Emaar Properties PJSC - SWOT Analysis

Overview

Emaar Properties PJSC SWOT Analysis

Emaar Properties PJSC is a leading Dubai-based real estate developer with a strong presence in the Middle Eastern region and expanding operations in other emerging markets, including North Africa, Asia and interests in multiple segments.

The company is well positioned to take advantage of the real estate boom, catering to European and American expatriates, though, the present crisis in the global financial markets may contribute to a decline in property prices in the Dubai market.

Strengths

• Government backing

• Business Model

• Foreign Expansion & Diversification

• Strong Regional Partnerships

Detailed

Government backing

The United Arab Emirates (UAE) Government holds a 32% stake in Emaar, and also extensive access to land required for developing properties, with less than stringent regulations than would otherwise be faced in developed economies. In addition, the UAE Government has showed the willingness and ability to support businesses in the face of economic crises, as is evident currently. The government has provided $ 6800 million to UAE banks to tide over the present liquidity crunch. Such help lines can be tapped upon as and when Emaar is in need of backing. This will help the company to stay adequately capitalized and finance operations and expand markets.

Business Model

Emaar has created a successful business model. The company has expertise in creating master-planned communities to international markets. The company has focused on creating a lifestyle living and not just offering a property. The innovative offering of self-contained communities that integrated schools, parks, landscaped grounds and retail centers into master-planned golf, equestrian and marina themed lifestyles has proved a winning combination. Each project has a mix of apartments, condominiums, and villas. It also offers land plots as an investment option to clients. The innovative concept is backed by timely deliveries of high quality properties. Emaar has delivered more than 22,000 properties till 2008 in the U.A.E. It also has the support of the Dubai government that has a 32% holding in the company. Most of the land bank totaling 22.26 million square meters in Dubai is a result of the strategic joint venture with Bawadi LLC. Emaar also has partnerships with established developers like Arabtec, Nasa Multiplex, Samsung, and Al Futtaim Carillion.

Emaar plans to replicate the same model outside the domestic market through the Vision 2010 document. To fulfill Vision 2010, the company has reorganized its corporate office. It has also attempted to leverage on global management expertise by creating an international talent pool and a data-bank of best practices. Some of the experienced managers from the U.S. have been moved to head other subsidiaries. Richard Rodriguez has become the CEO, Emaar Dubai and Bill Ratazzi CEO, Emaar MGF. The company has also introduced MBO, KPI system and Enterprise Risk Management in 2007. Emaar intends to spin off subsidiaries and associate companies to replicate the Dubai business model with emphasis on local tastes and culture.

Foreign Expansion & Diversification

Emaar International was launched in 2004 in a strategic move to diversify markets and reduce the risk of depending on a single market Dubai. Emaar International has entered into various markets through its subsidiaries to sustain future growth and create alternative revenues streams. Most of the subsidiaries have partnerships with the local government or private players to understand the market better. The company has a land bank of 22.26 million square meters in the U.A.E that increased by 76% to 162 million square feet through partnership with Bawadi LLC. The international land bank includes almost 500 million square meters across India, Saudi Arabia, Morocco, Pakistan, Syria, Turkey, Egypt, Jordan, Libya, Algeria, Tunisia, Canada, USA & Indonesia.

The company has entered into the developed foreign markets through acquisitions. In June 2006 Emaar acquired John Laing Homes, the second largest privately held homebuilder in the US. It helped the company become a significant real estate developer in residential homebuilding. It also acquired Hamptons International, the UK-based Real Estate agents.

The company has also focused on a diversification strategy. It has taken steps to diversify its business lines and develop new competencies in hospitality & leisure, malls, education, healthcare and financial services. Emaar entered into education sector through the acquisition of Raffles Campus, a Singapore based educational establishment. It has entered the hotels and resorts sector through Georgio Armani brand. The company has a agreement with Turner International for project coordination. Turner is responsible for completing the construction of sales centers and ‘Street of Dreams’ model homes for Morocco, Saudi Arabia, Egypt, India and Pakistan. The foreign expansion and diversification strategy has created synergies and helped the company gain execution capabilities and competencies in design through John Laing Homes, project management through Turner International and distribution/sales through Hamptons.

Strong Regional Partnerships

Emaar has a strong reputation and established partnerships with local governments and major local players in every country it has forayed in the real estate development segment. The main area of initial focus was the Middle East, North Africa and Indian subcontinent where the company has entered into partnerships with leading players in these markets. In 2008, Emaar Misr, Emaar’s Egyptian subsidiary signed a memorandum of understanding with Abu Dhabi Municipality to develop the 2.2 million sq m Sheikh Khalifa Bin Zayed Residential City in Cairo. Emaar also entered into a joint venture agreement with Prince Meshal Bin AbdulAziz Al Saud, chairman of Saudi Arabia’s Bayah Council, and owner of Al-Shoala Group of Establishment, to develop a 31 million sq m master-planned community, Rawabi Rumah, located near Riyadh.

