Dubai : The coming weeks represent a make-or-break period for Oman's Blue City master-development, with a lot resting on whether new partners with the required knowhow and capital can be brought on board. These attributes will be a pre-requisite in getting the much-stalled project back on its feet and moving.
"Attracting the right sort of partner to come in at this stage is high on any turnaround agenda for Blue City," said a source who has been associated with the development ever since it was launched in 2006. "Fresh funding is what the development needs and needs now."
It is still early days on whether there are any interested parties out there willing to come in to revive the real estate project, which at 25 square kilometres — including 9 kilometres of beachfront — was one of the largest such attempted in a region known for its developmental excesses (It used to be called developmental flourishes in those days).
Located at some distance from the capital Muscat, the land is fully secured to the original promoters and was to be developed over 25 years and feature as many as 10 phases. Until now, work on just about 10 per cent of Phase I is all that has been done.
One of the problems, according to real estate analysts, was that the original masterplan envisaged Blue City as a high-density mixed-use development. There was to be residential, high-end and mid-priced, tourism-specific components, and offices.
After the launch in 2006, the project went into a period of quiet as the promoters wrestled with fund-raising issues and designing a workable masterplan. It was then revived in 2008 and construction did start on site. But the property markets collapsed towards the end of the year and the project has since been in limbo.
Given the way the region's property markets are behaving, it would take an immense leap of faith for any developer to commit to supporting a development that would take 20 years and more to realise its full potential.
If that's so, a stripped-down version could be attempted, said the source. "There's a lot of residual value in the land that could be unlocked by selling portions of it to third parties and leaving a core for the master development itself," the source added. "Selling some of the land would also help in raising fresh cash and would merit serious consideration in any future plans for Blue City."
But of more pressing importance is an upcoming verdict that is to be delivered by Oman's Supreme Court on an equity ownership dispute involving the two shareholders in Blue City Company 1, the operating entity set up to handle the development.
The dispute has already moved through the lower courts. "Once the Supreme Court delivers its verdict, and it looks it could happen any day now, that will be the tipping point for any progress on the ground at Blue City," the source added.
"Moreover, for any interested third-party to come into the picture now would require a clear understanding on the shareholder structure. If the stalemate is removed, it clears the ground for a lot of things."
These developments will be closely watched by Essdar Investments, the investment company which recently completed the buyout in the secondary market of a bond issued by Blue City Company 1 in late 2006. As of June 7, Essdar Investments was holding 99 per cent of the Class A1 and A3 Notes of the Blue City Company 1 bonds.
Mohammad Sotoudeh, CEO of Essdar, said: "With the credit crunch, more and more entities are finding it difficult to refinance. Essdar's strategy is to look at such businesses and develop and execute a strategy which can extract value for our investors and the businesses."
Interestingly, the Blue City bond pulled in an overwhelming level of interest from investors based in the US and Europe, and less so from the Gulf.
With little happening on the project from the construction side, it did not take long for the bond to slip to as low as 19 cents to the dollar by early 2007. It was around that time or thereafter that Essdar decided to acquire the bond in the secondary market.
The process culminated with the June 7 announcement that Essdar owns 99 per cent of the bond issue. "This investment is a landmark transaction in regional distressed debt and is a significant step towards Essdar's regional strategy," said Hamad Abdullah Al Shamsi, chairman of Essdar.
Essdar officials were not willing to comment on what their immediate priorities would be or the course of action they intend to take.
But other investment banking sources were quite willing to do so on what Essdar Capital could try. "As the Class A bondholder, and the sole one by the looks of it, they can try and enforce the issue by insisting on land sales to recover their investments," said a banker.
"They will also have access to whatever cash reserves are there on account of the bond issue," the banker added.
Enforcement can be a time-consuming, taking anywhere between 18 to 24 months.
The other option would be to take on the more strenuous task of restructuring the project and make it work at the third attempt.
"Whilst the media and public opinion focus has traditionally been upon the real estate aspects, this is primarily a tourism-driven development," said Christopher Steel, managing partner at Savills Oman.
"The planned hotels, commercial and associated facilities appear to be on track and are of intrinsic importance to any aspects of the residential real estate components.
"Any restructuring of the finances for the development must be viewed as a most positive step in ensuring that site works continue at a realistic pace to meet the occupational demands of the burgeoning tourist arrivals into Oman."
But the banker reckons the restructuring can prove onerous. "It must involve all parties — the shareholders, subordinated bondholders and contractors," the banker said.
"It will take some doing especially as the environment is still not conducive for major real estate initiatives. The next two to three months will be decisive."
For a development that has stuttered from one crisis to another since 2006, two to three months cannot be that long.