by Lee, M
But with a sukuk, or Islamic bond, the investor becomes part-owner of a specific agreed asset; on this basis they were marketed as a safer option than traditional bonds. Nakheel’s sukuk offered two parcels of Dubai Waterfront land which, under KT’s new valuation model instructions, had a draft valuation of USD4.22 billion. Because Nakheel’s parent company Dubai World was state-owned, the sukuk was theoretically state-guaranteed, though the prospectus noted any liabilities were not the government’s responsibility. The investors’ confusion was understandable.
In any event, the sukuk, the biggest ever offered, was so successful it was oversubscribed, increasing from a planned USD2.5 billion to USD3.52 billion by December 2006 to mature three years later in December 2009. Barclays Capital, which ran it in conjunction with Dubai Islamic Bank, clearly didn’t share my concerns. And Barclays would have done its due diligence on the assets involved. Right?
Well, I’d had my say, now I just got on with doing my job to the very best of my abilities.
Julie and I continued to build our own financial security, putting down a 10 per cent deposit on a second one-bedroom unit in the same four-apartment development on Chevron Island back on the Gold Coast, where we had started paying off a unit the previous year. We also treated ourselves to a trip to Europe.
JULIE
When I was growing up in the 1970s, travel to Europe from Australia was a major event that took a lot of money and was only worth the expense if you backpacked around for a few months. One of the benefits of living in Dubai was its proximity to Europe, so I was very excited when Marcus and I finally made our first trip, in mid-2007. It was only for a week (that was as long as Marcus felt he could take off at that stage and I’d been in my job for less than six months), but it was wonderful. We had three days in London first, then over to Paris for another three. I absolutely fell in love with the ‘City of Light’ and really wanted to return and see more of France, including the Alps, so familiar from Tour de France footage.
MARCUS
In August 2007, we got a notice saying our Dubai rental lease would not be renewed because the owner wished to move in (code: they wanted to increase the rent, which wasn’t permitted with existing tenants). Fortunately, rather than embarking on another frantic accommodation search, we were able to lease a Nakheel-owned villa. Part of a group called Garden View Villas, it had been built to house management. Unfortunately, the villas had been built on limestone without proper foundations and they started to shift, crack and fall apart almost as soon as they were completed. Known to the occupants as ‘Hill Slide Villas’ and relatively modest by Dubai standards, the annual rent was nevertheless AED215,000 (about AUD71,000), fully paid in advance of course.
The following month the second Nakheel Day event was held. This time the performer was Shahrukh Khan, one of Bollywood’s biggest stars. He thanked Nakheel for the villa the company had just given him on Palm Jumeirah; by this stage the villas were close to completion and were selling for around USD5 million. On the way out guests were handed gift bags — different ones, depending if you were male or female. Inside mine was a AUD1000 designer watch. The whole thing was picture-postcard excess.
Earlier in the year I’d been told by KT’s department that further sukuk money-raising was being organised and another parcel of Dubai Waterfront had to be earmarked for it. Later, yet another parcel was needed. Investors were attracted by the valuations on these land parcels: inflated valuations remember, in which the costs had been removed.
Nakheel entered an incredible growth phase. From about 400 staff in 2006 it grew to 2000 by mid-2007 and would eventually grow to 5000 by 2008. Nakheel was making merger and acquisition deals all over the place, as was its parent company, Dubai World, with its purchase of the massive City Centre development in Las Vegas, more global container terminals for its port company DP World, and luxury hotels around the world. If anyone questioned the speed at which all this was happening, the most senior levels of management would simply say, ‘Dubai’s economy is different’. Nobody wanted anything to get in the way of the boom.
And yet there were warning signs. Hardly any of the sub-developers buying land from Nakheel were building on the plots they’d bought. Instead, the initial purchasers were on-selling them. This was done both with Nakheel’s approval, and with the active participation of its sales team who were out there acting on behalf of purchasers. If they found new buyers to take these plots at a higher price, Nakheel then earned a sales commission.
The same thing was happening right across Dubai where there was no shortage of buyers lining up to part with their money. There’s a name for this in economics. It’s called ‘the greater fool theory’. The NASDAQ website has a polite version of the explanation for this in its financial glossary: ‘An investment notion that even when a stock is fully valued by conventional standards, there is room for upward movement because there are enough buyers to push prices farther upward purely on speculation or hype.’ In a piece for the New York Society of Security Analysts, Neil O’Hara put it more pithily: ‘The first one out the door wins and the devil take the hindmost.’
If you were one of the early resellers you could walk away with a handsome profit, but with each resale the bubble expanded and expanded. Those left holding the land titles when the whole thing eventually went pop, as it inevitably would, were going to be the losers. They would have paid hugely inflated amounts for something that the market now judged as next to worthless.
