Recent announcements, such as the merger between Emaar and Dubai Holding, shows that developers are learning from past real estate cycles in other markets where companies that survived were those that built strong differentiated capabilities and diversified to stabilize sources of revenues, says the report from A.T. Kearney Middle East.
They can learn from similar real estate downturns such as those in Singapore and Hong Kong, which experienced strong boom busts in the past.
'With most property developers being cash strapped, with banks restricting lending and homebuyers defaulting on payments, the primary aim of consolidation is to pool resources to enable firms survive the downturn,' explained Dirk Buchta, Partner and Managing Director.
As well as the Emaar and Dubai Holding merger there are also currently consolidation moves underway within Dubai Holding for Dubai Properties, Sama Dubai, Bawadi, Remraam and the Tiger Woods golf course, Barwa and Qatar Real Estate Investment and consolidation of land from distressed developers into companies like Dubai Real Estate Corporation.
But Buchta warns that research shows that almost 70% of mergers fail, often due to such basics as lack of preparation, communication, unclear strategies or poor execution. He cites an example in Spain where poor timing and planning of a merger between two major developers failed, resulting in bankruptcy for the new company within six months of the merger.
Of those companies that do merge successfully only 29% achieve increased profitability. If developers are to merge, they need to ensure their company is on sound ground and research their prospective partner carefully before deciding this is the best solution.
'The main objective for a merger should not be size, which makes little sense in a quality-driven business like real estate development. The merged entities will have a reinforced position but risks will also increase,' he said.
He added that Dubai is regarded as a risky market and that the time of endless growth for opportunistic projects driven solely by land and cash availability is over.
Developers will compete for buyers and they need to define a convincing strategy to convince buyers why they should buy from them and not from the other developer. The report concludes that successful mergers can give leading Middle East players the critical mass and a competitive edge on the international scene.