Turner International (ME) has also commenced project coordination for the Emaar Group, completing the construction of sales centers and ‘"Street of Dreams’ model homes for Morocco, Saudi Arabia, Egypt, India and Pakistan. Emaar operates in India through Emaar MGF. Emaar MGF Land Private Limited is a joint venture company formed by Emaar Properties PJSC and MGF Developments Limited of India. Emaar expanded into Indonesia through Emaar Indonesia. In March 2008, Emaar signed a joint venture agreement with The Bali Tourism Development Corporation (BTDC) for developing tourist destinations. Emaar, along with a number of regional and Jordanian investors formed The Dead Sea Company to undertake projects in Jordan while in Pakistan Emaar Pakistan has a tie-up with the Haji Rafiq Defense Housing Authority. Emaar Properties has a joint venture with ONA Group to create large scale residential and golfing development projects throughout Morocco. Emaar Morocco has also signed a MoU with King Mohammed VI, King of Morocco, to undertake development projects.

Similarly, Emaar Properties and Invest Group Overseas (IGO), the offshore investment and property development company, has a joint venture in Syria, In Turkey, the Tuscan Valley project is a joint venture between Emaar Properties and Atasay, turkey’s largest gold jewellery exporter.

These partnerships could help the company have an integrated approach to customer service and property development. It also complements the Vision 2010 for Emaar that is a two-pronged strategy of geographical expansion and business segmentation. With the globally integrated company as a model, Emaar also created the Emaar Design Centre, based in Newport Beach, California to aid the company’s core competencies in conceptualization, master-planning, development, landscaping and interior design.

Weaknesses

• Overexposure to Dubai

• Operations and Funding Strategy

• Labor problems and Quality issues

Detailed

Overexposure to Dubai

Emaar has forayed into international markets, to reduce its dependence on Dubai. In terms of value, domestic sales have reduced to AED 13,926,334,000 in 2008 from 14,278,224,000 in 2007. But in terms of percentage, domestic revenues accounted for 79.91% of total revenues in 2007 and increased to 86.96% in 2008. As a result, despite entering into foreign markets, Emaar has not been able to reduce its exposure to the Dubai market. In March 2009, Standard & Poor's (S&P) downgraded Emaar's long-term corporate credit rating to BBB+ from A-. (BBB is a medium credit rating, and the lowest score a company can be given and still deemed to be ‘investment grade'.) The downgrade was done due to the weaknesses in the Dubai real estate market and uncertainty over the depth and duration of the downturn. The agency also pointed out that the rating was higher primarily because of the implicit support of the Dubai government.

Operations and Funding Strategy

The funding strategy of Emaar focuses on limiting the funding by the parent company to financing land acquisitions and initial infrastructure related construction. The parent company funding is restricted to 8 percent of the costs. Additional funds are raised at the project level through pre-sales, project based debt financing and IPO/Strategic sales. Emaar could have difficulty to raise cash as a result of the downgrade. Besides, it will have to pay higher interest rates than previously on new debt. Besides, higher interest rates on debts due to downgrade could make it difficult for the company to manage current projects in turn leading to imbalance of operations. There has been a decline in operating margins, operating costs (% of sales) return on equity, return on capital employed and return on assets. The operating margin has declined from 30.42% in 2004 to 13.61% in 2008 with a compound annual growth rate of -18.21%. The return on equity has steadily declined from 20.99% in 2004 to 8.48% in 2008 with a compound annual growth rate of -20.27%. The return on assets has a CAGR of -20.81% for the period 2004-2008. In addition, the operating costs have increased from 69.57% in 2004 to 86.38% in 2008, a CAGR of 5.56%.

The company has a substantial land bank across the world. With the global downturn the value of most of the assets has come down substantially followed by slow down in construction. The company has begun to focus on completing existing projects and putting on hold the new projects. This could have an impact on returns.

Labor problems and Quality issues

Emaar’ flagship project ‘The Burj Dubai’ is a leading mixed use property constructed in the heart of Dubai. With more than $ four billion spent on the project, the company has attracted a lot of attention on the attendant works and has been plagued by labor issues. The structure has been built predominantly with the help of migrant labor. Many labor groups and non profit organizations have accused the company of paying low wages and harsh treatment, and this has resulted in laborers resorting to industrial action, and also damaging property and disrupting work. These tarnish the image of the company and extended industrial action has the potential to delay the completion of projects.

Residents of one residential project developed by Emaar have accused the company of using inferior parts and equipment breakdowns. Some of these have suggested to have been occurred repeatedly. Instances such as this could lead to question marks over the quality of the company’ projects and make potential customers rethink their purchases with Emaar.

