Dubai: The latest UAE’s real estate development boom has well and truly taken hold of the market. If it was buyer demand leading the way in 2021 and most of last year, right now, developers are charging in with offplan launches.
Then there’s ADX-listed Eshraq Investments that’s taking a different approach to this boom. The investment firm does have its own decent-sized property development portfolio (including a hotel) as well a substantial land bank. In recent months, however, Eshraq has been selling land parcels to developers, including a recent deal with Danube.
This is what’s been catching the market’s attention, because this does go against the prevailing vibe of ‘have land, will build’.
In an interview, Ajit Joshi, member of the Board of Directors at Eshraq, does a deep dive into the new direction the company’s been heading into.
You are selling land at a time when prices are really shooting up. Couldn’t you wait for land values to rise further?
Land is worth its value only if it is developed. This land on Eshraq’s balance-sheet is undeveloped for more than a decade. It is a drag on various return ratios of the company, because land doesn’t generate any income unless developed.
We could have sold the land in the last four or five years, but prices were much lower. Even in 2021, the market was starting to go up, but we decided to give it some more time. In hindsight, one can always say that this was not the right time, but I believe no one can catch the top.
We have a large land bank. So, it’s probably prudent to start selling over time, such that we get a weighted average around the competitive market price at current levels.
The second thing about land is that if we were to develop it, we’ll have to incur significant capital expenditure of our own. Then wait for the completion of the project to monetize the land. From that point of view, if we sell it, we collect the cash, then we can redeploy it in other investments, which can possibly generate 15-20 per cent returns per annum.
Those would be equally competitive investment avenues in our view, and it will also reduce our real estate exposure, which is part of our new strategy.
How much of the land bank do you plan to sell?
In Abu Dhabi, we have land on Reem Island and a plot outside the Abu Dhabi Island, between Sheikh Zayed Bridge and Maqta Bridge, called the Gateway project. We are looking at options for those plots as well. We have received the Abu Dhabi Executive Council approval for an investment zone at the Gateway project, which opens up opportunities.
Some of the land transactions we have done are not the traditional sale sort. With Danube, we sold the land, but we have also maintained economic interest in the profit of the project.
We have a certain profit share at the end of the project and we also have a certain profit payment receivable for the time it takes them to complete the project. So it’s not only the base price that we collect, but we will also collect additional premium over the next three years when the developer completes the project.
We have in a way tied our economics to the market, and the development’s success. I would say that it’s a good transaction where we have protected our downside and we have managed to retain the upside to a certain extent.
The drawback of such a transaction is that we have to wait till the project finishes to collect the sale proceeds.
There are other transactions where we are looking to do an outright sale. In those, we believe that we have better use of that money elsewhere.
When mentions of Eshraq comes up, those who don’t know the company well would think it is a boutique investment firm. Are you fine with that?
You are probably right, now, because it used to be associated with real estate in the past and was called Eshraq Properties. Before the Goldilocks fund transaction, almost two-thirds of Eshraq’s balance sheet was land and real estate investments, and the rest were cash or financial investments.
There was a heavy tilt towards real estate sector, which has significantly dropped following the Goldilocks acquisition. Now, a third of our balance sheet is real estate and the rest are financial investments.
Was the transformation from a real estate focus pain-free?
To give you some numbers, the company had about Dh1.7 billion of total assets, of which land was almost about Dh650 million to Dh700 million. This means that 40 per cent of the assets were not generating any income for the company.
We developed one project on Reem Island in Abu Dhabi, which has now started to generate income. We have also significantly improved the efficiencies of our existing real estate book.
So the apartments in Burj Daman in DIFC, or the Nuran Marina hotel that we own on Dubai Marina are generating market leading returns compared to the peers, and with highest ratings. When we took over Nuran Marina it had about 8.1 rating on booking.com. Now it has 8.8 rating, and as you go up, ratings become very difficult to surpass every 0.1 per cent.
Our team has done exceedingly well and this is reflected in all of the assets that we have maintained and grown.
Nuran Marina is a property that we acquired from Emaar in 2012.
On the investment side, what sort of companies interest you? Would startups catch your attention or only entities that have built some track record?
As the largest shareholder in Goldilocks fund, not just majority of our investments, but all should be profitable. That is our philosophy for investments going forward.
Keeping that in mind, I think some of the very early-stage investments, may generate phenomenal returns, no doubt. But they also come with additional risks. It would probably be difficult for us to invest in a larger size.
Eshraq has Dh2.8 billion of shareholders’ equity. We could potentially do small-ticket transactions, and which may have a strategic angle to our other portfolio companies. Those will be on an exceptional basis.
Our investment philosophy going forward will be companies that generate profits for Eshraq, Investments that will not only have capital appreciation, but also have an income angle, because we want to be a regular dividend paying company.
And you have also been buying back shares…
We want to work towards getting our company’s share price to reflect our book value. Share price currently trades at about 49-50 fils. Our book value as of Q3-2022 was 92 fils.
Our current share price trades at a significant discount to the book value. One of the things that we are doing, and this again goes back to the capital allocation, is that we are buying back our shares. We have so far bought back about 36 million shares and every time we buy back a new share, we are actually making gains.
We are buying a $1 worth of share for 50 cents. Essentially, all of these buybacks are value-accretive to Eshraq shareholders.
One of the criticisms or concern that probably the investors had was the strength and the quality of the book value. One of the reasons why an investor would not invest in a company which has a book value of 92 fils, and is trading at 50 fils could be that the investors think that 92 fils is not realistic and that it is probably overstatement of book value.
So, selling off more land will remain a priority?
If you deconstruct the entire balance-sheet, we have no intangible assets. You can actually drill down to all of our investments and look at the underlying business and see the value there. All our investments generate positive income and profitability.
The land bank, which probably was one of the reasons that we’re not generating any income, and that could be leading to a discount to our book value, or the share price. All of our land transactions that we have done so far are on average done at or above our book value of the land.
Our land bank is not overstated. The entire balance-sheet is very strong. When we sell these lands, and we put that money in other profitable investments, our overall income and profitability will go up.