Answer to Soft Economy – Mega Developments Phasing & Sustainability Issues - Infrastructure Summit MEA, 2009

Answer To The Soft Economy -Project Phasing & Raising

Sustainability Standards For Mega Developments

Infrastructure Summit MEA, 2009Loay Ghazaleh – Burooj Properties

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The MEA Region Amidst The Financial Crises

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Still, Large Infrastructure Investments

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MEA Market Now!;• Stock market slow recovery• Oil prices picking up• The process of capital erosion / asset value shrinkage nearly bottomed• The period of price stagnation and foreclosure appears to be softened• Continued expenditures for public improvements • Mortgage defaults, delinquencies re-structuring in place • The volume of building is stimulated by real market rather than by credit • The banks selectively real estate & infrastructure projects• land boom back to basics, new buildings / speculation no longer the driver• Service competition - increase in service charges coupled with improvement• Project downsizing still taking place; Project phasing is becoming the norm

The belief in “ the risk less asset class” has been terminated. There is no risk free investing in this world.

•Buy with the approach of a ‘home owner’ ALWAYS measure total returnUse the yard stick of existing and projected rental yieldsNEVER speculate unless you can hold the property for the investmentREIT exposure adds liquidity at the cost of transparencyOff plan exists in your imagination.

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Market Forecast!• Capitalism has a long history of boom and bust, greed and fear, hyper

growth and crashes. we have to continue to learn by every crisis

• The economic recovery that may start in 2010 will remain shallow as long as the consumer in the Emerging Markets is not able to supersede the US consumer as the driving force of the world economy.

• Governments tries to combat the systematic liquidity and solvency crisis with unlimited liquidity, cuts back interest rates, and recapitalizes balance sheets to the point of nationalization.

• In the short time ahead, the financial crisis will have a deflationary effect that will make the pressure of inflation fade away. In the long term, the outlook concerning inflation is troubled by re-regulation and expansion of liquidity, especially since the government can easily recover from debts with the help of higher inflation rates.

• From a long and medium perspective risks are predominant, but very negative scenarios have been priced in. It should take some time until insecurity and mere “muddling through “ will be over.

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Property Development Model - Where Are We!

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Attempt 1 – Is Financing The Solution?

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Project Long term FinancingProject cash flows must be sufficient to service (interest and principal)

All risks to lenders must be eliminated

• Construction ,Market ,Consumption ,Operating ,Inflation & Credit risk• Other risks as applicable –Refinancing, Interest rate, Exchange rate

Advantages

• Enables high debt to equity ratio , Releases equity for other projects & reduces equity

• Enables equity risk sharing in projects • Funds (usually prohibited from giving guarantees) can invest into SPV• Avoids refinancing risk

Disadvantages

• More restrictions in use of funds• Restrictive covenants (debt service cover ratios etc)• More complex documentation (risk mitigation)• Less flexible administration (most changes require lenders' consent)

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Structuring Project Finance

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Attempt 2A – Phasing Solution

• Shorter overall construction time, cheaper & more convenient.• Predictable cash flow in expenditure, financing & revenues. • Credibility w/ Lending Entities , Clients, Suppliers , Consultants• Increased Investors trust / interest - well defined business plan • Pressure on Government for roads & utilities time delivery• Optimizing marketing budget, better project positioning• Increasing pre-sale due to clarity, increase mortgage interest• Cheaper & easier 5 years construction & 15 years rent roll financing• Lesser collateral needed as it will be Business Plan Based. • Building resilient image for the Developer.

The problem most developments are designed for continuous

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Infrastructure Systems prohibitively inefficient or Impossible! OR

Infrastructure Systems Silo Situation ;

• Little to no communication or coordination between systems• Result-Multiple interfaces, vendors and service providers• Uncoordinated system behavior• System incompatibilities• Operational inefficiencies• System duplication• Limited energy savings

Attempt 2B – Phasing Solution

The problem most master plans can not be phased efficiently

Extreme geometric layouts could lead to monotony & Infrastructure problems11

Attempt 3 – Project Down Sizing Scenario

Earlier committed & pipeline Partners may not be interested

Financing difficult as Project concept/ success at question

Components scaled down may not be profitable on stand alone basis.

