Aldar-Sorouh merger: Who gains? Who feels the pain?

Posted on March 13, 2012

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The merger sends the signal that Abu Dhabi won’t let its companies fail.

Abu Dhabi

The Aldar-Sorouh merger may be win-win for the companies, shareholders and banks, but property investors see no respite from asset-value erosion. (Image via Wikipedia)

Consolidation in a sector is always good news for investors and shareholders. This was proved true when the merger announced between Abu Dhabi-based master developers Aldar Properties and Sorouh Real Estatepushed their share prices up by almost 10%. The merger will create an entity with assets valued at AED 55 billion and consolidated net profit of just over a billion dirhams. But that’s not the only story here.

Despite forecasts of about 5% economic growth this year, Abu Dhabi, which holds 7% of the world’s oil reserves, has scaled back many of its ambitious real-estate projects to conserve cash as the global economy has slowed, according to a Zawya Dow Jones report.

According to property consultants C.B. Richard Ellis, at the end of 2011, Abu Dhabi’s total office supply reached 2.74 million square meters and this figure is seen growing rapidly during 2012, while residential supply will likely outstrip demand over the next 12 months, resulting in further house price declines. The merger is unlikely to change any of these essential drivers or act as a magic pill for the property sector.

What it does do is send a signal that the Abu Dhabi government is not going to let its real estate companies fail. This is an important factor for debt investors, especially the banks that hold paper issued by these companies. The merged entity will become a key player in the emirate’s real estate market, and benefit from a more solid balance sheet, higher ability to price assets, and have more cash to deploy towards future growth. Win-win all round, except for the investors in property, who face the prospect of further depreciation in their asset values as more supply comes on line and demand continues to lag.

— Yazad Darasha

More intelligence on the Aldar-Sorouh merger (Zawya.com):

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Posted in: Corporate, Markets