The way this property reselling or ‘flipping’, as it was called, worked, the original purchaser would put down a 10 per cent deposit and then, often even before their cheque had cleared, they would on-sell it to another party. This would be done under what was known as a ‘premium agreement’, meaning that the price paid by the new buyer would be the amount already outlaid (that 10 per cent deposit), plus a ‘premium’ — profit for the seller. The new purchaser then simply took over the existing contract with Nakheel or whichever master developer had sold the land in the first place. Properties might be sold over and over again in this way, with each sale inflating the price further and further. It didn’t matter where the land was, how big the plot, or what its intended use. The purchasers weren’t buying to build on it, just to on-sell it at a profit. With oil contributing only 3 per cent of Dubai’s GDP, and tourism around 20 per cent at that point, the emirate’s economy was now based on this bizarre property speculation. It was never going to end well.
Along with Matt Joyce and the other development directors, I was alarmed by the pace at which we were pushing Nakheel’s developments through. Our concerns centred on the financial viability — the question of how much the cost for Nakheel might change from project announcement to project completion, as it had done with Palm Jebel Ali, plus the prospect of flooding the market and thereby forcing your own selling price down — and on the quality of what was being built (the more things were rushed, the more quality would inevitably suffer).
Consistently we tried to make arguments for building at a sustainable pace and equally consistently we were overruled. One example was the Veneto development, an area of around 1400 ‘Venice-inspired’ villas built alongside the eight-kilometre canal being carved through the desert as part of Phase 1 of Dubai Waterfront. Matt and I, with other senior Dubai Waterfront management, took a proposal to a meeting of the Dubai World investment board to complete Veneto in fourteen incremental steps: building 100 villas at a time and selling them before starting on the next hundred. No, we were told, it all had to be done at once.
The market was certainly ready to support this kind of thinking — at least for a while. As the detailed building planning was underway, the villas were released for sale. Almost the entire 1400 were snapped up by eager purchasers on the day of release, the exception being fifty villas which were ‘gifted’ to the rulers of neighbouring Abu Dhabi.
It was also clear that Chris had well and truly ‘caught the Dubai bug’. Another phase of the Dubai Waterfront development was the
Al Badra apartment clusters, 50,000 apartments in all. Again, we argued to build in stages, 1000 at a time. The message came back that when the Sheikh was flying over it, 1000 apartments would look like nothing; it had to be ten times that. It meant nothing that, aside from all the other considerations, there simply wasn’t enough manpower or equipment free to build 10,000 apartments immediately. The investment board didn’t accept that as a reason. ‘Think more Nakheel,’ Chris told us.
Raising questions was not winning me friends. One night I checked my email to find a tirade from KT. Questioning the valuation process would cause his funding plans to fail, he thundered, and that in turn might bring down Dubai World which would, in turn, bring down Dubai itself.
KT often sent me blistering emails, claiming that the Dubai Waterfront project staff were not helping to meet his and Nakheel’s goals. He copied in all sorts of people, including Sultan Ahmed bin Sulayem and other senior Dubai World executives. I always responded (‘reply all’) with what I believed were controlled, professional answers, detailing the ways in which my team and the larger Dubai Waterfront team were in fact assisting KT. That made him even angrier. I chose to ignore the pepper-spray of emails he sent throughout the rest of that evening and into the early hours. But next time I saw him in the office, there was no reference to his email storm; instead he greeted me amiably.
I fully understood that some people, including KT, would have preferred me just to go along with things, but if I saw something that I thought was wrong and would ultimately damage the company I felt it was my duty to speak up. As a senior staff member I believed that it was part of the role I was being paid very well for.
At various points I spoke to Chris, saying things like, ‘Chris, I used to come to you when we were at Investa on various issues and you used to respect my opinion, but here you’re just ignoring me.’ He’d say, ‘Marcus, there are things you should go and do and things you shouldn’t be involved in.’ I then had to give my bosses, including Chris and Matt, the benefit of the doubt. I wasn’t privy to every discussion they were having with the topmost decision-makers, right up to the Sheikh, so perhaps there was something they knew that I didn’t about the choices Nakheel was making.
I was often asked to speak on behalf of the company to the media and at roadshows and conferences in Dubai and elsewhere, including at the ‘Global Real Estate’ conference organised by mega law firm DLA Piper in Chicago. I was also often given the job of showing big-name potential investors around the Dubai Waterfront land. As the world’s largest development, it attracted high-level interest.
Sometimes I’d be briefed on who they were — which sheikhdom or corporation they controlled, how high up they were in the Saudi royal family, or which Wall Street business they represented — but more often I found out about these meetings at the very last minute. Once I was called to meet a trio — a couple of Brits and a Russian, whose names initially rang no bells. They were looking for a winter training ground for their football club. The meeting was arranged by the marketing arm and Tony Perrin and I were told about it at the eleventh hour.
As often happened in these situations, we flew with the VIPs in a helicopter over various parts of the project and discussed how it might suit their needs. At the end they presented us each with an official English Premier League Chelsea jersey with our names on the back, along with other Chelsea-branded paraphernalia. Clearly the meeting had been organised well in advance. Only afterwards did I discover that the people we had been taking around were the owner, CEO and senior management of Chelsea Football Club; among them some of the world’s richest and most influential men.