More financing required due to min pre-sale , mortgage issues

More equity injection required as lending ratio decreased

Increased cost of borrowing ( small project), reduction effect on IRR

Established operators may not be interested with such a scale

The mix use / highest & best use may not be in place

The Developer may be concerned about his market image, land banking!

Expanding partners to Contractors w/ cash / in kind & work done payments OR Expanding equity partners to include direct beneficiaries like Operators ; have not been employed successfully in the UAE

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Reality Kicks In – Likely Developers Action Plan

• Coordinate with authorities and move on with high level of Infrastructures, renegotiate cost share & time delivery.

• Reevaluate Project risks , mix use, feasibility & Master Plan layout for friendly phasing & construction. Tailor mix to market.

• Efficiently manage the Cash-in into the company, secure equity partners, financing. Manage the cash-out by efficiently planning the components that yields money first.

• Improve traffic / parking / access situation & all public facilities.

• Enhance and value engineer all Consultants designs & coordination systems

• Introduce sustainability / Green concepts in the project, premium!

• limit cost variances & contractor performance.

• Improves system operation and reliability ,standardization across multiple facilities. Introduce DC & renewable energy. maximizes energy efficiency

Developers , after some give & take, can be expected to acknowledge swiftly the impact of the soft economy & mix use / market shift to review the project, its components & investment strategy as follows;

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Step 1A – Re-Liaise W/ Authorities

The cost of the infrastructure projects varies with respect to :

• The size of the land , location• The roads & utilities requirement as per the land use• Various authorities’ requirement for regional development

Prepare an optimized process with authority's agreement to ensure

• Efficient governance,• Effective communication,• Implantation of monitoring programs

Benefits from proper coordination and liaising with the local authorities :

• Creating realistic construction program that meets stakeholders interests.• Proper cost estimate for project constructions• Allows the Project teams to assess and evaluate the project feasibility• Allow the authorities to properly and timely plan of the main networks.• Allow the authorities to build data base of all projects for planning & budgeting

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Step 1B – Develop Cost Share W/ Authorities

• Roads & Transport Authority – usually fund 100% based on approved TIS within the structural plan. Collector roads, service corridors within are by the Developer.

• Municipalities – usually refuse to share in construction costs despite they stand to benefit from the networks & structures.

• Electrical and Water Department - Usually fund the infrastructure / SS construction @ 20 % cost share of the network to Developer and SS share is contributed based on demand (cost sharing) , cabling & any other costs for SS are charged as connection charges

• Etisalat - All network costs are paid for by Etisalat. Etisalat usually provides / free issue material and supervision, civil works to be carried out by the Infrastructure Contractor.

• Others Include - Civil aviation , Irrigation Department , Navigation , Water Ways, Environmental

• District Cooling - funded by Developer / Investor. The additional services required to run the DC system (power, sewerage & water) are included in the cost sharing of the external main utilities.

Identifying a cost share strategy and developing a cost share and cost recovery mechanism between various authorities and entities is at the core of infrastructure planning

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Sharjah Marina – Better Drop Off Revision

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Sharjah Marina – Water Canal Across Design

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Sharjah Marina – Expanded Mall Design

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Sharjah Marina – Pre Market Downturn Design

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Sharjah Marina – Pre Market Downturn Design

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Step 2B – Consider Functional Guidelines

• Start right, engage all principle disciplines

• Grouping of structures: Towards Sea

• Improve accessibility/safety by proper junction spacing

• Create both -Public & Private Beaches

• Create Buffer Zone Promenade/ Cornish Pedestrian Walkway

• Achieve a Win-Win situation between Public and Private Demands

• Avoid intensive high development on waterfront (massive)

• Avoid blocked Views, locate low rise development on water front

• Allow for road reserve & parking

• Allow for recreational activity for public

• Landscape green buffer, large taller trees to frame up the view

• Provide shaded walkways , colonnades utilizing breezes and hear protection.

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Sharjah Marina – Post Market Downturn Design 1

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Sharjah Marina – Post Market Downturn Design 1

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Sharjah Marina – Post Market Downturn Design 2

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Sharjah Marina – Post Market Downturn Design 2

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Beach Front Massing Guideline

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Recommended Buffer Areas

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Step 3 – Incorporate Sustainability

• Sustainability is a Progressive Process and a more holistic approach to ensure conservation and protection by seeking solutions thru seamless Integration of Activities that minimizes material & energy resource use and consumption, whilst maximizing the well-being of occupants, contributing positively to society and recognizes, protects and enhances the ecology, through re-thinking standards and effective management.

