The awaited consolidation wave in the real estate industry in the GCC countries has started, A.T. Kearney, a leading global strategic consulting firm, said in a recent study. Developers demonstrate that they are mindful of lessons learnt from past real estate cycles in other markets, where companies that survived have built strong differentiated capabilities and diversified across the value chain to stabilize sources of revenues. In similar markets such as Singapore and Hong-Kong, which were hit strongly by real estate cycle bursts in past decades, only two to three major developers survived and reinforced themselves, the report noted. Most regional markets have been confronted with strong oversupply - which peaked last year at over 100 percent in the high-end residential and commercial segments in some GCC countries. ‘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', said Dr. Dirk Buchta, partner and managing director, A.T. Kearney Middle East. Announced merger plans for Emaar and Dubai Holding; within Dubai Holding for Dubai Properties, Sama Dubai, Bawadi, Remraam and the Tiger Woods golf course; Barwa and Qatar Real Estate Investment Co; and consolidation of land from distressed developers into companies like Dubai Real Estate Corporation come as no surprise. However, planning for a merger is paramount to its success. Almost 70 percent of mergers fail, often due to such basics as lack of preparation, communication, unclear strategies or poor execution. Careful geographic diversification, first at a regional rather than on an international level, coupled with a balanced portfolio of activities and assets - both physical and financial - will be pillars for success, in line with regional markets' evolution and competitive landscape changes. Successful mergers can give leading Middle East players the critical mass and a competitive edge on the international scene, based on the regional market long-term potential and easier access to liquidity than most competitors worldwide. Poor timing and planning of a merger between two major developers may fail, resulting in bankruptcy for the new company. Of those companies that do merge successfully only 29 percent 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 reinforced position on different parts of the value chain, but risks will also increase. This can be linked to a stronger focus on a risky market like Dubai, in addition to liquidity issues or ‘doubling' activities which will have to be rationalized. It is therefore the perfect time to review the corporate strategy of the new entities, enlightened by the new market conditions and the analysis of the growth path of most successful real estate developers worldwide such as Hines in the US, Hochtief and Nexity in Europe, or Capitaland in Asia. 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 why buyers should buy from them and not from the other developer,” said Olivier Laroche, senior manager of A.T. Kearney Middle East. Mergers in the real estate sector typically fall into two categories; merging of similar companies, or merging of complementary companies. The reasons to merge two similar companies are often to achieve synergies and operational excellence or to balance risks and diversify. While mergers focusing on achievement of operational excellence have not been common in the region, mergers focusing on balancing of risks and portfolio of assets are especially pertinent for master developers with Dubai interests.
