Property project finance in the Gulf hit by global downturn

Property project financing in the gulf region has substantially dropped off due to the global financial crisis, a conference in Dubai has been told.

The property project finance market has also seen a number of changes including a shorter tenure and maturity terms and a tighter loan structure, according to senior executives in the industry.

A significant decline of active banks in the market fuelled primarily by a lack of liquidity in the financial system is behind the decline, said Thomas Waterhouse, Joint General Manager and Head of Energy and Natural Resources at Sumitomo Mitsui Banking Corporation Europe.

In addition, the disappearance of regional banks in the project finance sector, the lack of foreign currency and the impact of the correcting real estate market is aggravating the problem.

The amount of finance available to the sector in the Middle East is dwindling further because of a mismatch in terms of ongoing infrastructure projects and lack of funding.

'There is a strong need for project finance and if there is not enough volume in the market in terms of liquidity alternative structures have to be used,' David Wadham of Ashurst to the Flemings Gulf's fifth Project Finance Forum.

Michael Cooper, Director of Infrastructure Mena at HSBC, said the market came to a standstill in the last quarter of 2008 and first quarter of 2009, and project finance deals have almost dried up.

However, he added; 'People are beginning to look forward again, people are beginning to lend again but I don't think that we will return to the same terms we used to have. Definitely this time, pricing and tenor are going to be different in order to attract the bond market and Islamic products. Sponsors are witnessing tough days.'

Project finance involves financing of long-term infrastructure and industrial projects based upon a complex structure where project debt and equity are used to finance the project rather than the balance sheets of project sponsors.

But the region will still maintain its attractiveness, according to Rajesh Ramanathan, Vice-President of Apicorp's GCC Business Group. The development of projects, however, will undergo a dramatic shift in financing strategy.