Another day Chris called me early in the morning to tell me that I needed to come to the Nakheel sales centre at Jumeirah, a 30-minute drive away, immediately because there were dignitaries who were interested in the Dubai Waterfront project. Abandoning my planned meetings at our site offices, I quickly gathered the storyboards used to explain the project and got going. On arrival I was introduced to one of the princes of Saudi Arabia and executives of Saudi state-owned and -run company Kingdom Holdings, who had unexpectedly flown in on the prince’s private helicopter, expecting that everyone would scramble to accommodate his whims — which we did.
Another day, another billionaire, this one closer to home: Australian James Packer. At Chris’s behest I had two meetings with him: one to present the project, and a follow-up meeting where I took him out onto the Dubai Waterfront project site. Packer had interests in all kinds of companies. I didn’t know it at the time but one of them was an Australian company called Sunland, in which he held an 11 per cent share. Sunland was based in Queensland and its CEO, Soheil Abedian, had made it onto the ‘Rich List’ published by Australia’s BRW magazine purely based on his company’s share price. Abedian was worth a couple of hundred million, which might have made him a big deal on the Gold Coast but wasn’t even worth mentioning in Dubai — real power players like Packer could make or lose that much over breakfast and barely notice.
But Sunland was to become a familiar name. In September 2007, Abedian’s company paid more than AED200 million (the equivalent of about AUD64 million) for plot D17, a piece of Dubai Waterfront, with the intention of building a tower called The Atrium. Sunland had previously bought a plot called D5B (which they named Waterfront 1) in early 2007 for a whopping AED290 million (around AUD100 million). Abedian had ‘the Dubai bug’ too: in 2005 Sunland had created a subsidiary called Emirates Sunland PV Dubai Limited, registered in the British Virgin Islands. There was a Sunland office in Dubai and Abedian had moved to the emirate to oversee what he intended to be billions of dollars’ worth of joint ventures and developments.
As the designation given to D17 might suggest, it was part of an area called Precinct D. A development site as enormous as Dubai Waterfront was split into various precincts, and this was part of the first phase, which was known as Madinat Al Arab or ‘City of the Arabs’. Before each phase, plot or project could be put on the market, it was part of my job to prepare what was known as a business case or board report for it.
These reports pulled together information from the planners (what kinds of developments might suit the land), the development directors (what their development strategy and timing would be) and the sales and marketing departments (what kind of product the current market was looking for and, if available, what the best marketing and sales-release strategy would be). As the legal department handled the transfers of all sales at Nakheel, they provided input on what similar plots or properties were selling for in the secondary market, so we could estimate and propose appropriate sales prices. My job was to compile and condense all this and present it in a logical, comprehensible form for Nakheel’s board (Chris O’Donnell, Manal Shaheen, KT Quek and head of legal, David Nicholson). They would either approve the business case, send it back with requested amendments, in which case it would be resubmitted for approval, or reject it outright.
This was a stock-standard procedure for master developers anywhere in the world which we had succeeded in introducing to Nakheel. During my time in Dubai I must have prepared, or been involved in the preparation of, more than 50 such reports. It was such a universal procedure that I used the same template I had used preparing similar reports for Investa back in Australia.
A business case report had to be approved by the board before plots could be sold off to buyers. I submitted my business case for Precinct D, covering four large plots, on 10 September. Because so much would end up hinging on this particular report I’m including it in its entirety at the back of the book. It is a perfectly ordinary example — nothing special.
The report recommended ensuring the purchasers actually intended to build on the purchased plots, and had the means to do so, rather than just flipping them. I wrote:
It is proposed as part of this business case that DWF sells these plots to selected developers to facilitate construction activity on site. To sell simply to a land speculator or another party that does not intend to
develop immediately will not achieve the desired result. This will ensure that the Phase 1 project is ‘book ended’ from a development perspective as additional development works are also proposed at the northern end of the site, further demonstrating to existing plot purchasers development activity and thus encouraging additional development activity. This would also flow onto added value to other surrounding Nakheel owned plots.
The word ‘developers’ was italicised to emphasise the recommendation that the plots not be sold to speculators.
Occasionally business case reports would include the name of potential purchasers — if, for instance, someone who had bought one plot had expressed interest in another. In this case, however, while names of potential purchasers were thrown around at Nakheel, they were just companies staff thought might be interested. Among these I recall fleeting mentions of Sunland, made by Nakheel’s Director of Planning and Development, Jeff Austin. He would have thought of them, I figured, because they’d already bought plot D5B, which was near the newly planned area.
Matt signed off on the report the following day in his capacity as head of Dubai Waterfront. Even though the report had yet to be signed off by Chris O’Donnell and Director of Marketing and Sales, Manal Shaheen, the sales team must have got right on the job. On 13 September I took a call from Sunland’s Chief Operating Officer for the Middle East, David Brown, asking what price had been put on the plot, which, he said, Sunland was interesting in developing as a joint venture with Prudentia, a company I hadn’t heard of. I explained that my report had recommended a price of AED120 per square foot, based on comparisons to other recent sales, but that this price was subject to final approval by the board.