There was quite a significant reaction to my last column regarding a structure that resembled something similar to what the US did with the RTC (Resolution Trust corporation) bailout of banks.
Among the most critical responses included the “moral hazard” problem, where the government was stepping in and almost bailing out errant developers as well as speculators, thereby setting the stage for an even more spectacular bubble in future. This is a common criticism that has been aired across the world each time there is some sort of government regulation that is considered interventionist.
Nonetheless, it bears worth responding to.
Cross-guarantee — or a bailout as it is most often referred to — is a process whereby the government is stepping in and assuming the costs of private sector activity that has gone awry. In the case of the US, the bailout was a structure where the debts extended to the savings and loans institutions were “equitised”.
This raised a huge outcry at the time as well. In fact, it been the case with every subsequent bailout too. But the long arm of history shows clearly that tax payers ended up as net gainers — real estate prices recovered, stalled projects were revived, bad loans were cleaned up, and the financial sector emerged healthier than ever.
In the case of Dubai, there would not even be any guarantee as the structure (under a variety of proposals) would include the oversight of the regulatory authorities to “equitise” investors and other creditor claims for stalled projects. The “pooling of interest” concept would in fact spur the process rather than specific projects being bogged down due to different and individualised legal hurdles, specific to each project, encountered in the process.
As a global city, Dubai attracts worldwide attention on a daily basis. Its real estate ambitions and accomplishments have excited the world. However no real estate story can be completely told without encountering the issue of stalled projects.
While the criticisms levied about the maturity of the banking system and project finance may or may not be relevant, it is tangential to the issue of the revival of these very projects. And the success of which would be heralded as a case study for dealing with such issues, as has been the case with the development of RERA (Real Estate Regulatory agency).
In my humble opinion, the RTC framework provides for an a priori structure and a comprehensive mechanism for the resolution of these projects that offers investors the maximum upside possible. Especially given that the majority of them have had to suffer through no fault of their own.
A public-private sector framework here would be optimal, requiring the participation of well-capitalised and pre-approved developers that would be bidding for these assets. As mentioned in the previous column, this could be segmented into tranches for different stages of stalled projects, but where the liabilities would be equitised into the development portfolio.
With regards to the moral hazard problem, the issue that is brought into sharp focus is what is the alternative? For all the naysayers, the history of regulation has been a mixed bag.
What is clear is that structures where the private sector has been involved in the subsequent revival have been the ones that have performed the best. Nothing could be closer to the raison d’etre of this city.
Dubai has built its reputation on developing with changes in an expeditious manner. Reforms that have been recently announced (Which include the 10x initiative) represent a continued manifestation of this spirit.
By the same token, the revival of stalled projects needs a discussion that turbo charges its revival and continues to cement the city’s position as a global centre for excellence as well as a magnet for capital.
— Nasser Malalla Ghanem is Senior Partner at NM Associates, which has a joint venture with GCP Group.
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