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What is Sustainability

• Sustainability is as much about energy and resources as it is about the end-users and being good stewards of the environment, thus making the development more economically successful.

• Minimal consumption of non-renewable natural resources: energy resources, land, water and other materials

• Minimal wastage during construction and usage:• Elimination of unnecessary components or extend product life• Maximum indoor environment quality, including air quality, thermal regime,

illumination, acoustics/noise and visual aspects

• Sustainable FM Culture

• The goal is to integrate sustainability into day-to-day FM practices.• FM role is to turn a cost into a benefits & then into an asset.• FM should look upward and ask Sr. Mangers what they want from their building? • FM has to use all his power of persuasion in some cases.• FM has to know how to push the subject just enough for a change to become an

accepted norm. It is a long term measure.

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Why Sustainability

• Delivering developments in accordance with Government Policy in the UAE

• Sustainability goes to the heart of ‘bank-ability’• Attracting international finance and Development

Finance Institutions• Attracting high end residential tenants with sustainable

practices• Attracting commercial lease tenants, Business anchors

with sustainable supply chain Policies• Potential for enhanced equity returns - Branding,

marketing, promotion• Exploitation of opportunities under Clean Development

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Sustainability – Hard Facts

In the United States alone, buildings account for:

• -72% of electricity consumption,• -39% of energy use,• -47% of all carbon dioxide (CO2) emissions,• -40% of raw materials use, • -33% of landfill waste• -30% of waste output (136 million tons annually), and• -14% of water consumption

• Buildings are responsible for 48% of all annual greenhouse gas emissions in the US.

• Energy Consumption - (Tons -Oil Equivalent Per Capita)

• UAE (Average) 10.5• Canada 8.3• USA (Average) 7.7• USA (non-urban) 8.9• USA (Manhattan) 3.0• U.K.6.2• Abu Dhabi - 4,700 residents / m2, 6.8 oil tons/capita• Central London 4,760 residents / m2, 3.8 oil tons/capita• new York City - 9,880 residents / m2, 3.0 oil tons/capita

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Sustainability – Tips!An efficient building is -One with electrical energy consumption of less than 100 KWhe/m2/yr-One with connected electrical load lower than 150 W/m2

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Sustainable communities: more than a collection of green buildings

• Designed for our unique climate by building healthy communities• Facilities management practices –e.g.. cleaning, monitoring , life cycle

assessment while using certified materials and eco-products.• Less power consuming equipment , onsite power generation• Integrate renewable energy• Safe and livable places , a living breathing ecosystem• Minimized ecological impact ,work with the region’s important living systems• Eco-efficient utilities & infrastructure - energy & water savings , recycle

water ,Water Treatment• Diverse and inclusive neighborhoods with mixed facilities• Integration effect on local economy, population and market ,leverage

feedback to continually• Self-sustaining economies with acceptable payback periods• Effective governance .Tenants , field and office staff sustainable behavior • Ease of adaptability to future legislative changes – e.g. Dubai law requiring

on-site generation of 2.5% power from renewable sources• Target setting for continuous improvement

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Conclusion, Major Lessons Learned

1 Continuous Construction & Geometric Layouts - Phasing Not Planned?

2 Weak Feasibility Studies - Downsizing / Construction Slowdown Later!

3 Riding The Speculative Boom - Market Demand , Financing Shock!

7 GFA Maximization , High Density - Urban Plan. Best Practices Sacrificed

10 Late Sustainability - Inefficiencies , Socio Economic Environ. Imbalances

8 Fast Marine / Coastal Reclamation – Improvise methodology & regulation!

5 Gov. Regulations - Developers As Zoning / Marine Authorities!

4 Short / Delayed Gov. Utility Capacities - Cost Sharing Solutions!

9 Marine Habitat & Environmental Impacts - Ad hoc situation!

6 Project Re-Planning, Re- Structuring & Financing - Entanglement!

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Loay Ghazaleh – Sharjah Marina

[email protected] ; [email protected]