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Nakheel Creditors Could Seize Dubai Waterfront Land in Default

Dec. 7 (Bloomberg) — Nakheel PJSC creditors may win the right to seize a strip of barren waterfront land the size of Manhattan if the company defaults on the $3.5 billion bond backing the development.

Investors will be able to seek foreclosure on the property’s mortgages should the Dubai World unit fail to repay the loan, according to the bond’s prospectus. The debt is due on Dec. 14, after which Nakheel has two weeks to remedy a default. The property forms part of the Dubai Waterfront project, where Nakheel plans to build a city twice the size of Hong Kong.

Dubai World is trying to restructure $26 billion of debt after seeking a “standstill” agreement on liabilities including Nakheel’s sukuk bond on the waterfront parcel. The bond is secured against a 50-year lease on 677 million square feet (63 million square meters) of land on which Nakheel plans to build the southern part of Dubai Waterfront, and a series of man-made islands in the shape of a crescent.

“The project isn’t likely to happen,” said Saud Masud, a Dubai-based real estate analyst at UBS AG. “I’d be very surprised if anything is built in the next five years.”

The land was valued at $4.2 billion by Jones Lang LaSalle Inc. three years ago, based on the entire project being ready by 2018, when it would be worth $11.8 billion, the prospectus said.

Sukuk are securities that comply with Islamic law, which forbids interest-bearing bonds. The leases on the two Nakheel properties were sold to a special-purpose vehicle that issued the sukuk. They were then leased back to Nakheel which made rental payments to stay within the law.

Setting the Tone

The sukuk’s trustee, acting on behalf of noteholders, can “take any action to enforce any of the security documents,” if Nakheel doesn’t redeem the bond, said the 2006 prospectus, which classifies the mortgages as security documents.

“The outcome of Nakheel will set the tone of how people will approach the question of access to assets, what a security package is really worth, and legal rights with a jurisdiction,” said Brinda Kirpalani, head of credit and convertible research at ADI Alternative Investments SA in Paris.

Nakheel didn’t return telephone calls and e-mails yesterday for comment.

The waterfront project was among Dubai World’s most ambitious. Dubai Waterfront posters had lined a wall of billboards about 10 meters (30 feet) high and stretching for at least a kilometer (1.6 miles) along Sheikh Zayed Road, which surrounds part of the land. The posters were removed in the last month. Smaller billboards with Nakheel’s corporate logo remain.

Now the area is bare except for a cluster of partly finished low-rise buildings and idle cranes for hundreds of meters. Yesterday, camels roamed part of the land.

Doubling Dubai’s Size

The waterfront development was “essentially a doubling of Dubai,” said Masud. Some initial land reclamation and building work has taken place and little else, he said.

The portion of the land backing the sukuk is likely to be worth “significantly less” than the 2006 valuation, Saud estimates.

Dubai office values fell 58 percent in the year through September, according to Colliers International. House prices have plunged 50 percent from the peak last year.

“If built houses drop 50 percent in value, un-built land will likely drop more,” he said.

Court Case?

Creditors seeking to enforce any mortgages, which are governed by Dubai law, would have to do so in a Dubai court, according to Mark Andrews, a London-based partner at law firm Denton Wilde Sapte LLP who is advising some sukuk-holders.

“That process will be neither quick nor easy,” he said.

Nakheel sold parts of the waterfront land to private builders, while remaining as lead developer, according to brokers based in Dubai. It sold for as much as 95 dirhams ($26) per square foot based on the project being completed, said Ian Albert, Colliers’ regional director. That value reached about 400 dirhams at the market’s peak before falling to about 70 dirhams. Its value today is indeterminable, he said.

“They put in the infrastructure and the utilities and then sold off serviced plots to private developers who would actually build the individual projects,” said Matthew Green, head of U.A.E. research at CB Richard Ellis Group Inc. “We are still awaiting further infrastructure for the project to move ahead and that’s unlikely to happen in the current environment.”

Nakheel’s bonds sunk to the lowest in four days on Dec. 4 as creditors held a conference call to discuss their plans.