Opportunities

• Consolidate Position in Domestic Market

• International Expansion and Diversification of Revenue

Detailed

Consolidate Position in Domestic Market

The company has enough scope to increase its presence in Dubai. The company has 16.8 million square meters of land available for planned construction activities ad an additional 6.5 million square meters of land bank in Dubai through the JV with Bawadi. Emaar has already completed the construction of key assets in Dubai, namely, The Dubai Mall and Dubai Marina Mall with a gross leasable area exceeding 3.9 million square feet. In 2007, Emaar Hospitality Group opened three hotels in Downtown Burj Dubai: Al Manzil, Qamardeen and The Palace, The Old Town. Emaar Hospitality Group will open an additional four hotels in Dubai: Burj Lake Hotel, Dubai Mall Hotel, Dubai Marina Hotel and the Armani Hotel in Burj Dubai. Emaar also began operations of the Emaar Raffles International School in Singapore followed by the Raffles International School in Dubai Umm Suqeim in September 2007. The establishment of the University of the Arts is another strategic step taken by Emaar as there is growing demand for local arts education of international standards in the MENA region and Indian Subcontinent.

International Expansion and Diversification of Revenue

Emaar’ mission is to become a one-stop, global solution provider for lifestyle. In keeping with this strategy, Emaar has made investments in to such areas as education, malls, hospitals, mortgage financing and hotels and resorts. To achieve this, the company has made outright acquisitions and partnered with existing companies to enter new markets to expand operations and product and services offerings. This expansion, by moving away from the construction sector, will seek to insulate the company from any sectoral crises. As part of the company’ growth plans, Emaar has expanded in to various emerging international markets that have high growth potential. The focus of these plans are countries whose expected Compounded Average Growth Rate of GDP per capita for the past three years to be 12%. These countries include India, Indonesia, Turkey, Morocco and others. With the emerging middle class, Emaar has a vast market for the company’ varied products and services.

In 2008, the domestic segment accounted for AED 13,926,334,000 (86.96%) and the international segment 2,088,799,000 (13.04%). The company has enough scope to expand outside the domestic market. According to IMF – World Economic Database (October 2007), the GDP/Capita for countries in which Emaar has a presence is CAGR of 12.0% while it is CAGR 7.4% for Western Europe and CAGR 3.8% for U.S. for the period 2005-2008. Emaar estimates that by 2010 60-70% of revenues would come from international operations and it could generate 15% of net profit from Hotels and Malls. The company also plans to expand into Education and Healthcare in the MENA and Indian subcontinent regions. As on 31 December 2008, the principal segments into which the company operates were property investment and development, property management services, education, healthcare, hospitality, retail and investment in providers of financial services. The systematic expansion and diversification of revenues is highlighted by the following.

• Education – Emaar will offer premium quality education and an integrated curriculum throughout the MENA region and India.

• Healthcare – Emaar plans to establish a number of premium-quality hospitals and healthcare centers throughout the Middle East region.

• Hotels – Emaar has signed an exclusive partnership with Giorgio Armani SPA to create an international portfolio of luxury, exquisitely-furnished hotels.

• Retail – Emaar is aggressively expanding into the emerging markets of the Middle East & North Africa and the Indian subcontinent.

• Financial Services – Emaar has a significant holding in Amlak, a major Islamic financing company in Dubai.

Threats

• Economic Protectionism

• Global Economic Downturn

Detailed

Economic Protectionism

Many countries have regulations regarding foreign investments in certain sectors, infrastructure, being one of them. Domestic lobbies in the United States have succeeded in derailing investments citing real or perceived national security concerns. One such example was the case involving Dubai Ports World in the United States. Such restrictions could altogether delay or deny Emaar the ability to successfully execute growth plans.

Global Economic Downturn

Dubai has been the focus of expatriates from the United States and Western Europe, and they have been the main driving factors behind the rise of Dubai. It is worth mentioning that expatriates comprise of 80% of the population. Widespread job losses and the freeze in the credit markets may not provide the capital required investing in the Dubai property market, and this may adversely impact the company’ sales.

Emaar recorded an inventory write down AED 0.919 billion (US$ 0.250 billion) relating to real estate inventory in J L Homes, US in the fourth quarter of 2008. The lower revenue of AED 3.495 billion (US$ 0.952 billion) and operating profit of AED 0.924 billion (US$ 0.252 billion) for the fourth-quarter (October to December) 2008 (prior to considering the impact of inventory write down) has resulted in lower overall results for the year 2008. Annual net operating profits of AED 5.578 billion (US$ 1.519 billion) that was 15 per cent lower than the net operating profits of AED 6.575 billion (US$ 1.790 billion) in 2007. This is primarily due to slowing down of the real estate market in the U.S. and Dubai resulting from the current state of the global financial climate. Further, higher pre-operating expenses in Hotels/Malls and higher marketing costs will off-set profitability generated by international revenue.