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May 2011

News Letter - 23rd May 2011

UAE REAL ESTATE MARKET UPDATE

Legal sources report that Al Murjan Real Estate LLC, developer of the 19 million square feet - White Bay project, is to be liquidated. This is a limited liability company registered in the small and relatively obscure Emirate of Umm al Quwain which is also the location of the project.

Umm al Quwain (UAQ) does not have the sophisticated real estate laws like its prominent sister Emirate, but this liquidation appears to be a true first of the kind that would have suited Dubai. Further this process appears to function without the need of any piece of special legislation or tribunal as in the case of the restructuring of Dubai World. Whilst Al Murjan may well be a special case nevertheless it is a good signal amid a situation where so many buyers and investors into other projects are left in a limbo over the future of their investments.

According to legal opinion the Al Murjan liquidation is special because it appears to be a solvent liquidation. The liquidation was ordered by the Federal Court of First Instance in Umm al Quwain upon the request of Sheikh Abdulla bin Rashid Al Mualla. Sheikh Abdulla is a joint shareholder of Al Murjan and stated as his main reason the inability to obtain planning approvals from the local authorities for the necessary sub-division of the land plot. There is much speculation as to the reasons why a shareholder who is also a member of the Umm al Quwain ruling family was not able to use his influence to overcome such obstacles.

The liquidators are holding meetings with every buyer in order to outline the process and to give an overview of the situation. While this is not required by international standards it seems to the writer to be a sound approach: we have been calling for more openness in the UAE markets for years. Reportedly there's AED 370 million in unsecured debts against an escrow account balance of only AED 45-50 million. The liquidators are yet to assume control of either the escrow account or the 19 million square feet of land which could be a valuable asset if it is without liens. The good news is that it seems all the monies invested are either still in the escrow account or have regularly gone into the development of the land: this has not been the case with some developments in Dubai. Nonetheless, in the current climate it is unlikely that the sale of land will realize enough proceeds to satisfy everyone, even assuming resistance from the local authorities with regards to the sub-division of the land can be overcome by the liquidator.

So perhaps in six months creditors may receive an offer or a variety of offers involving a combination of cash and land but whatever the future brings it seems certain that investors will have to make do with a certain loss. Some of them will not rest and look into other directions for compensation, but we hope this process marks a positive turning point towards a better legal structure and atmosphere for the handling of failed projects and failed developers.

In related news we hear that Nakheel, which overstretched itself building islands in the shape of palms and other ambitious projects, is in the process of splitting from its parent conglomerate Dubai World to become a “government-owned” entity by June, when its efforts to restructure $10.8bn in debt are due to be completed. Nakeel was at the centre of the debt problem suffered by its parent company Dubai World. You’ll recall the alarm in global markets in November 2009 when DW asked for a standstill on around $25bn in loans. Nakheel’s inability to meet its obligations, in the wake of a property collapse and the global credit crunch, left it with billions of Dirham’s in unpaid bills to contractors and suppliers.

In March, Nakheel said it had paid AED 4.6bn ($1.25bn) in overdue payments to trade creditors. Nakeel plans to issue around AED 5bn in Islamic bonds by the end of the second quarter to contractors and trade creditors: more than 90 percent of whom have reportedly agreed to a plan that would see Nakheel pay off its bills through a 40 percent cash payoff with the remaining 60 percent issued in the form of shares with an annual return of eight percent. Creditors may have been motivated to do this in part by a warning from lawyers that they might find themselves unable to pursue disputes against Nakheel in the Dubai World tribunal after the split from Dubai World. In April Nakeel said it had stopped selling real estate units in Dubai in order to focus on offering credit swap options to existing investors which Nakheel introduced in the wake of Dubai’s real estate crash to enable buyers to transfer cash from unfinished or halted developments to completed real estate.

PIRACY UPDATE

The Danish Navy reportedly killed four pirates and released 16 Iranian hostages on May 12th after the warship ESBERN SNARE came under fie from a pirate mother ship off the coast of Somalia. In addition to the four KIA, twenty-four were taken into custody. The four dead pirates were buried at sea in accordance with NATO procedures and Muslim traditions.

India has protested the extension of the Indian Ocean piracy zone nearer to its west coast and called on insurers to stop charging a war-risk premium on cargo ships that transit the region to counter the rising freight costs that result. Earlier in the year, a “war committee” of underwriters from the Lloyd’s Market Association and the International Underwriting Association expanded the official war zone limit beyond the previous boundary of longitude 65 degrees east to 78 degrees east. In addition to higher insurance premiums India’s exporters and importers might also have to bear higher costs due to the restricted availability of ships as many fleet owners may avoid using the route instead of paying higher premiums. India has defended their reaction by stating there have been no attacks reported in the last two months within 500 nautical miles of the Indian coast as a result of action taken by the Indian Navy.

At Carmania we tend to focus on the human aspects of a pirate attack and resolving / preventing them from happening. However once a vessel is seized there are commercial aspects that must be considered. For an excellent article on this subject we heartedly recommend the one recently published but or friends at Fichte & Co. written by their Alessandro Tricoli. The article can be found at http://www.fichtelegal.com/en/news_article.php?news_id=107.

EC RAIDS SHIPPING LINE OFFICES IN CARTEL PROBE

The European Commission (EC) has raided the offices of some of the world’s largest shipping companies as part of a major antitrust investigation in the belief that some leading carriers have violated the European anti-trust laws that abolished conferences. While the EC didn’t reveal the companies involved, Maersk, CMA CGM, Hapag-Lloyd, Hamburg Süd, NOL, Hanjin, Evergreen and Cosco have all reported visits to their offices by EC officials. The EC abolished liner shipping conferences block exemption in October 2008 stopping shipping lines from agreeing freight rates and surcharges. Whilst the EC said it was investigating both they and the companies involved stressed that the raids in themselves do not mean the shipping lines are guilty of violating EU competition law.

CARMANIA’S VISION

By nurturing a winning network of partners and building mutual loyalty we aim to promote awareness of, and knowledge within, the maritime community. Encouraging intelligent risk, we endorse change and embrace opportunities within this exciting sector and invite you to join us in our journey towards becoming a driving force in the maritime community, both in the Middle East and beyond.