate.

Sorouh Real Estate He added that bank support would add credibility to a project by ensuring its delivery and quality, although bank finance was likely to be limited to developers who were known and trusted.

'It's about name lending. The banks will look to a developer they can trust and will be willing to finance if they see them making progress and delivering on developments,' he explained.

Nicholas Maclean, the managing director at CB Richard Ellis, agreed that there needs to be a fundamental change in how developments are funded. 'We need bank finance. Provided the plan and scheme is right and is needed in the marketplace, the banks will want to share in the profitability through their lending. It's not a great time for them to do so, but I think it's essential.'

Developers would also need to look towards other sources of finance, such as capital markets. 'We rely heavily on local banks to fund us but that is a limited pool. After that, you have to tap the capital markets. It could be a mixture of securitisation to project financing or trying to attract private equity. If things are coming out of the ground, then people are more willing to invest with you,' added Kapadia.

Dubai developer Omniyat Properties has funded the construction of its projects entirely through off-plan sales but now admits it has to change. Stephen Ashford, the company's group director, said it will look at more intelligently structured off-plan packages to help fund part of projects, while the rest would come from banks.